PROBLEMS

1. Consider the following: If the price per unit of good A is P200 quantity purchased is

valued at 1,500 units. If price changes (increase or decrease) by P1, quantity demanded

changes (decreases or increases) by 4 units.

A. Determine the demand function expressed as a price function. (2 points)

B. Set up a demand schedule for this function and determine the price elasticity of

demand at various P and Qd combinations using point-price elasticity formula.

(Make sure that all elasticity concepts are found on the same demand curve.) (10

points)

C. Determine the TR and MR functions. (4 points)

D. Graph the demand curve and the TR curve (TR curve just below the demand curve)

(6 points)

E. At what P and Qd combination will TR be maximum? (2 points)

2. Suppose the own price elasticity of demand for good X is -2, its income elasticity is 3,

and the cross-price elasticity of demand between it and good Y is -6.

A. Interpret the elasticity coefficients. (6 points)

B. Determine how much consumption of this good will change if:

B.1 The price of good X increases by 5%. (2 points)

B.2 The price of good Y increases by 10%. (2 points)

B.3 Income falls by 3%. (2 points)