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1. Graph the accompanying demand data, and then use the midpoint formula for E

d

to

determine price elasticity of demand for each of the four possible $1 price changes. What

can you conclude about the relationship between the slope of a curve and its elasticity?

Product Price

Quantity Demanded

$5

1

4

2

3

3

2

4

1

5

SOLUTION:

Slope does not measure elasticity. This demand curve has a constant slope of -1 (= -1/1), but elasticity

declines as we move down the curve. When the initial price is high and initial quantity is low, a unit change

in price is a low percentage while a unit change in quantity is a high percentage change. The percentage

change in quantity exceeds the percentage change in price, making demand elastic. When the initial price

is low and initial quantity is high, a unit change in price is a high percentage change while a unit change in

quantity is a low percentage change. The percentage change in quantity is less than the percentage change

in price, making demand inelastic.

Problem 2

Danny “Dimes” Donahue is a neighborhood's 9-year-old entrepreneur. His most recent venture is

selling homemade brownies that he bakes himself. At a price of $1.50 each, he sells 100. At a

price of $1 each, he sells 150. Is demand elastic or inelastic over this price range? If demand had

the same elasticity for a price decline from $1.00 to $0.50 as it does for the decline from $1.50 to

$1, would cutting the price from $1.00 to $0.50 increase or decrease Danny's total revenue?

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1. Graph the accompanying demand data, and then use the midpoint formula for Ed to determine price elasticity of demand for each of the four possible $1 price changes. What can you conclude about the relationship between the slope of a curve and its elasticity? Product Price $5 4 3 2 1 Quantity Demanded 1 2 3 4 5 SOLUTION: Slope does not measure elasticity. This demand curve has a constant slope of -1 (= -1/1), but elasticity declines as we move down the curve. When the initial price is high and initial quantity is low, a unit change in price is a low percentage while a unit change in quant ...
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