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Elasticity of Demand and consumer Surplus
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Running head: ELASTICITY OF DEMAND AND CONSUMER SURPLUS
Elasticity of Demand and consumer Surplus
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1
ELASTICITY OF DEMAND AND CONSUMER SURPLUS
Questions:
1. The accompanying table shows the price and monthly demand for barrels of gosum
berries in Gondwanaland.
a. Using the midpoint method (show your work), calculate the price elasticity of
demand when the price of barrel of gosum berries rises from $10 to $20.
What does this estimate imply about the price elasticity of demand of gosum
berries?
2
ELASTICITY OF DEMAND AND CONSUMER SURPLUS
(800 – 900) ÷ (900 + 800)/2 ÷ (20 – 10) ÷ (10 + 20)/2
-100 ÷ (1700 / 2) ÷ (10 ÷ (30 / 2)
(-100 ÷ 850) ÷ (10 ÷ 15)
-0.1176 ÷ 0.6667
= 0.1765
= 0.1765
Since the price elasticity of demand is less than 1, the price elasticity of demand for the
gosum berries is inelastic in this price range. A change in price will cause a smaller
change in the amount demanded while revenue increases.
b. Using the midpoint method (show your work), calculate the price elasticity of
demand when the price of barrel of gosum berries rises from $70 to $80.
What does this estimate imply about the price elasticity of demand of gosum
berries?
(200 – 300) ÷ (300 + 200)/2 ÷ (80 – 70) ÷ (70 + 80)/2
-100 ÷ (500 / 2) ÷ (10 ÷ (150 / 2)
(-100 ÷ 250) ÷ (10 ÷ 75)
-0.40 ÷ 0.1333
=3
With a price elasticity of demand greater than 1, this means that gosum price is elastic.
Increase in price may cause customer to stop buying the product and thereby decreasing
the revenue.
c. Notice that the estimates from (a) and (b) above are different. Why do price
elas...