Microeconomica – GradSchoolPapers.com

Microeconomica
Fill in the blanks in the table below by computing the elasticity values.
Price
Demand
Total Revenue
Percent change in price
Percent change in quantity
Elasticity
0
14



1
12
2
10
3
8
4
6
5
4
6
2
7
0
Exercise 2
1.) Suppose that the monthly demand for Alaska Club memberships is QD = 10000 – 10P.
a.) Using the formula for elasticity we have described in class, suppose that the initial
price is $400 dollars, calculate the price elasticity of demand between a price of $500 and
$400 (P in the equation above is equal to price). Explain the meaning of your answer
using the concept of elasticity.
b.) Suppose that the prevailing price is $400. Would you recommend an increase in the
price to $500, why or why not? Explain using the concept of elasticity. If not, describe
the conditions under which you could make such a recommendation.
c.) Calculate the total revenue first from the sale of memberships at a price of $400 and
then at a price of $500. Do you reach a different conclusion regarding the effect of the
increase in price?
d.) Under what condition would you unambiguously recommend a firm to increase their
price?

 
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