Elasticity Practice problems

B Chatterjee
ASMSOC
NMIMS
Q.1 A consumer purchases 80 units of a commodity when its price is Re. 1 / unit and
purchases 48 units when its price is 2Rs/unit. What is the Arc/mid-point price
elasticity of demand?

Q.2 Suppose price of a good falls from Rs 10 to Rs 8 per unit. As a result, its quantity
demanded increases from 80 units to 100 units. What is the price elasticity (Arc/mid-
point) of demand?
Q.1 A consumer purchases 80 units of a commodity when its price is Re. 1 / unit and purchases
48 units when its price is 2Rs/unit. What is the Arc/mid-point price elasticity of demand? (-0.75)

Q.2 Suppose price of a good falls from Rs 10 to Rs 8 per unit. As a result, its quantity demanded
increases from 80 units to 100 units. What is the price elasticity (Arc/mid-point) of demand? (-1)

(Q 2  Q1)
[(Q 2  Q1) / 2]
Price elasticity of demand = ( P 2  P1)
[( P 2  P1) / 2]
From the demand schedule below calculate price elasticity of
demand and total revenue
Price Price
Quantity Elasticity Elasticity Total
Price Demanded (Point) (Arc) revenue

A 10 20

B 8 30

C 6 35

D 4 40
From the demand schedule below calculate price elasticity of
demand and total revenue
Price Price Point elasticity
Quantity Elasticity Elasticity Total
Price Demanded (Point) (Arc) revenue
(Q 2  Q1)
10 20 ---- ---- 200 Q1
( P 2  P1)
P1
8 30 -2.5 -1.8 240

6 35 -0.66 -0.54 210

4 40 -0.43 -0.33 160

(Q 2  Q1)
[(Q 2  Q1) / 2]
Price elasticity of demand (Arc) = ( P 2  P1)
[( P 2  P1) / 2]
Studies in the United States indicate that price elasticity of demand for
cigarettes is -0.4. If a pack of cigarettes currently costs $2 and the
government want to reduce smoking by 20 percent, by how much
should it increase the price?
Studies in the United States indicate that price elasticity of demand for
cigarettes is -0.4. If a pack of cigarettes currently costs $2 and the
government want to reduce smoking by 20 percent, by how much
should it increase the price?
Percentage in quantity=-20%
PED=-0.4
PED=(%change in demand/%change in price)
-0.4=-20/%change in price
%change in price=20/0.4=50%
Increase in price would be 50%*2=$1
Final price=$3
Calculate price elasticity of
demand curve, P=100-5Q at
each of the following price and
quantity levels:

(i) P=90, Q=2

(ii)P=50, Q=10

(iii)P=5, Q=19
 Calculate price elasticity of P=100-5Q
demand curve, P=100-5Q at Differentiate P with respect to Q
Slope=dP/dQ=-5
each of the following price and
quantity levels: E=(dQ/dP)*(P/Q)=(1/dP/dQ)*(P/Q)
E=(1/slope)*(P/Q)
E=(1/dP/dQ)*(P/Q)
E=(1/(-5))*(90/2)
(i) P=90, Q=2 E=-9
OR
(ii)P=50, Q=10 E=(dQ/dP)*(P/Q)
dP/dQ=-5
dQ/dP=-1/5
(iii)P=5, Q=19 E=(dQ/dP)*(P/Q)
E=(-1/5)*(90/2)
E=Percentage change in Quantity Demanded/Percentage change in price
= [(New Demand-Old Demand)/Old Demand]*100 E=-9
[(New Price-Old Price)/Old Price]*100
= (New Demand-Old Demand) X Old Price
(New Price-Old Price) Old Demand
= dQd X P
dP Q
=[1/(dP/dQd)]*P/Q
Calculate price elasticity of demand curve, P=100-5Q at each of the following price and
quantity levels:
P=100-5Q ; dP/dQ=-5

(i) P=90, Q=2

E=(dQ/dP)*(P/Q)=(1/dP/dQ)*(P/Q)

PED=[1/(-5)]*90/2=-9

(ii)P=50, Q=10
E=(dQ/dP)*(P/Q)=(1/dP/dQ)*(P/Q)

PED=[1/(-5)]*50/10=-1

E=(dQ/dP)*(P/Q)=(1/dP/dQ)*(P/Q)
(iii)P=5, Q=19

PED=[1/(-5)]*5/19=-0.052
Suppose that 50 candy bars are demanded at a particular price. If the
price of candy bars rises by 4 percent, the number of candy bars
demanded falls to 46 candy bars. Calculate price elasticity and was the
decision to increase price correct?
Suppose that 50 candy bars are demanded at a particular price. If the
price of candy bars rises by 4 percent, the number of candy bars
demanded falls to 46 candy bars. Calculate price elasticity and was the
decision to increase price correct?
Percentage increase in price=4
Percentage fall in demand=((46-50)/(50)*100=-8
PED= Percentage fall in demand /Percentage increase in price=-8/4=-2
INCORRECT DECISION. WHY? DEMAND IS ELASTIC. IF YOU INCREASE
PRICE, TR WILL FALL.PRICE IS INCREASED BY 4 %DEMAND WILL FALL
BY 8%TR WILL FALL
Suppose a seller of a textile cloth wants to lower the price of its cloth
from Rs 150 per metre to Rs 142.5 per metre. If its present sales are
2000 metres / Month and further it is estimated that its elasticity of
demand for the product equals - 0.7 .

Calculate the change in total revenue.

Suppose a seller of a textile cloth wants to lower the price of its cloth
from Rs 150 per metre to Rs 142.5 per metre. If its present sales are
2000 metres / Month and further it is estimated that its elasticity of
demand for the product equals - 0.7. Calculate the change in total
revenue.

Percentage change in price=((142.5-150)/150)*100= -5%

E=(%change in Q/%change in P)
-0.7=(%change in Q/-5)
%change in Q=3.5%
New Q=2000+3.5%(2000)=2070
TR1=150*2000=300000
TR2=142.5*2070=294975
Change in TR=-5025. Revenue will fall by 5025
 Suppose the demand curve for a product is given by Q=10-2P+Pr, where
P is the price of the product and Pr is the price of a related good. The
price of the related good is Rs20.
a. Suppose P=Rs10. What is the price elasticity of demand? What is
the cross price elasticity of demand. Are the goods substitute or
complement?
b. Suppose the price of the good, P, is now Rs 5. What is the price
elasticity of demand? What is the cross price elasticity of demand?

Price Elasticity: (%change in Q/%

Cross price Elasticity: (%change in Q/%
change in P)
change in Pr)
E=(dQ/dP)*(P/Q)
E=(dQ/dPr)*(Pr/Q)
E=(1/dP/dQ)*(P/Q)
E=(1/dPr/dQ)*(Pr/Q)
dQ/dP
Q=10-2P+Pr Pr=price of related commodity
dQ/dP: Differentiate Q=10-2P+Pr with respect to P.
dQ/dP=0-2dP/dP+dPr/dP

dQ/dP=-2+dPr/dP

Treat Pr as constantdPr/dP=0 (when P is changing we are holding Pr

constant)
dQ/dP=-2
dQ/dPr:
dQ/dPr: Differentiate Q=10-2P+Pr with respect to Pr

dQ/dPr=0-2dP/dPr+dPr/dPr

dQ/dPr=1-2dP/dPr

Treat P as constantdP/dPr=0 (when Pr is changing we are holding P

constant)
dQ/dPr=1
a. Price elasticity b. Price elasticity
Q=10-2P+Pr
dQ/dP=-2 P=5, Q=10-2(5)+20=20
Price elasticity: (dQ/dP)*P/Q
Pr=20; P=10 Q=10-2(10)+20Q=10
=(-2)*5/20=-0.5
E=(dQ/dP)*P/Q=(-2)*10/10
E=-2
OR
b. Cross price elasticity
dP/dQ=-1/2 P=5, Q=10-2(5)+20=20
E=(dQ/dP)*P/Q this is same as: (dQ/dPr)*Pr/Q
E=(1/dP/dQ)*P/Q dQ/dPr=1, Pr=20 and Q=20
(dQ/dPr)*Pr/Q
E=[1/(-1/2)]*10/10=-2
=(1)*20/20=1
a. Cross price elasticity
Q=10-2P+Pr
Cross price Elasticity =(dQ/dPr)*Pr/Q
dQ/dPr=1
(1)*20/10=2. Since its positive, the goods are substitute
Q x = 1.5 – 3.0 P x + 0.8 I + 2.0 P y – 0.6 Ps + 1.2 A
Q x = Sales of Coffee in million pounds
P x = Price of coffee brand X
I = Personal income in trillion dollars year
P y = Price of Competitive coffee brand
Ps = Price of sugar in dollars / pound
A = Advertisement expenditure in thousand dollars / Year
Suppose this year P x = 2, I = 2.5 , P y = 1.8, Ps = 0.5, A = 1
Find income elasticity and cross price elasticity
Q x = 1.5 – 3.0 P x + 0.8 I + 2.0 P y – 0.6 Ps + 1.2 A
P x = 2, I = 2.5 , P y = 1.8, Ps = 0.5, A = 1

Plug the values of Px, I, Py, Ps and A in the above equation to get Qx=2.
Own Price elasticity=(dQ/dP)*P/Q=-3*(2/2)=-3
Income elasticity= (dQ/dI)*I/Q=0.8*(2.5/2)=1
Cross price elasticity(Py)=(dQ/dPy)*Py/Q=2*(1.8)/2=1.8
Cross price elasticity(Ps)=(dQ/dPs)*Ps/Q=-0.6*(0.5)/2=-.15
Vijay Dairy is selling flavoured milk and buttermilk in packets of 150 ml.
The dairy sells 2000 packets of flavoured milk and 100 packets of butter
milk every day. The former is priced at Rs.6 and the latter at Rs. 4. A
market survey estimates the cross elasticity (bothways) at 1.8 and the
own price elasticity to be -1.3. The dairy is contemplating a 10%
reduction in the price of flavoured milk. Should it go ahead with the
price reduction? Show your working.
PED for flavoured milk: (%change in Qf/%change in Pf)=-1.3
Cross price elasticity: (%change in Qb/%change in Pf)=1.8 and also (%change in Qf/%change in
Pb)=1.8
%change in Pf=-10
(%change in Qf/%change in Pf)=-1.3
(%change in Qf/-10)=-1.3
%change in Qf=13% (percentage increase in demand for flavoured milk due to fall in price of
flavoured milk)
(%change in Qb/%change in Pf)=1.8
(%change in Qb/-10)=1.8
%change in Qb=-18% (percentage decrease in demand for butter milk due to fall in price of flavoured
milk) Qf: Quantity of flavoured milk
Pf: Price of flavoured milk
New quantity of Qf=2000+13%2000=2260 Qb: Quantity of butter milk
New quantity of Qb=100-18%100=82 Pb: Price of butter milk
TR1: Initial total revenue
New Pf=6-10%6=5.4 TR2: New total revenue
TR1:Initial revenue was: 2000*6+100*4=12400
TR2:New revenue is: 2260*5.4+82*4=12532
TR2-TR1=12532-12400=132. Since TR is increasing, the company should go ahead with the price