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MICRO WRITTEN ASSIGNMENT ANSWERS
Spring 2015
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Assignment # 5
Chapter 5
 What is the formula we should use to calculate the price elasticity of demand? Note:
this is the formula half-way down on page 131.
Ed = Q2-Q1
Q1+Q2
P2-P1
P1+P2
 Page 149, #4. Consider the following demand schedule:
Price
Quantity
Elasticity
demanded
coefficient
$25
20
>
$20
40
>
$15
60
>
$10
80
>
$5
100
a.
b.
c.
d.
What is the price elasticity of demand between:
P = $25 and P = $20?
P = $20 and P = $15?
P = $15 and P = $10?
P = $10 and P = $5?
It is important to draw the demand curve with price on the “y” axis and quantity
demanded on the “x” axis. You will need to use the elasticity formula half-way of
the way down on page 131 or your answers will not be correct. For each one of
the a, b, c, or d sub-questions, you will have to change the P1, P2 and Q1, Q2
points in your formula. You must draw the graph and show your work.
-1-
This was done perfectly by one of your classmates
Price elasticity of Demand chart
30
25
20
15
10
5
0
0
20
40
60
80
100
120
Chapter 5
 Page 149 - Question #4
Consider the following demand schedule:
Price
Demand
25
20
20
40
15
60
10
80
5
100
What is the price elasticity of demand between?
a. P = $25 and P= $20?
(40-20/20+40)/(20-25/25+20) = (20/60)/(-5/45)= 1/3 / 1/9 = 3 will be elastic.
b. P =$20 and P=$15?
(60-40/40+60)/(15-20/20+15)=(20/100)/(-5/35) = 1/5 / -1/7 = 1.4 will be elastic.
c. P=$15 and P=$10?
(80-60/60+80)/(10-15/15+10) = (20/140)/(-5/25) = 1/7 / -1/5 = 0.714 will be inelastic.
d. P=$10 and P =$5?
(100-80/80+100)/(5-10/10+5) = (20/180)/(-5/15) = 1/9 / -1/3 = 0.3 will be inelastic.
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 On pages 138 - 140 we study the “Determinants of Price Elasticity of Demand”.
Explain the three determinants that are talked about and why they affect elasticity.
Remember, you must answer the why question.
In Exhibit 6 on pate 139 you see the estimated elasticities of demand for various
items. There are three major things that affect how elastic (sensitive or responsive)
demand is:
1. Availability of Substitutes
This is by far the most important influence that affects elasticity. The more
choices we have (substitutes) the more sensitive we will be to a change in price.
If the price of something goes up and we don’t have to buy it because we can
substitute it with something else, we will be very sensitive (elastic) to this change
and may readily pick something else.
2. Share of the Budget on the Product
When some expense is a large part of our budget (like rent), our elasticity
(sensitivity) will be higher than say a dollar item going up in price.
3. Adjustment to a Price Change over Time
The longer we have to adjust to a price change the higher our elasticity
(sensitivity) will be because we have time to make alternative choices.
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