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?