Use the table below to answer the following questions:
Price Quantity Demanded Elasticity Coefficient
$5 1 -
$4 2 A
$3 3 B
$2 4 C
$1 5 D
Microeconomic Problems
1. Given the simple demand schedule information in the table above, calculate the coefficient of price elasticity of demand four times (in the cells labeled A, B, C, and D). Note that the coefficient of price elasticity of demand over the entire range of the demand schedule is 1, indicating unit elasticity. Note also that the coefficient changes between specific price and quantity demanded points, indicating that a linear downsloping demand curve has different elasticity coefficients in different parts of the curve. As the price changes from $5 to $4 and the quantity demanded changes from 1 to 2, what is the coefficient of elasticity of demand (cell A)? As the price descends from $4 to $3 and the quantity demanded jumps from 2 to 3, what is the coefficient of price elasticity of demand (cell B)? Calculate the coefficient again for the $3-$2 price range and for the $2-$1 price range (cells C and D, respectively). Use the midpoints formula for all calculations.
2. Why is the coefficient for the $5-$4 price range higher than all the other ranges? In other words, why is the upper left portion of a linear downsloping demand curve the relatively most elastic portion? Why is the lower right portion always the most inelastic? This may seem difficult to answer, but it is not-if you think about the numbers involved and you remember that elasticity measures the percentage change in quantity demanded compared to the percentage change in price.
3. Calculate the total revenues for each price-quantity demanded combination (for example, if one were sold at $5, the total revenue would be $5). What happens to total revenue as price goes down in the elastic portion of the schedule? What happens to total revenue as price goes down in the inelastic portion of the schedule?
4. Why does total revenue increase if the price of an elastic good is decreased? Why does total revenue increase if the price of an inelastic good is decreased?
5. What types of goods should government tax if the government objective is to make money? Elastic or inelastic? Why?
6. Finally-and this is a stretch question-if you were a monopolist facing a downsloping demand curve, which portion of the curve would you strive never to be in? In other words, you can choose any price and output combination you want. Which combinations would you seek to avoid? Why?