1. Given absolute value of computed elasticity = 8.0 and the %change in Quantity

Question

1. Given absolute value of computed elasticity = 8.0 and the %change in Quantity = 2% what is the % change in Price?

2. If the store owner (who also paid attention in his economics classes) found that his demand elasticity was the value given in the previous question, what does he need to do to raise revenue assuming he has a straight line downward-sloping demand curve?

3. The RAND study is

a. looked at the presence of the July effect

b.investigated the behavior of those eligible for Medicaid in Oregon

c.randomly allocated 2 types of health insurance to different individuals

d.randomly allocated 4 types of health insurance to different individuals

e. investigated the impact of long hours on doctors' efficiency

Explanation / Answer

Elasticity=% change in qty demanded/%change in price

8 = 2/% change in price

% change in price = 2/8 = 0.25%

Also as we know the demand is elastic, the producer will need to reduce the price to increase the revenue. A 1 percent increase in price will lead to 8% increase in qty demanded.

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