Econ 213 Problem Set 3

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Problem Set 3

Problem Set 3 is to be completed by 11:59 p.m. (ET) on Monday of Module/Week 6.

1. Data for the market for graham crackers is shown below. Calculate the elasticity of demand between the following prices.

|Price of crackers |Quantity Demanded (per month) |
|$3 |80 |
|$2.5 |120 |
|$2 |160 |
|$1.5 |200 |
|$1 |240 |

$1.00 - $1.50: Elasticity of demand equals .45; favoring inelasticity

$1.50 - $2.00: Elasticity of demand equals .78; favoring inelasticity

$2.00 - $2.50: Elasticity of demand equals 1.29; favoring elasticity

$2.50 - $3.00: Elasticity of demand equals 2.2; favoring elasticity

If the price of graham crackers is $2.50 should firms raise or lower their prices if they want to increase revenue? Explain this in terms of elasticity.

The firm should lower their prices 50 cents in an attempt to raise revenues. The elasticity of demand from 2.50-2.00 is 1.29, meaning with a reduction in prices there would be an elastic effect on quantity demanded. The maximum profit would be reached at the price of $2 because of the increased in demand with the price reduction.

2. Assume the competitive market shown below faces a short run price of $10. Using the graph below, identify the following:

Profit maximizing output: 110

Approximate mark up over cost: $2 per unit

In the long run, the price falls to $7.50. Why does this happen?

An increase in demand would temporarily increase the price of the good in the short run.…...

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