Foundation of Microeconomics

Assignment 4

Chapter5

When the price of Internet service rises from $24 to $26 a month, the quantity demanded decreases from 204 million to 196 million subscribers.

1. Calculate the percentage change in the price of Internet service, the percentage change in the quantity demanded of Internet service, and the price elasticity of demand for Internet service.

To calculate the Percentage change in price, we use the midpoint method. Percentage change in price = (new price-initial price) divide to {(new price + initial price) divide to 2} and multiply by 100. In this example we have: Percentage change in price = ($26- $24) divide to {($26+$24)/2} and multiply by 100. Then percentage change in the price of internet service is = 8 percent and the percentage change in quantity = (new quantity- initial quantity) divide to {(new quantity + initial quantity)/2} and multiply by 100. In this example we have: percentage change in quantity = (196-204) divide to {(196 + 204)/2} and multiply by 100. Then the percentage change in the quantity demanded of Internet service = 4 percent. A positive change in price give a negative change in quantity demanded. For comparing both price and quantity, we use the absolute values and ignore the minus sign. Price elasticity of demand = (Percentage change in quantity demanded) divide to (Percentage change in the price). Price elasticity of demand = 4 percent/8percent. Then price elasticity of demand for internet service is 0.5 It means demand is inelastic.

2. When heavy rain ruined the banana crop in Central America, the price of bananas rose from $1 a pound to $2 a pound. Banana sellers sold fewer bananas but their total revenue remained unchanged. By how much did the quantity of bananas demanded change? Is the demand for bananas from Central America elastic or inelastic?

The percentage change in the price of banana in Central America = ($2- $1) divide to {($2+$1)/2} and multiply by 100. The percentage change in the price of banana = %66,67. Because a rise in price leaves total revenue unchanged, then demand is unit elastic. We have: 1 = (percentage change) divide to (%66,67). The percentage change in quantity supplied and demand is %66,67. If the banana sellers total revenue decreased, demand will be elastic. If the percentage change of demand be more than the percentage change of price, then we have elastic demand. The revenue come from, price multiplied by quantity, and if the quantity are increased then the total revenue will be more. In other word, every time the rectangle under the point (price, quantity) be greater than other one, it is clear that the revenue is more than other one. However, in unit elastic, one percent change in price will occur the one percent change in demand, because the elasticity of demand is equal 1.

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