ECON 213 Economic Analysis: Elasticity, Profit Maximization, Shutdown Decisions, and Marginal Productivity

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ECON 213 Page 1 of 4 ECON 213 Economic Analysis: Elasticity, Profit Maximization, Shutdown Decisions, and Marginal Productivity P ROBLEM S ET 3 Name: _______ Kyudong Kim ___ __________________________ Problem Set 3 is due 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: ____ - .45 inelasticity _ __________________ $1.50 – $2.00: ____ - .78 inelasticity _ __________________ $2.00 – $2.50: ____ - 1.29 elasticity ___________________ $2.50 – $3.00: ____ - 2.2 elasticity _____________________ Now, assume the price of graham crackers is $2. 7 5 . S hould firms raise or lower their prices if they want to increase revenue? Explain this in terms of elasticity. They must lower the prices .75 to raise revenues. The elasticity of demand from 2.50 - 3 .00 is 2.2 , meaning with a reduction in prices there would be an elastic effect on quantity demanded. The maximum profit would be at the price of $2 because of the increased in demand with the price reduction.
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