Q4.

(a) 1. When price falls from falls from $400 to $350 a chip, total revenue increases.

Price at $400 Price at $350

Quantity Demanded (in millions per year) = 30 Quantity Demanded (in millions per year) = 35
Total Revenue: Price X Quantity Total Revenue: Price X Quantity
Total Revenue: 400 X 30 Total Revenue: 350 X 35
=$12,000 Billion =$12,250 Billion

2. When price falls from falls from $350 to $300 a chip, total revenue decreases.

3. Price at $350 Price at $300

The
Quantity Demanded (in millions per year) = 35
Total Revenue: Price X Quantity
Total Revenue: 350 X 35
=$12,250 Billion
Quantity Demanded (in millions per year) = 40
Total Revenue: Price X Quantity
Total Revenue: 300 X 40
=$12,000 Billion

price at which total revenue is at a maximum is $350. Total Revenue at $350 is $12,250 Billion, which is
more than the total revenue at any other given price.

(b) At the average price of $350, the demand for chips is unit elastic. For an average price of $350 a
chip, cut the price from $400 to $300 a chip. When the price of a chip falls from $400 to $300,
total revenue remains at $12,000 million. So, at the average price of $350 a chip, demand is unit
elastic.

Dejuan please input the calculation for this question.

The calculation you showed me in the tutorial.

(c) At the average price of $250, the demand for chips is inelastic. According to the Total Revenue
Test, if a price cut decreases total revenue, demand is inelastic. Thus, in a case of decrease in
price from $250 to $200, Total revenue decreases from $11,250 Billion to $10,000 Billion.

Q5.
(a) If the price elasticity of demand for bananas is 4 and If the price of bananas rises by 5 percent, the
percentage change in the quantity of bananas one buys would be -20%.

Elasticity of Demand = Percentage change in quantity demanded/Percentage change in price

4 = Percentage change in quantity demanded/5
4X5 = Percentage change in quantity demanded
20% = Percentage change in quantity demanded

(b) Since the Elasticity of Demand = 4, the elasticity of demand is elastic. As a result, total
expenditure decreases. The fall in expenditure is approximately 15 percent, the 5 percent rise in
price offset by the 20 percent decrease in the quantity purchased.

OR

Since the Elasticity of Demand = 4, the elasticity of demand is elastic. As a result, total
expenditure decreases. The fall in expenditure is 16 percent since:

Increase in Price = 5% that is Price increases from $1 to $1.05

Decrease in Quantity = 20% that is Expenditure decreases from $1 to $0.8
Total Expenditure = Price X Quantity
=1.05 X 0.8
=0.84 (84% of Total Expenditure)
=Decrease in Expenditure = 16%

(c) If the income elasticity of demand for bananas is 1/2 and If the income rises by 10 percent, the
percentage change in the quantity of bananas one buys would be 5%.

Income Elasticity of Demand = Percentage change in quantity demanded/Percentage change in

Income
1/2 = Percentage change in quantity demanded/10
0.5x10 = Percentage change in quantity demanded
5% = Percentage change in quantity demanded

(d) If the income elasticity of demand is greater than zero but less than 1, demand is income
inelastic and the good is a normal good. Thus, the income elasticity in this case is ½, which is
 greater than 0 and less than 1. Thus, Banana in the following case stands to be a Normal Good.
This is also because as the income in the above case rises by 10%, the quantity demanded
also increases by 5%.

Q6:
The economic argument based on the demand-supply analysis would be there would be a surplus of labor.
Since the minimum wage has been set above the equilibrium wage rate, which was $10,700. The
minimum wage has now been set at $12,700, because of which the quantity of labor supplied by workers
exceeds the quantity demanded by employers.
The quantity of labor supplied exceeds the quantity demanded and unemployment is created. A minimum
wage leads to an inefficient outcome. The quantity of labor employed is less than the efficient quantity.

Q7:
(e) The price elasticity of demand by taking the market equilibrium point in 2011 Golden week and
that in 2012 Golden week is 1/16 or 0.0625.

P = 10 | P1 = 0 (Average Price = 5)
Q = 75 | Q1 = 85 (Average Quantity = 80)
Elasticity of Demand = Average Price/Average Quantity X Change in Quantity Demanded/Change
in Quantity Supplied
Elasticity of Demand = 5/80 X 10/10 = 1/16 or 0.0625.
Q8: