March 2008 exam – question 3

Calculate the arc price elasticity for each of the following changes in demand by a household.

	Demand for	P1 ($)	P2 ($)	Q1	Q2
a)	Long-distance telephone service	0.25 per minute	0.15 per minute	300 minutes per month	400 minutes per month
b)	Orange juice	1.49 per litre	1.89 per litre	14 litres per month	12 litres per month
c)	Big Macs	2.89	1.00	3 per week	6 per week
d)	Cooked shrimp	9.00 per kilo	12.00 per kilo	2 kilos per month	1.5 kilos per month

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Comment 1 by Moderator @ 2009-02-22 10:28

E={(Q2-Q1)/Q1+Q2}*{(P2+P1)/(P2-P1)}

E TEL ={ (400-300)/(400+300)}/{(0.15+0.25)/(0.25-0.15)= (1/7}*{-4/1)=-4/7