Show and explain carefully all the work. Explain the answers, and show the steps in your calculations.
1) The initial price of a cup of tea is $1, and at that price, 400 cups are demanded. If the price falls to $0.90, the quantity demanded will increase to 500.
a. Calculate price elasticity of demand for tea using the midpoint formula.
b. Based on your answer, is the demand for tea elastic or inelastic?
c. Based on your answer to a., if the price of tea is increased by 10%, what will happen to the revenues from tea? Carefully explain how you know.
2) The demand curve is: QD = 500 – 0.5P
a. Calculate the (point) price elasticity of demand when price is $100. Is demand elastic or inelastic?
b. Calculate the (point) price elasticity of demand when price is $700. Is demand elastic or inelastic?
c. Find the point at which point elasticity is equal to -1.
3) Suppose that the price elasticity of demand for wheat is known to be -0.75. Will a good corn crop (which increases the supply of corn) be likely to increase or decrease the revenues of farmers?