66

MATH 1174 PROBLEM BOOK

ELASTICITY EXERCISES:
1.

An airline has determined the demand for its flight from Vancouver to Fort St. John is given by:
p = 10 ( x 218) 2 3240 , where x is the number of tickets it can sell in a day and p is the price per
ticket. The current demand is 120 flights per day.
a) Use elasticity to determine if the airline should raise or lower the price to increase revenues.
b) What price will maximize revenues?

2.

A company can sell q = 80,000 widgets at a price of p each (the current price is $300 per widget).
500 p
a) Compute the elasticity of demand at the current price;
b) Should the company raise or lower the price if it wants to increase revenue?

3.

The demand function for a company's product is p = 60,000 (x + 3000) 1, with demand 3000 units
weekly.
a) Compute the elasticity of demand at the current demand.
b) Should the company raise or lower the price if it wants to increase revenue?
c) What price will maximize revenues? What will be the demand at this price?Skytrain used to
charge $2.00 per person (for a one-zone trip). Say the demand function for riding Skytrain is given
by x 2 + 450p = 1000, where x is the number of riders (in thousands) and p is the price of a one-zone
ticket in dollars:
a) Compute the elasticity of demand at p = $2.00.
b) Should the ticket price be raised or lowered to increase the revenue from the Skytrain?
c) What price will maximize revenues? What will be the demand at this price?

d ln x
. (HINT: use the chain rule twice.)
d ln p

4.

Show that another expression for elasticity is |E| =

5.

Define the analogous quantity elasticity of supply and give an intuitive interpretation.

6.

Show that demand function p (x) = a x has constant elasticity |E| = 1, > 0, a > 0.

(It may help to remember dx = dp .)

dp dx
7.

A chartered cruise requires a minimum of 50 people. If 50 sign up the cost per

person is $400; for each additional person signed up the cost per person drops by $2.
a) Find the number of people that will maximize revenues.

67
MATH 1174 PROBLEM BOOK

b) What is the price per person when the number of people in (a) signs up?
c) How many people need to sign up so that the elasticity of demand is unity?
Why does this make sense economically? Explain.
8.

Show that, in general, since MC (x) > 0 for all x > 0, then at the x-value where profit is maximized the
demand is elastic (|E| > 1).

9.

Given when p = $2 the demand is 1000 units, and |E| = 0.4. Find the value of dx .
dp

10. (Problems #10 and #15 use linear approximation .) For the problem above use linear approximation

(tangent line approximation) to estimate the demand if the price rises from $2.00 to $2.25.
11. Assume that the demand equation for a certain product is given by q p 2 300 where q is the

maximum quantity demanded at price p per unit. For what value of p is the revenue maximized?
12. Given the demand curve x = 3a 2 p 2, a > 0:

a) Find the price p which reduces demand to zero.

b) Show that demand is unitary (|E| = 1) when p = a.
c) Find the values of p for which demand is inelastic, and elastic.
13. Suppose demand x for a product at unit price p is given by x (p) = a%p k, where a, k are constants.

(k > 0 and p > 0). Show that if the price increases by A per cent, then demand will drop by
approximately (k%A) per cent. Relate this to elasticity E. (HINT: Use differentials or a linear
approximation.)
14. Consider demand function x =

A where A > 0 and p > b > 0.

pb

a) Find E (p).
b) Show that there is no price p such that |E (p)| = 1 (unitary elasticity). Is |E| > 1 or < 1 for all p?
c) Form total revenue function R (p) = p x (p) = p

A . Show directly that R (p) does not

pb

have a maximum value. Relate the sign of R (p) to the value of |E| relative to unity found in (b).
Given that when p = $2 the demand is q = 1000 units, and the elasticity of demand is |E| = 0.4, find
the value of dq , then use a linear approximation to estimate the demand at a price of $2.15 per unit.
dp