Tuesday
July 22, 2014

Homework Help: Managerial Economics/Math

Posted by klynn on Wednesday, October 3, 2007 at 11:29am.

This is an MBA-level Managerial Economics Course. I'm working on some HW and just want to double-check my answers.

1. Jimbo's is a new company producing exploding cigars. Jimbo's company has the following demand curve for the cigars:

P = 10 - 2Q

Jimbo is currently charging $2 per cigar.

A. A marketing official cliams that the price elasticity of demand at $2 is -2.0. Do you agree? If you disagree, what is the correct price elasticity?

On A, I found the price elasticity to be -.25. In the problem, P=2 and Q=4 (as a result of P=2). With a 1% increase in P, the new P is $2.02. The new Q as a result of the price increase is 3.99. So, a $.02 increase in price led to a .01 decrease in Q demanded. Price elasticity is the % change in Q/% change in P, so:

-.01/4 divided by .02/2 =
-.0025/.01 =
-.25

Can someone tell me if this is correct? If not, can you tell me how to get the correct answer? Thanks! :)

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