Arc Elasticity of Demand - Assignment Example

If we used arc elasticity instead with 75 (average of the two as denominator) the increase would only have been 2/3 (or 50/75) and conversely when we look at the reversal from 100 to 50 again the change of 50 in absolute terms would again have the denominator of 75 thus the decrease too would only be 2/3. This is how arc elasticity offers greater consistency in measurements. 2. National income (Y) is simply the sum of three components: consumption (C), investment (I), and government spending (G).

These three are known as producers income. These variables are not nominal but are expressed in real terms. For the second equation, it shows the relationship between consumption and income. That is, consumption is influenced by income. The third equations talk about an investment which is a decreasing function of the interest rate. Government spending is assumed to be exogenous. 3. To really understand how the optimal pricing formula comes about we must look at the definition of Marginal cost production in the first place which would be the change in the quotient of the total cost being divided by quantity.

We know that price elasticity changes at different points along the curve. For students at Hull, the price elasticity is different than it would be for business executives and for them this would be the Optimal Price. It would be foolish here to assume that the optimal price would reflect a greater change or when comparing it to the previous optimal price at an increase of 25% travelers with a 10% cut yielding an optimal price of £233.33 then likewise an increase of 35% might have a higher optimal price.

A correlation between the two is only misleading at best. Since Q2 must never be negative then the subsidy for the first scenario must be 0 < s < 6 whereas for the second scenario the subsidy is 0 < s < 4.5.