Answer to Question 1
When the price of an input increases, the firm will substitute away from it toward other types of inputs. This is the factor substitution effect. Since the input is more expensive, the firm's costs will rise. Therefore, the firm will lower its level of production in the short run. This means that the firm will need to employ fewer units of all of the inputs it uses. This is the output effect. Both of these effects suggest that if the price of an input rises, the quantity of that input demanded will fall. This inverse relationship between the price of an input and its quantity demanded is represented by a downward sloping curve.
Answer to Question 2
The midpoint formula is a more precise way of calculating percentage changes. It uses the value that is halfway between P1 and P2 for the base in calculating the percentage change in price, and the value halfway between Q1 and Q2 as the base for calculating the percentage change in quantity demanded.
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