Assume you are working at a department store and you are told by ...

[anjilletteb]

Assume you are working at a department store and you are told by the manager to cut prices by 20 for all the new women's sweaters that are currently priced at 50 .
 
  What will be the new price of these sweaters? Suppose the manager tells you to raise the prices back up by 20. What is the new price of the sweaters? Why is your answer not the same as the original price of the sweaters? What importance does this have for why the midpoint formula is used in calculating price elasticity?

Question 2

Which of the following is a factor of production?
 
  A) an acre of forested land B) 25,000 in cash
  C) a U.S. Treasury bond D) 20 shares of Ford stock

[ryhom]

Answer to Question 1

The new price of the sweaters will be 40 . If you are asked to increase the price of the sweaters back up by 20 the new price will be 48, not 50 . The reason is that the even though the price change in percentage terms was the same going in both directions the starting point was different. The same percentage change for a smaller number is going to be an absolutely smaller number. This fact has an important factor to play in why we use the midpoint formula. If we didn't use the midpoint formula we would get different price elasticities of demand depending on whether their was a price increase or a price decrease. The bias concerning which base you are using is eliminated using the midpoint formula.

Answer to Question 2

A

[anjilletteb]

Thank you

[ryhom]

No problemo