Jim Whitney Economics 101

  Price elasticity of demand: Worksheet

In the diagram to the right, the initial market equilibrium is at point a.

Your example number: ______
    Your linear demand curve passes through point a and also through the point:
        P = ______   Q = ______

1. Draw your demand curve
2. Suppose that the marginal cost of producing cigars rises by exactly $4 per unit. Carefully draw the new supply curve in your diagram, and label the new equilibrium price and quantity.
3. Use your diagram to contrast the total expenditure (TE=PxQ) of consumers before and after the price change. Shade in TE as follows:
        /// = TE before the price change
        \\\ = TE after the price change
 
4. Use the information from your diagram to answer each of the following questions, and be sure everyone in your group agrees about the answers:
(1) Does the equilibrium quantity of cigars (1) rise, (2) fall, or (3) remain the same?

 
(2) Does the equilibrium price of cigars (1) rise by more than $4, (2) rise by exactly $4, (3) rise by less than $4, (4) remain the same as before, or (5) fall?

 
(3) Does the total expenditure on cigars (P x Q) by consumers (1) rise, (2) fall, or (3) remain the same?