A Little Math Problem

[{GD}Ghost]

I've got a friend who is currently studying micro-economics an is stumped on this question right here:

Using this formula for price elasticity: (Q2-Q1)/[(Q2+Q1)/2] / (p2-p1)/[(P1+P2)/2]?How do I answer this:?

what would a 10% increase in the pprice of movie tickets mean for the revenue of a movie theater if the price elasticity of demand was .1, .5, 1.0, and 5.0

This stuff is a bit beyond me atm so I thought I'd see if any of my genius friends around here could assist.

Thanks.

 

[geogob]

Could you please define the symbols used in your equation?

 

[sir_edmond]

The Wikipedia page on this http://en.wikipedia.org/wiki/Price_elasticity_of_demand
looks like the quick sum up is the change in demand over the change in price.

 

[geogob]

Nevermind. Got it.

That was fairly simple. Let me cook the explanation (need verification. Economy is not my field at all - I'm more into physics).

 

[geogob]

Here's the solution. There might be errors in it (math and/or language). I don't have time to proveread it right now. I just quickly typed this out during a meeting

 

[chuckus]

You goofy math nuts with your real world application of equations and theorems ... run along and play now...

 

[geogob]

Hey! That is the game


But I have serious doubts this price elasticity theorem has real applications. The model seems a bit too simple to cover the complexities of the effect of price variations on demand.

Too many factors come into play. It may work well on a first degree approximation, but I wouldn't base my long (nor short) term business plans on this law as presented in the literature I quickly found on the subject.

 

[chuckus]

From what I understand, all economics theories are quite simple. The tricky part is when you start modeling and tacking on extra variables to account for all kinds of things like weather, price of oil, migration of birds etc.

Then you're equation starts to look like a tricked out Airsoft M4. But the meat of the equation stays relatively the same.