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§ 5.3

§ 5.3. Applications of the Natural Logarithm Function to Economics. Section Outline. Relative Rates of Change Elasticity of Demand. Relative Rate of Change. Relative Rate of Change. EXAMPLE.

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§ 5.3

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  1. §5.3 Applications of the Natural Logarithm Function to Economics

  2. Section Outline • Relative Rates of Change • Elasticity of Demand

  3. Relative Rate of Change

  4. Relative Rate of Change EXAMPLE (Percentage Rate of Change) Suppose that the price of wheat per bushel at time t (in months) is approximated by What is the percentage rate of change of f(t) at t = 0? t = 1? t = 2? SOLUTION Since we see that

  5. Relative Rate of Change CONTINUED So at t = 0 months, the price of wheat per bushel contracts at a relative rate of 0.22% per month; 1 month later, the price of wheat per bushel is still contracting, but more so, at a relative rate of 0.65%. One month after that (t = 2), the price of wheat per bushel is contracting, but much less so, at a relative rate of 0.0087%.

  6. Elasticity of Demand

  7. Elasticity of Demand EXAMPLE (Elasticity of Demand) A subway charges 65 cents per person and has 10,000 riders each day. The demand function for the subway is (a) Is demand elastic or inelastic at p = 65? (b) Should the price of a ride be raised or lowered in order to increase the amount of money taken in by the subway? SOLUTION (a) We must first determine E(p).

  8. Elasticity of Demand CONTINUED Now we will determine for what value of pE(p) = 1. Set E(p) = 1. Multiply by 180 – 2p. Add 2p to both sides. Divide both sides by 3. So, p = 60 is the point at which E(p) changes from elastic to inelastic, or visa versa.

  9. Elasticity of Demand CONTINUED Through simple inspection, which we could have done in the first place, we can determine whether the value of the function E(p) is greater than 1 (elastic) or less than 1 (inelastic) at p = 65. So, demand is elastic at p = 65. (b) Since demand is elastic when p = 65, this means that for revenue to increase, price should decrease.

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