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(Solved): To estimate changes in consumer surplus, economists often use estimated elasticities around a known ...



To estimate changes in consumer surplus, economists often use estimated elasticities around a known point on the demand curve. This method is sometimes referred to as “point expansion.” a. What does an own price elasticity of -0.75 imply about the relationship between price and quantity at a particular point on the demand curve? In other words, how should this elasticity be interpreted? b. Consider a town with monthly residential water use of 9 million gallons at a price of $0.003 per gallon. At this equilibrium, and assuming a linear demand curve with an elasticity of -0.75, what would be the loss in consumer surplus if the price of water increased to $0.004 per gallon? (Hint: See lecture slides from 30 Jan 2024).



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