Answers

  1. For each of the following values of price elasticity of demand, indicate whether demand is elastic, inelastic, perfectly elastic, perfectly inelastic, or unit elastic. In addition, determine what would happen to total revenue if a firm raised its price in each elasticity range identified.
  1. ED = -2.5
  2. ED = -1.0
  3. ED = - infinity
  4. ED = -.08

 

  1. Why is the price elasticity of demand for Coca-Cola greater than the price elasticity of demand for soft drinks generally?

 

  1. Using supply and demand curves, predict the impact on the price and quantity demanded of Good 1 of an increase in the price of Good 2 if the two goods are substitutes. What if the two goods are complements?

    2.  

  2. Complete each of the following sentences:
  1. The income elasticity of demand measures, for a given price, the ________ in quantity demanded divided by the ________ income from which it resulted.
  2. If a decrease in the price of one good causes a decrease in demand for the other good, the two goods are ________.
  3. If the value of the cross-price elasticity of demand between two goods is approximately zero, they are considered ________.

 

  1. Suppose that 50 units of a good are demanded at a price of $1 per unit. A reduction in price to $0.20 results in an increase in quantity demanded to 70 units. Show that these data yield a price elasticity of -0.25. By what percentage would a 10% rise in the price reduce the quantity demanded assuming price elasticity remains constant along the demand curve?

 

  1. Calculate the income elasticity of demand for each of the following goods:

    2. Quantity Demanded Quantity Demanded

    When Income =$10,000 When Income = $20,000

    Good 1 10 25

    Good 2 4 5

    Good 3 3 2

     

     

     

  2. Calculate the price elasticity of supply for each of the following combinations of price and quantity supplied. Determine whether supply is elastic, inelastic, perfectly elastic, perfectly inelastic, or unit elastic in each case.
  1. Price falls from $2.25 to $1.75; quantity supplied falls from 600 units to 400 units.
  2. Price falls from $2.25 to $1.75; quantity supplied falls from 600 units to 500 units.
  3. Price falls from $2.25 to $1.75; quantity supplied remains at 600 units.
  4. Price increases from $1.75 to $2.25; quantity supplied increases from 466.67 units to 600 units.

 

  1. Rank the following in order of increasing (from negative to positive) cross-price elasticity of demand with coffee. Explain your reasoning.

Bleach

Tea

Cream

Cola