Question

5. Not so long ago, voters in our state passed a law raising the tax on a pack of cigarettes by $2. Let’s say that as a result, the price of a typical pack went up from $5 to $7 per pack. If the quantity of packs purchased each day at $5 was 5 million packs per day in our state, predict what happened to quantity purchased when the price rose to $7 per pack. 6. Name a product or service that is completely new—not discussed in the Modules or the text. What is the price of this product (or service)? What is the quantity sold per year? (you may estimate this). IS THE DEMAND FOR THIS PRODUCT OR SERVICE (PRICE) ELASTIC? OR INELASTIC? WHY? What would happen to the quantity purchased of this product if the price were to rise by 10%? Why? 7. In Module #2 we discussed the idea that Coke and Pepsi demonstrate a high “CROSS” (price) elasticity measure. What does this mean, exactly? 8. In theory, if Coke were to raise its price by 5%, how would this affect the Demand for Pepsi? Why? 9. In theory, if Coke were to LOWER its price by 5%, what would happen to the Demand for Pepsi? Why?

Answer 1

(5). when the price of a cigarette pack rose to $7, then the quantity purchased will decline from earlier demand of 5 million packs per day.

(6). Let the product be bournville dark chocolate, and its price is Rs. 55 and the demand is 50 million pieces per year. The demand for this chocolate is relatively inelastic, as this is a luxury item and people who want it, seldomly change their consumption decision based on prices. However, there is some change in demand with change in price as there are some people who will change their consumption decision withe change in price.

If the price of chocolate is increased by 10%, then price becomes Rs.60.5. Here, quantity purchased will decline but prorportionately less as the demand is relatively inelastic.

(7). Coke and Pepsi demonstrate a high cross price elasticity measure. This means that coke and pepsi are perfect substitutes, i.e. consumers are indifferent between coke and pepsi. When the price of either coke or pepsi increases(decreases), then the demand for the other good will increase(decrease).

(8). If coke were to raise its price by 5%, then demand for coke will decline and demand for pepsi will rise, because consumers who were consuming Coke, will now switch to pepsi as pepsi is relatively cheap now.  

(9). If Coke were to lower its price by 5%, then demand for coke will rise and demand for pepsi will fall, because consumers will now switch their demand from pepsi to coke as coke is now relatively cheap.