Question

a. Define elasticity, calculate and interpret the following elasticities:

Scenario 1		Scenario 1		Scenario 1
P	Q	P	Q	P	Q
6	1000	6	1000	6	1000
5	2000	5	1100	5	1200

b. Outline the three (3) motives of money demand.

c. Highlight any two (2) functions of money.

d. Discuss any five (5) reasons behind the prevalence of poverty in rural areas.

Answer 1

Ans) Elasticity means degree of responsiveness as percentage change in quantity demanded divided by percentage in price.

Scenario 1

ED = (Q2-Q1)/ (Q 2 +Q 1) /(P 2 -P1)/ (P2 + P 1 ) = ( 2000-1000)/3000/-1/11 = 1/3/-1/11 = 11/3 = -3.66

Scenario 1 :

ED = (Q2-Q1)/ (Q 2 +Q 1) /(P 2 -P1)/ (P2 + P 1 ) = ( 1100-1000)/2100/-1/11 = 1/21/-1/11 = -11/21 = -0.52

Scenario 1 :

ED = (Q2-Q1)/ (Q 2 +Q 1) /(P 2 -P1)/ (P2 + P 1 ) = ( 1200-1000)/2200/-1/11 = 1/11/-1/11 = -11/11 = -1

As in scenario 1, the demand is elastic as price changes has been greately effect the quantity demanded where as in other case when the elasticity of demand is less than 1 as it shows that there has been inelastic demand where as in scenario 1 the demand elasticity is unit elastic.

Answer b  : Three motives of the money demand are :

• Transaction motive : This means that consumers has been needed money to meet their day to day requirement where as producer need money for investment
• Precautionary motive: It has been used to cover unforseen events such as sickness, accidents and loses.
• Speculative motive: It has been used for making  speculation or making future gains.

Answer c : Functions of money are :

• Money as a medium of exchange as it is used to pay for goods and services. It help in reducing transation cost and leading to specialisation
• Money as a unit of account

Answer d : Prevalance of poverty in rural area are:

• poor education facilities available to the children.
• lack of infrastructure result in poor structure
• slow growth of resources
• poor health care facilities available to the people living there
• Availability of low income and redistribution of income