Question

4. For each of the following, state if the reaction is Elastic? Inelastic? Unitary elastic? Perfectly elastic? Perfectly inelastic? Support your answer as instructed.

a. An international student was quoted as saying,” I would give up none of my units if they raise tuition by another 15%”; his unemployed American classmate felt he would give up 10% of them, however. Reaction is _____________________ Support with calculation or explanation . .

b) A couple of years ago I received this email from a GCC instructor (this really happened!) “Hi Caroline, I just got back from the little store on Campus ...... I was shocked that they charged me $2.50 for a 20 oz, Coke. Gas at a high price I understand, but Cola??? Wow!. Never! As a result, the demand curve of this colleague is best described as being __________________ - why? Explain/ show with a graph.

c). It was reported in Feb 2016 that Uber is cutting the fares in New York which is angering its drivers. The reason Uber gave: “In NY things tend to be quieter after the holiday. So we lowered the prices to get more people to use Uber. One driver complained, however, that the amount of money he earned did not change. Reaction of customers is ( elastic; inelastic; unitary elastic) _________________ Use total revenue to explain graphically.

Answer 1

a)

Elasticity and inelasticity refers to the degree to which the demand responds to a change in another economic factor.

This refers to a Perfectly elastic demand. A small increase in price will push the demand to zero. Here inthis scenario, if the tution fee increased by 15%, none of the units will be given up.

Hence the demand plummets to zero, with a small increase in price.

Said so, it refers to a Perfectly elastic demand.

b)

The demand curve here can be best explained as Relatively Elastic. Relative elasticity refers to, a change in the price of a product results in a more than proportionate change in demand for that product. This always have a negative impact, where the demand drops inversely. For an instance, a 10% increase in price produces a 20% decrease in demand, it can be referred to as Relatively Elastic.

Here it is mentioned that the person was surprised with the price of the Coke. The customer will rethink his spending priorities here in this case, as the price is higher than expected.

c)

This case refers to a Inelastic demand.

As per the data provided, the company has decreased the price, expecting a boom in demand. But as per the drivers, earnings have been the same, which refers to a less than proportionate change in demand. The demand has not increased as expected, which doesnt have an impact on the revenue of the company.

For example,

Scenario1

Assume that the company was serving two customers say, A and B, when the price was $15 per person from Point X to Point Y

Amount paid by Customer A = $15

Amount paid by Customer B = $15

Total earnings = $30

Scenario 2

As per the driver,their earings remained the same, despite a change in the price.

Say, the company has reduced the price by $5 from Point X to Point Y

Hence the new price will be $10

As the drivers earings remained the same at $30, the customer number shoud have increased by 1.

Amount paid by customer A = $10

Amount paid by customer B = $10

Amount paid by customer C = $10

We have a new customer here, C.

From the above explanation we can conclude that, the demand changed in a less than proprtionate manner, than the change in price.

Hence the demand is Inelastic.