Question

13. If a 10% increase in the price of gas causes a 40% decrease in the demand for standard sized autos, then the cross-price elasticity of demand is:
Possible answers: -4.00    -3.00    -2.50    -2.00    -1.75    -1.33

14. If the price elasticity of demand of for gasoline is 2.7, then a 20% increase in the quantity demanded is caused by:
Possible answers: a. 7.41% decrease in the price of gasoline            b. 8.33% increase in the price of gasoline            c. 11.54% decrease in the price of gasoline             d. 11.54% increase in the price of gasoline            e. 16.67% increase in the price of gasoline            f. 16.67% decrease in the price of gasoline

15. Suppose the price of 40 inch LCD televisions decreases by 20%. If their price elasticity of demand is 0.85, then this price decrease will cause a:15.       a.    25% decrease in quantity demanded            b.   13% decrease in quantity demanded            c.    9% decrease in quantity demanded             d.    7% decrease in quantity demanded            e.   6% decrease in quantity demanded            f.   17% increase in quantity demanded

16. A business report claims that the median home price of existing homes fell from $300000 to $175000. Over the same time period the quantity demanded of these homes sold increased from 2150000 to 4200000. Using the arc elasticity formula, calculate the arc elasticity implied. The arc formula is: E = q1-q2/p1-2 * p1+p2/q1+q2
Possible answers: a. 0.200            b. 0.591            c. 0.193            d. 0.535            e. 0.715            f. 1.23

17. The demand for a product in income inelastic with an elasticity coefficient of 0.85. If there is a 25% increase in demand due to increased income, then the increase in income must be: a. 29.4%            b. 70.0%            c. 48%            d. 30.7%            e. 120%            f. 52.5%

Please show work on how you solved the problems.

Answer 1

13. -4
(Cross price elasticity of demand = Percentage change in demand of autos/Percentage change in price of gas = -40%/10% = -4)

14. a. 7.41% decrease in the price of gasoline
(Price elasticity is always negative. So, price elasticity = Percentage change in demand of gasoline/Percentage change in price of gasoline = -2.7
So, percentage change in price of gasoline = Percentage change in demand of gasoline/(-2.7) = 20%/(-2.7) = -7.41)

15. f.   17% increase in quantity demanded
(Elasticity = -0.85 = Percentage change in demand/Percentage change in price
So, percentage change in demand = (-0.85)*Percentage change in price = (-0.85)*(-20%) = 17%)

16. f. 1.23
(E = q1-q2/p1-2 * p1+p2/q1+q2 = [(2,150,000-4,200,000)/(300,000-175,000)]*[(300,000+175,000)/(2,150,000+4,200,000) = (-2,050,000/125,000)*(475,000/6,350,000) = -1.23)

17. a. 29.4%
(According to income elasticity of demand = percentage change in quantity/Percentage change in income = 0.85
So, Percentage change in income = percentage change in quantity/0.85 = 25%/0.85 = 29.4%)