Question

2) At the start of the new year, Adriana finds out that the price of her economics textbook increased from $100 to $120, She along with her classmates plans on purchasing the textbook, but falls from 10 students to 9 students. At the same time, the minimum wage increased from $11.50 to $12.00. What is Adriana’s income elasticity?

3) Ernesto is looking to purchase a new vehicle as his income has increased from $2,000 per month to $3,000 per month, so his purchase increases from 0 to 1 vehicle. He see’s a new Mercedes Benz that decreased its price from $45,000 to $42,000. What is Ernesto’s income elasticity of demand for a Mercedes Benz vehicle?

4) Cris, a dedicated employee at Google just found out that he will be recognized for the employee of the year award, plus an additional pay increase of 10%. He along with several top employees from other states rush to purchase Porsche 911 4S vehicles resulting in a 7% increase in the quantity demanded. What is Cris’ income elasticity of demand for a Porsche 911 4S?

5) Jerry, an addict of Jamba Juice finds out about his 3% increase in pay, so he plans on increasing his Jamba Juice consumption by 5% not to mention Jamba Juice’s 1% price decrease. However, he plans to decrease his consumption of Tropical Smoothie by 2%. What is Jerry’s cross-price elasticity of demand for a Tropical Smooth with respect to the price of Jamba Juice?

6) Matthew is an addicted coffee drinker and proud patron of Starbucks, so he keeps an eye out on the prices of coffee. He finds out that Starbucks increases its price of a grande frappuccino from $3.50 to $4.00, so he expects many patrons to consume less grande lattes from 2 to 1 per week, and to find an alternative. He lives by a Coffee Bean and Tea Leaf café and his opportunity for a grande frappucino is a medium ice blended. He plans to consume more medium ice blended drinks increasing his quantity demanded from 1 to 5 per week. What is the cross price elasticity of demand for a medium ice blended drink with respect to a grande frappuccino’s price?

Answer 1

2) Given, old price is $100 and new price is $120. Change in price = $20
Old wage income is $11.50 and new wage income is $12. Change in income is $0.50
Old quantity demanded is 10units and new quantity demanded is 9 units. Change in demand is -1 unit

Income elasticity of demand = (
where = change in quantity = -1units
= change in income = $0.50
   Y = initial or old income = $11.50
   q = initial or old demand = 10 units

Income elasticity of demand = (
or, Yd = (-1/0.50) * (11.50/10)
or, Yd = -2 * 1.15
or, Yd = -2.3

3)Old income = $2000, new income = $3000 change in income = = $1000
Old demand = 0 units, new demand = 1 unit, change in demand = = 1 unit

Income elasticity of demand = (
where = change in quantity = 1units
= change in income = $1000
   Y = initial or old income = $2000
   q = initial or old demand = 0

Yd = (1/1000) * (2000/0) thus this is indeterminant

4) Percentage bchange in income is 10% = 0.1
percentage change in demand is 7% = 0.07

Thus income elasticity od demand = 0.07/0.1 = 0.7

5) Percentage change in price of jamba juice is -1% = -0.1
Percentage change in quantity demanded for tropical smoothie is -2% = -0.02

Thus cross price elasticity = Percentage change in quantity demanded for tropical smoothie/Percentage change in price of jamba juice

   = -0.02/-0.1 = 0.2

6) Matthew increses his demand for ice blended coffee in Tea leaf cafe as a result of price increase of frappuccino in Starbucks.

Old price at starbucks is $3.50 , New price is $4.00. Change in price = $0.50

Old quantity at tea leaf cafe was 1 unit, New demand is 5units. Change in quantity = 4units

Cross price elasticity = (change in quantity demanded ay tea leaf / change in price at starbucks)* (initial price at starbucks/initial quantity at tea leaf)
Cross price elasticity = (4/0.50)*(3.50/1) = 8/3.50 = 2.3