Question

1. which of the following would cause a definite leftward shift of the demand curve?

a) an expectation by consumers of a lower price and an increase in the price of a compliments

b) an expectation by consumers of lower income and an increase in the price of a substitute

c) a decrease in the number of consumers and a decrease in income (assume inferior good)

d) a decrease in income and a positive change in consumer tastes

2. When a hair salon charged $20 for a haircut it served 300 customers in a day. When it increased the price to $24 it served 240 customers in a day. What is the price elasticity of demand (in absolute value)?

a) 1.65

b) 1.22

c) .82

d) 1.00

e) 1.34

Answer 1

Q1

Option

a) an expectation by consumers of a lower price and an increase in the price of complements

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an expectation by consumers of a lower price decreases demands and shifts the demand to the left and an increase in the price of complements decreases demand and shifts to the left. In total demand curve shifts to the left.

an expectation by consumers of lower-income decreases demands and shifts the demand to the left and an increase in the price of a substitute increases demand and shifts the demand to the right. In total unknown.

a decrease in the number of consumers decreases demand and shifts the demand to the left; and a decrease in income (assume inferior good) increases demand and shifts to the right. It is unknown in total.

a decrease in income decreases demand and shifts to the left and a positive change in consumer tastes increases demand and shifts the demand to the right. It is unknown in the total.

Q2
Answer
Elasticity of demand=(change in quantity/average quantity)/(change in price/average price)
Change in quantity=240-300=-60
average quantity=(240+300)/2=270
change in price=24-20=4
average price=(24+20)/2=22
Elasticity of demand=(-60/270)/(4/22)
=-1.22222222
=1.22 (aboslute value)
Option b