Question

1. a recent news broadcast made the following statement : "an increase in the price of coffee has caused a decrease in the demand of coffee". Would an economist agree with this statement? (carefully look at the wording.)

a)yes, an economist would agree with this statement

b) no, an economist would not agree

2. A price ceiling causes the actual number of units of a good bought and sold to decrease compared to the equilibrium quantity. A price floor causes the actual number of units bought and sold to increase compared to the equilibrium quantity.

a) true

b) false

3. Assume that you manage a car wash, and you have previously calculated the price elasticity of demand to be 1.2(in absolute value). To draw in more customers, you decide to DECREASE your price by 5%. Based on this information you would estimate the wuantity demanded will ___ by ____.

a)increase 4.17%

b) increase 5%

c) decrease 6%

d) increase 6%

e) decrease 4.17%

4. the cross-price elasticity of demand between two goods is -1.9. this tells us these two goods are __ and __

a) subtitutes, used together

b) complements, used together

c) complements , used in place of each other

d) substitutes, used in place of each other

Answer 1

1) Yes , an economist would agree to this.

An increase in price of coffee will decrease demand of coffee if we go through the law of demand. Law of demand states that a rise in price will lead to lower demand for that commodity and vice versa. Hence when prices of coffee will increase, it will discourage consumers to consume cofee.

2) False

The effect of price ceiling is on quantity will differ as per quantity demanded and quantity supplied. In case of price ceiling, quantity demanded is more(thus rise) and quantity supplied is less( thus decrease) when compared to equilibrium quantity. So quantity bought and sold will not decrease , but have specific affects on both bought and sold. Same goes for price floor.

*Figure below mentions the effect of both price ceiling and price floor respectively.

3) ans- (d)

A decrease in price will increase the demand. The increase in demand will be in proportion to the decrease in demand and the products elasticity. As the good has elasticity of 1.2, it can be said that the good is elastic and sensitive to price change.  

Hence demand will increase by 6% . Thus all options gets eliminated.

4)(b) cross elasticity takes place when price of one good affects demand for other goods. As the cross elasticity is given as -1.9 hence it is negative, and as per economics a negative cross elasticity denotes that the two goods are complementary. Hence the two goods are complementary and we know that complementary goods are those goods which are consumed together say (bread and butter). Hence they are consumed together.

Option(a) is wrong as substitute goods have positive cross elasticity and not negative. Option(c) is wrong as it says complementary goods are used in place of one another, which is again wrong. Option(d) is wrong because negative cross elasticity takes place in case of complementary goods and not in case of substitute goods.