Question

In: Economics

Calculate the appropriate elasticity and identify what it tells about the product(s). (i.e., is it a...

  1. Calculate the appropriate elasticity and identify what it tells about the product(s). (i.e., is it a normal or inferior good, are they complements or substitutes, is it elastic, inelastic, or unit elastic).
  1. The price of apples increases by 5% causing the quantity demanded of pie crust to increase by 2%. (2 points)
  1. Income increased by 6% causing the quantity demanded of pizza to increase by 10%. (2 points)
  1. The price of computers increased by 5% causing the demand for computer disks to decrease by 2%. (2 points)
  1. The price of automobiles decreased by 10% causing quantity demanded to increase by 5%. (2 points)

Solutions

Expert Solution

A.

Cross price elasticity of demand =percentage change in quantity demanded for pie crust /percentage change in price of apples

=2/5

=0.4

When price elasticity of demand is less than 1 it is inelastic.

Goods are: substitute

Explanation :

When cross price elasticity of demand is positive, two goods are substitute.

B.

Income elasticity of demand =percentage change in quantity demanded /percentage change in income

=10/6

=1.67

When income elasticity of demand is greater than 1 it is elastic.

Good is : normal good

Explanation :

When goods are normal, increase in the income will cause increase in the demand for good. And income elasticity of demand is positive. So here pizza is normal good as increase in income raise the demand.

C.

Cross price elasticity of demand =percentage change in quantity demanded for computer desk /percentage change in price of computer

=-2/5

=-0.4

When cross price elasticity of demand is less than 1 it is inelastic.

Goods are: complements

Explanation :

When two goods are complements, increase in the price one good cause decrease the demand for another good as they are used together. For complement goods cross price elasticity of demand is negative.

D.

Price elasticity of demand =percentage change in quantity demanded /percentage change in price

=5/-10

=0.5

When price elasticity of demand is less than 1 it is inelastic.

Rahul Sunny answered 2 years ago
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