Question

Which of the following pairs of goods would be expected to have a positive cross-price elasticity of demand? *

A) coffee and tea.

B) gasoline and cars

C) tennis racquets and tennis balls.

D) hot dogs and hot dog buns.

As the price of socks increases, what would reasonably be expected to happen to the equilibrium price and equilibrium quantity of shoes? (Socks and shoes are complements.) *

A) Equilibrium price would increase and equilibrium quantity would decrease.

B) Equilibrium price and quantity would both decrease.

C) Equilibrium price would decrease and equilibrium quantity would increase.

D) Equilibrium price and quantity would both increase.

As we move up the demand curve, the price elasticity of demand *

A) increases

B) decreases

C) becomes unitary

D) does not change

If the price of lemonade increases relative to the price of grape juice, the demand for: *

A) grape juice will decrease.

B) grape juice will increase.

C) lemonade will decrease.

D) lemonade will increase.

Suppose a consumer's income increases from $30,000 to $36,000. As a result, the consumer increases her purchases of compact disks (CDs) from 25 CDs to 30 CDs. What is the consumer's income elasticity of demand for CDs? *

A) 0.5

B) 1.0

C) 1.5

D) 2.0

Answer 1

1. When cross price elasticity of two goods is positive, then

if price of one good increases, the demand for another good increases. Now let's check the options one by one.

In option (A) the pair is, tea and coffee. We know that, tea and coffee are substitutes. Hence, if the price of tea increases, consumers will switch to coffee. Hence, demand for coffee will increase. Hence, cross price elasticity is positive.

Option (A) is correct.

Now, the pairs in option (B), option (C) and option (D) are complements. In other words, if gasoline price rises, people will not buy cars. Hence, car demand will fall. Cross price elasticity is negative. Same logic for the pairs, 'tennis racquets and tennis balls' and 'hot dogs and hot dog buns'.

Hence, we eliminate (B), (C) and (D).

Answer is Option (A). (coffee and tea)

2. Socks and Shoes are complements. Hence, if price of socks increases, people will not pretend to buy shoes. Hence, shoe's demand will fall. Eventually according to the law of demand, shoe's price will increase.

Hence, if price of socks increases then,

the equilibrum price of shoe increases and

the equilibrum quantity of shoe decreases.

We eliminate options (B), (C) and (D) as they do not match our result.

Answer is Option (A). (Equilibrium price would increase and equilibrium quantity would decrease.

3. The formula of price elasticity of demand is

Ed = (dQ/dP).(P/Q)

Now, dP/dQ = Slope of the demand curve i.e. constant for any linear demand curve.

Now, as we move up the demand curve, then the quantity demanded (Q) decreases and Price (P) increases.

Now, from the above formula, we can see that,

if Price (P) increases and Quantity Demanded (Q) decreases, then (P/Q) increases. Hence, the price elasticity of demand increases.

We eliminate options (B), (C) and (D) as they do not match our result.

Answer is Option A. (Increases)

4. We know that, lemonade and grape juice aee complements. Hence, their cross price elasticity is positive. Means, if price of one good increases, demand for other good decreases.

If the price of lemonade increases relative to the price of grape juice, then the demand for grape jouce must increase. As people will buy more of grape juice at lower price.

Option (B) agrees with this.

We eliminate option (A) as it says the opposite.

Now, if price of lemonade rises, then demand for lemonade will decrease according to law of demand.

Option (C) agrees with this. But we eliminate option (D) as it says the opposite.

Answer is Option (B) (grape juice will increase) and Option (C) (lemonade will decrease).

5. Income increases from $30000 to $36000.

Hence, % change in income is

= [(36000 - 30000)/30000]×100%

= 20%

Demand for CDs rises from 25 CDs to 30 CDs.

Hence, % change in demand is

= [(30 - 25)/25]×100%

= 20%

Hence, Income elasticity of demand is

Em

= (% change in income)/(% change in demand)

= 20/20

= 1.0

We eliminate options (A), (C) and (D) as they don't match our result.

Answer is option (B) (1.0)

Hope the solutions are clear to you my friend.