Question

Choose the degree AND the type of elasticity list for each event below: Please use ONLY lower case letters as your answers.

Degree	Type
a) perfectly elastic	f) price elasticity of demand
b) elastic	g) price elasticity of supply
c) unit elastic	h) cross elasticity (substitute)
d) inelastic	i) cross elasticity (complement)
e) perfectly inelastic	j) income elasticity (normal)
	k) income elasticity (inferior)

Part 1. Egg prices change by -6 % causing the demand for toast to change by 3 % . (Note: decreases in p or q will be shown as a negative change, increases shown as a positive change)

The degree of elasticity is (a-e):

The type of elasticity is (f-k):    

Part 2. Beer prices increase 29 % causing a 30 % increase in the amount offered for sale.

The degree of elasticity is (a-e):

The type of elasticity is (f-k):    

Part 3. Beef producers' sales change by 3 % because of a 2 % change in the income of the average consumer (Note: decreases in q or y will be shown as a negative change, increases shown as a positive change)

The degree of elasticity is (a-e):

The type of elasticity is (f-k):    

Part 4. Book prices change by -6 % causing bookshop sales to change by 3 %. (Note: decreases in p or q will be shown as a negative change, increases shown as a positive change)

The degree of elasticity is (a-e):

The type of elasticity is (f-k):    

Part 5. Soda water prices change 10 % causing a 7 % change in juice sales. (Note: decreases in p or q will be shown as a negative change, increases shown as a positive change)

The degree of elasticity is (a-e):

The type of elasticity is (f-k):   

Answer 1

Part 1) Due to a -6% change in the price of eggs, the demand for toast increases by 3%

The cross price elasticity becomes = 3/-6 = -1/2

As the demand for toast increases with the decrease in the price of eggs and the cross price elasticity is negative. Eggsa nd toast are complements to each other.

The decgree of elasticity - inelastic (1/2<1)

Type= Cross price elasticity (complements)

Part 2) A 29% increase in the price of beer, increased the supply of beer by 30 %

The price elasticity of supply becomes= 30/29 =1.03

Degree of elasticity : elastic ( 1.03< 1)

Type = Price elasticity of supply.

Part 3) Beef producers' sales change by 3 % because of a 2 % change in the income of the average consumer

Thus, the income elasticity becomes= 3/2 =1.5

As the income elasticity is positive, that is with the increase in the income of the consumer, the demand for for beef increases.

Degree: elastic (1.5 <1)

Type: Income elasticity (normal)

Part 4) Book prices change by -6 % causing bookshop sales to change by 3 %.

The price elasticity of demand = 3/ -6 = -1/2

Degree: inelastic (1/2<1)

Type; Price elasticity of demand.

Part 5)  Soda water prices change 10 % causing a 7 % change in juice sales

The cross price elasticity = 7/10 = 0.7

As the sign of cross price elasticity is positive, soda water and juice are substitutes to each other.

Degree: Inelastic (0.7<1)

Type; Cross price elasticity (substitutes)