Question

Question No.4:                                                                                                                   {10marks}

• Solve the following problems:

1. When her wage rises from £10,000 p.a. to £12,000, an individual only uses the bus twice a week compared to the ten journeys she used to make each week before the increase. Calculate åy for this individual, and comment on the result. (2marks)

2. Calculate åd when the price of TV set declines from OMR 100 to OMR 90, quantity demanded increases 10%. Comment on the result.(2marks)

3. When Mr. Ahmed's income was OMR. 500, he bought 50 liters of milk per month; when his salary increased to OMR. 550, he purchased 54 liters of milk per month. What was Mr. Ahmed's income elasticity of demand for milk? (3marks)

4. Suppose the price of the good increases by 15%. As a consequence, the demand for other good increases by 30%. Calculate the cross-price elasticity for the other good. Is the other good a substitute good or a complementary product to the first one? (3marks)

Answer 1

Solution :

1. When her wage rises from £10,000 p.a. to £12,000, an individual only uses the bus twice a week compared to the ten journeys she used to make each week before the increase. Calculate åy for this individual, and comment on the result.

M₀ = 10,000
M₁ = 12,000
=> Q₀ = 10
=> Q₁ = 2

= (2/2000) * (10000/10) = 1

2. Calculate åd when the price of TV set declines from OMR 100 to OMR 90, quantity demanded increases 10%. Comment on the result.

Elasticity = = (-10)/10 = -1

3. When Mr. Ahmed's income was OMR. 500, he bought 50 liters of milk per month; when his salary increased to OMR. 550, he purchased 54 liters of milk per month. What was Mr. Ahmed's income elasticity of demand for milk?

M₀ = 500
M₁ = 550

=> Q₀ = 50
=> Q₁ = 54

Income Elasticity

Income Elasticity = 40/50 = 0.8

4. Suppose the price of the good increases by 15%. As a consequence, the demand for other good increases by 30%. Calculate the cross-price elasticity for the other good. Is the other good a substitute good or a complementary product to the first one?

Now, Price of goods increases by = 15%
Demand for other good increases by = 30%

Gross Price Elasticity = 30/15 = 2

Since Gross Price Elasticity is positive which makes goods a substitute good.

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