Question

1. What, if anything, does each of the following quotations tell you about the demand elasticity? Explain.

a. "I drink two cups of coffee every morning regardless of the price."

b. "Attendance at the ball park went down when they increased the ticket price, but in spite of the decreased attendance, more money was taken in.”

c. "When the newspaper raised its price, the number of newspapers sold dropped by 20%.

d. My budget is $10 a week for cigarettes. I don’t care what happens to the price of cigarettes, once my budget is gone, I chew gum!

Answer 1

Question 1

a) Whatever change happens to price of coffee, he drink two cup of coffee every morning. This shows that demand for coffee is perfectly inelastic. That is quantity of demand is fixed at two cup regardless of change in price.

b) With an increase in the ticket price, there was a decrease in attendane but more money was taken in. It means that with an increase in price, even though the quantity demanded of ticket decreased, there was an increase in the expenditure made by people on park ticket. Therefore even after an increase in price, if the total expenditure increases, demand is said to be inelastic demand.

c) Demand for newspaper is elastic because an increase in the price of newspaper has brought about a 20% decrease in the demand for newspaper.

d) In this case the consumer has allocated $10 per week for cigaretts. So when this budget is over he stops its consumption. Therefore an increase in the price of cigarettes will cause a decrease in the demand for cigaretts because of budget constraint. Therefore his demand for cigarettes is elastic