Question

All questions must be answered in details

ELASTICITY

1. Suppose that Bill’s Thrift Mart annual Founder’s Day sale, when all prices in the store are reduced by 50%, results in its sales doubling compared to a typical day. (a) What is Thrift Mart’s price elasticity of demand? (b) Is the Founder’s Day sale a good idea for the store?

2. List three examples of an inferior good (not discussed in class or in the text). Justify your choice of examples.

3. How responsive are your grades to a change in the amount of studying you do? For example, if you increased your study time by 25%, how would your grades respond? State these estimates as elasticities. Are your estimates high or low? Would it be worth your while to study more for each class? Explain.

4. Jumping Joe’s Night Club has found that when they offer half price admission to the club on Wednesday nights (when business is typically slow), their total revenue rises. (a) Is their demand elastic? Explain. (b) Is it a good idea for them to continue with this promotion? Why?

5. Absolut Vodka ran the same advertising campaign for about 20 or 30 years. What must the company have believed to be its advertising elasticity of demand? Explain.

7. The elasticity of demand for Dave’s Famous is Pizza is 2.6. Dave is considering raising pizza prices by 20%. Is this a good idea? What will happen to his sales? His total revenue? Explain.

Answer 1

ELASTICITY

1. Suppose that Bill’s Thrift Mart annual Founder’s Day sale, when all prices in the store are reduced by 50%, results in its sales doubling compared to a typical day. (a) What is Thrift Mart’s price elasticity of demand? (b) Is the Founder’s Day sale a good idea for the store?

a)Price elasticity of demand= % change in quantity demanded / % change in price of the good.

% change in quantity demanded = ((New quantity-old quantity)/old quantity)) x 100

% change in quantity demanded= 100

% change in price of the good =50

Price elasticity of demand=100/50=2

b) Yes it is good idea since the price elasticity of demand is 2, which means the demand is very elastic. For every one percent change in price, the change in quantity demanded is 2.

2. List three examples of an inferior good (not discussed in class or in the text). Justify your choice of examples.

Inferior good is one for which demand decreases if income increases.

Examples of inferior goods

1. Public transportation: If income increases, people will buy cars instead of using the public transportation system.
2. Bread, cereal, noodles and other staple food of the poor. If income increases, people will buy more expensive food.
3. Unbranded products like clothing, shoes etc. People will move to branded products if income increase.