Question

Calculate the elasticity for the following questions (USING THE MIDPOINT (AVERAGE) FORMULA) and indicate if the goods are:

1. Inferior,
2. Normal,
3. Complements, or
4. Substitutes

(Please Include The Negative signs in your answers where appropriate and calculate to 2 decimals)

A. The price of gasoline increases from 10 per barrel to 32 per barrel and as a result, the demand per month for new cars changes from 700 to 200.

Part 1: The elasticity is:


Part 2: These goods are: (answer using numbers, 1-4)

B. As a result of a change in income from 1,900 to 3,100 per month, the consumption of good X changes from 300 to 375 units.


Part 3: The elasticity is:



Part 4: Good X is a(an): (answer using numbers, 1-4)


C. As a result of a decrease in the price of good Y from 45 to 17 the demand for good X changes from 200 to 400 units.


Part 5: The elasticity is:



Part 6: These goods are: (answer using numbers, 1-4)


D. As a result of an economic boom in Calgary, the average income increases from 2,200 to 7,800 per month and as a result the demand for new houses increases from 200 to 260 units.


Part 7: The elasticity is:



Part 8: New houses are a(an): (answer using numbers, 1-4)

Answer 1

A ) . Part - 1 . Ans: The elasticity is: - 1.05

A ) . Part - 2 . Ans: These goods are: Complements

Explanation:

Cross elasticity of demand =

= { ( 200 -700 ) / ( 32 -10 ) } * [ ( 10 +32 ) / ( 700 +200)]

= ( -500 / 22 ) * ( 42 / 900 )

= -22.7272 * 0.0466

= - 1.05

Since , cross elasticity of demand is negative , therefore both the goods are complements.

B ) . Part - 3 . Ans: The elasticity is: 0.46

B ) . Part - 4 . Ans: These goods are: Normal

Explanation:

Income elasticity =

= {( 375 -300 ) / ( 3100 -1900 )} * {( 1900 + 3100 ) / ( 300 +375}

= ( 75 / 1200 ) * ( 5000 / 675)

= 0.0625 * 7.4074

= 0.46

Since income elasticity of demand is positive and less than one , the good is normal good.

C ) . Part - 5 . Ans: The elasticity is: - 0.82

C ) . Part - 6 . Ans: These goods are: Complements

Explanation:

Cross elasticity of demand =

= { ( 400 -200 ) / ( 17 - 45 ) } * [ ( 45 + 17 ) / ( 200 + 400 ) ]

= ( 200 / - 25) * ( 62 / 600)

= -8 * 0.1033

= - 0.82

Since , cross elasticity of demand is negative , therefore both the goods are complements.

D ) . Part - 7. Ans: The elasticity is: 0.23

D ) . Part - 8 . Ans: These goods are: Normal

Explanation:

Income elasticity =

= {( 260 -200 ) / ( 7800  - 2200 )} * {( 2200 + 7800 ) / ( 200 +260}

= ( 60 / 5600 ) * ( 10000 / 460)

= 0.0107 * 21.7391

= 0.23

Since income elasticity of demand is positive and less than one , the good is normal good.