Question

3. Consider the demand elasticities below (these are actual estimates of elasticities drawn from many sources):

Price Elasticities Commodity Short Run Long Run Radio and TV repairs .47 3.84 Movies .87 3.67 China and glassware 1.54 2.55 Tobacco Products .46 1.89 Electricity (household) .13 1.89 Foreign travel .14 1.77 Bus transportation (local) .20 1.20 Medical insurance .31 .92 Jewelry and watches .41 .67 Stationery .47 .56

Estimated Income Elasticities Commodity Income Elasticity Radio and TV repairs 5.20 Movies 3.41 Foreign Travel 3.90 Medical insurance 2.20 Electricity (household) 1.94 Bus transportation (local) 1.89 Stationery 1.83 Jewelry and watches 1.64 Tobacco products.86 China and glassware .77 Margarine - .20 Flour - .36

Estimated Cross Elasticities Commodity Cross Elasticity Margarine Butter +.81 Butter Margarine +.67 Natural Gas Fuel oil +.44 Electricity (Household) Natural Gas +.20 Beef Pork +.28 Pork Beef +.14 Sugar Fruits - .28 Cheese Butter - .61

3a. What do you observe about the long-run price elasticities vs. the short-run elasticities? Would you expect to observe this?

Explain. b. If the price of bus transportation were to increase, would the bus companies find that their revenues increase or decrease? Is your answer the same for the short run and long run? Explain.

c. The short-run demand elasticity for tobacco products is .46. Would you infer from this that the short-run demand elasticity for Marlboro Cigarettes is .46? If not, what would you expect to be true of the demand elasticity for Marlboros?

d. The income elasticity for foreign travel is estimated to be 3.90, while the income elasticity for margarine is estimated to be -.20. What do these statistics tell you? Do they surprise you, or are they as you would expect.

e. What does the cross elasticity between margarine and butter tell you? What about the cross elasticity between cheese and butter? f. Are there any elasticity coefficients shown above that you find surprising or interesting? Discuss.

Answer 1

Price elasticity of	short run	long run
radio and TV repairs	0.47	3.84
movies	0.87	3.67
china and glassware	1.54	2.55
tobacco products	0.46	1.89
household electricity	0.13	1.89
foreign travel	1.4	1.77
bus transportation	0.2	1.2
medical insurance	0.31	0.92
jewellery and watches	0.41	0.67
stationery	0.47	0.56

commodity	income elasticity
radio and TV repairs	5.2
movies	3.41
foreign travel	3.90
medical insurance	2.2
household electricity	1.94
bus transportation	1.89
stationery	1.83
jewellery & watches	1.64
tobacco products	0.86
china and glassware	0.77
margarine	-0.2
flour	-0.36

commodity	cross price elasticity
margarine & butter	0.81
butter and margarine	0.67
natural gas & fuel oil	0.44
household electricity & natural gas	0.2
beef & pork	0.28
pork & beef	0.14
sugar and fruits	-0.28
cheese and butter	-0.61

Part (A)

It is observed that short run price elasticity is smaller than long run elasticity for every commodity. Price elasticity of demand is usually lower in the short run, before consumers have much time to react, than in the long run, when they have greater opportunity to find substitute goods. Thus, demand is more price elastic in the long run than in the short run

Part (B)

in short run price elasticity of local bus transportation is 0.2 whereas in long run price elasticity of local bus transportation is 1.2. This implies local bus transportation service is price inelastic (0.2<1) in short run and price elastic (1.2>1) in long run.

When price elasticity of demand is inelastic and price of good is raised , total revenue increases

when price elasticity of demand is elastic and price of good is raised , total revenue decreases

Rise in price of bus transportation raises revenue in short run but reduces revenue in long run

Part (C)

It is mentioned that price elasticity of tobacco products in short run is 0.46. This does not implies short run demand elasticity for marlboro cigarettes is 0.46 because short run price elasticity of a category of products i.e. tobacco products is 0.46 not only of cigarettes. Although, as per WHO cigarettes account for the largest share of manufactured tobacco products, 96 percent of total value sales. Tobacco products also includes cigars, kreteks, bidis and many others

Though we can infer that short run price elasticity of marlboro cigarettes is around 0.46

Part (D)

it is found that income elasticity of foreign travel is 3.9 while that of margarine is (-0.2). This means foreign travel is income elastic and margarine is income inelastic.

high income elasticity of foreign travel is plausible after all people with higher income tend to visit foreign lands

Margarine is a healthy inexpensive substitute of butter. It can be inferred as income rises people tend to reduce consumption of margarine and switchover to butter, which is unelathy due to presence of saturated fats and expensive also

PArt (E)

It is observed that cross price elasticity of margarine and butter is +0.81, which implies 1% rise in price of butter increases demand for margarine by 0.81%. This means margarine and butter are substitute goods.

Cross price elasticity of cheese and butter is (-0.61). This means cheese and butter are complementary goods. Therefore, cheese and butter are cosumed togather not alone, which is in contrary to the general thought that cheese and butter are substitutable