Question

1. From the data shown in the table below about demand for smart phones, calculate the price elasticity of demand (using the arc method) from: 1.1. Point B to point C 1.2. Point D to point E 1.3. Point G to point H Classify the elasticity at each point as elastic, inelastic or unit elastic. Points P Q A 60 3,000 B 70 2,800 C 80 2,600 D 90 2,400 E 100 2,200 F 110 2,000 G 120 1,800 H 130 1,600 2. From the data shown in the table below about supply of alarm clocks, calculate the price elasticity of supply from: 2.1. point J to point K 2.2. point L to point M 2.3. point N to point P. Point Price Quantity Supplied J $8 50 K $9 70 L $10 80 M $11 88 N $12 95 P $13 100 2 Classify the elasticity at each point as elastic, inelastic, or unit elastic. 3. The federal government decides to require that automobile manufacturers install new anti-pollution equipment that costs $2,000 per car. Under what conditions can carmakers pass almost all of this cost along to car buyers? Under what conditions can carmakers pass very little of this cost along to car buyers? Show it graphically. 4. Suppose you are in charge of sales at a pharmaceutical company, and your firm has a new drug that causes bald men to grow hair. Assume that the company wants to earn as much revenue as possible from this drug. 4.1. If the elasticity of demand for your company’s product at the current price is 1.4, would you advise the company to raise the price, lower the price, or to keep the price the same? 4.2. What if the elasticity were 0.6? 4.3. What if it were 1? Explain your answer. 5. The average annual income rises from $25,000 to $38,000, and the quantity of bread consumed in a year by the average person falls from 30 loaves to 22 loaves. What is the income elasticity of bread consumption? Is bread a normal or an inferior good? 6. Suppose the cross-price elasticity of apples with respect to the price of oranges is 0.4, and the price of oranges falls by 3%. What will happen to the demand for apples? 7. Transatlantic air travel in first class has an estimated elasticity of demand of 0.40 less than transatlantic air travel in economy class, with an estimated price elasticity of 0.62. Why do you think this is the case? 8. The equation for a demand curve is P = 2/Q. 8.1. What is the elasticity of demand as price falls from 5 to 4? 8.2. What is the elasticity of demand as the price falls from 9 to 8? Would you expect these answers to be the same

Answer 1

Solution to Question 1 :

1.1) Elasticity of demand is 0.5 , thus it is inelastic

1.2) Elasticity of demand is 0.75 , thus it is inelastic

1.3) Elasticity of demand is 1.333, thus it is elastic

Formula used for Elasticity is

(-) (∆Q/∆P)* (P/Q)