Question

Question 1

Suppose that the price of bread increases from $1/loaf to $2/loaf, resulting in the quantity demanded of bread to decrease from 200 loaves to 160 loaves. What is the arc elasticity of demand for bread? Is bread elastic or inelastic? Why? Is demand for bread elastic or inelastic over this price range? (20 points)

Question 2

If a firm wants to increase revenue on its product. Clearly explain why the owner needs to know whether their product is elastic or inelastic in deciding to change the price of their product. (15 points)

Question 3

Use graphs to demonstrate the income elasticity of:

1. Steaks,
2. Hamburgers, and
3. Ramen noodles.

What assumption did you make about each product in regard to its income elasticity? Use the appropriate economic terms in describing your assumptions. What is the economic significance of this for US agriculture? Explain. (30 points)

Question 4

Consider a competitive market for pork with the quantity demanded (per year) at various prices are given as follows:

Price (dollars/kg)	Demand (million kg)
60	22
80	20
100	18
120	16

Calculate the price elasticity of demand when the price is $80/kg. (5 points) Calculate the price elasticity of demand when the price is $00/kg. (5 points) Calculate the arc elasticity between price of $80/kg and $100/kg. (5 points)

Question 5

What impact will animal rights laws that cause producers to change their production practices have on the price and quantity of meat? Hint: be careful here… think about both demand and supply. (10 points)

Question 6

The own-price elasticity is related to changes in quantity demanded. Cross-price elasticities are related to changes in demand. Explain this statement. (10 points)

Answer 1

1.

P	Q	Change in P	Change in Q	Average P	Average Q	Ed Arc
1	200
2	160	1	-40	1.5	180	-0.5

The demand is inelastic. The value of price elasticity of demand is less than 1. The demand is inelastic over this price range which shows that for a 1% rise in price the quantity demanded will fall by 0.5% in our case.

2.

If the firm wants to raise revenue for its product then it will have to consider the price elasticity of demand. If the demand is inelastic then a rise in price will raise the revenues generated for the firm. If the demand is elastic then a price fall will raise the revenues generated.

3. The information regarding income elasticity may please be given. It can be either data for demand and income or just the elasticity for th given products.

4.

Price (dollars/kg)	Demand (million kg)	Change in P	Change in Q	Average P	Average Q	Ed Arc
60	22
80	20	20	-2	70	21	-0.40
100	18	20	-2	90	19	-0.56
120	16	20	-2	110	17	-0.75