Question

The quantity of demand for chickens fell by 2% when prices rose by 8%. By substituting, in the equation Ep, the result is (-.50). Notice a negative result.

a) Why is there an inverse relationship between quantity and price?

b) is elastic or inelastic.

c) What does a ratio of change of 8: 2 mean?

4. If a 12% increase in the price of grapefruit juice causes a 22% decrease in the quantity of grapefruit juice demanded. On the other hand, there is a 14% increase in the amount of demand for Ron Don Q; Calculate: a) the price elasticity of demand for grapefruit juice and rum. b) Calculate the cross elasticity of demand between grapefruit juice and Don Q Rum.

Answer 1

a) When price of chickens rises, people consume less quantity of chickens than before. Because people consume less quantity of any good that has become expensive and tend to replace some of the consumption of this good with cheaper alternatives.

So, when price of chickens increases, the quantity demanded of chickens decreases.

Similarly, when chickens price decreases, people consume more of chickens because people tend to consume more of good that has become cheaper.

Therefore, rise in chicken price causes demand to decrease and fall in chicken price causes demand to increase. Hence, the inverse relationship.

b) Inelastic.

​​​​​​It is given that elasticity is -0.50.

Absolute value of elasticity = 0.50 < 1. The absolute value of elasticity is less than 1. So, demand is inelastic.

That is, a one percent increase in price will decrease the quantity demanded by less than one percent.

c) The ratio of change 8:2 means that for a one percent change in price the quantity demanded will change by 2/8 = 0.25%.

A one percent increase in price decreases quantity demanded by 0.25% and a one percent decrease in price will increase quantity demanded by 0.25%.

4. Increase in price of grapefruit juice = 12%

Decrease in quantity demanded of grapefruit juice = 22%. ----> change = -22%.

Increase in quantity demanded of Ron Don Q = 14%.

a) price elasticity of demand =

(%change in demand/%change in price ) =

-22/12 = -1.83

Therefore, price elasticity of demand of grapefruit juice = -1.83

b) Cross price elasticity =

(% change in quantity demanded of Ron Don Q/ % change in price of grapefruit juice) =

14/12 = 1.17.

Therefore, the cross price elasticity of demand between grapefruit juice and Don Q rum is 1.17.