Question

Answer the following elasticity questions: E = ∆% Q / ∆% P

1. The following data is from the demand for chocolate cookies:

Producer reduces the price of some cookies from 12 to 10 cents. Find out that the quantities sold increased from 210 to 250 units:

a) Calculate the price elasticity of cookies.

b) Present the graph; Indicate if it is Price Elasticity of Demand or Supply.

c) if it is elastic, inelastic or unitary.

d) If the price elasticity coefficient in varieties is (- 3.0). What happens if I lower the price by 15%? What will be the quantity of cookies demanded?

2. A shoemaker notices increases of $ 5,000 in his weekly income; after making an increase of $ 18 to $ 20 on the classic sandal. When reconciling sales, the increase in quantities sold was 1,000 sandals or a 20% increase. What is the price elasticity of sandals?

3. 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

1.a) Price of cookies decreased from 12 cent to 10 cent.
% change in price = [(10-12)/12]*100
= (-2/12)*100
= -16.66%

Quantity demanded increased from 210 to 250 units.
% change in quantity demanded = [(250-210)/210]*100
= (40/210)*100
= 19.04%

Hence price elasticity = % change in quantity demanded / % change in price
= 19.04% / -16.66%
= 0.1904 / -0.1666
= - 1.14

| Elasticity | = |1.14|

b) The graph is as follows:

As we can see tht the effect of change in prices are captured by the demand curve and not by the supply curve hence the elasticity is elasticity of demand.

c) | Elasticity | = |1.14| > 1
Hence it implies an elastic demand. That means quantity demanded will change at a greater rate than change in price .

d) If the coefficient of elasticity is -3
That means it is an elastic demand. Quantity demanded will change by three times than the price change. Hence if price changes by 15%, quantity demanded will change by 15% * 3 = 45%.

2. Price changed from $18 to $20.
% change in price = [(20-18)/18]*100
= [2/20]*100
= 10%

% change in quantity demanded is given by 20%.

Price elasticity of sandals = %change in quantity demanded / %change in price
= 20% / 10%
= 0.2 / 0.1 = 2
Hence sandals are price elastic.

3. a) As given, elasticity results to be -0.50. The negative sign of elasticity is due to the inverse relationship between price and quantity demanded. It is a result of law of demand. As price rises, quantity demanded for the commodity falls and vice versa. This depicts the basic human nature and behaviour towards a price change.

b) Elasticity = -0.50
or, | Elasticity | = |0.50| <1
Hence the elasticity is inelastic. That means quantity demanded will change at a lesser rate tahn change in price.

c) Ratio of change = % change in quantity demanded / % change in price
= -8% / 2% or 8:2

That means when price changes by 1%, quantity demnded will change by 4%.

4) Price elasticity of demand for grape fruit :

= % change in quantity demanded / % change in price  
= -22% / 12%
= -0.22/0.12  
= -1.83

Price elasticity of demand for rum :

= % change in quantity demanded / % change in price  
= 14% / 12%
= 0.14 / 0.12
= 1.16

Cross elasticity between grape fruit and rum :
= % change in quantity demanded for rum / %change in price of grapes
= 14% / 12%
= 0.14 / 0.12
= 1.16