Question

1.       You run the only lemonade stand at SUBR. If people don't buy lemonade from you, their only other option is to buy orange juice from a nearby POD. One day, you decide to raise the price of your lemonade from $1 per glass to $1.25 per glass. As a result, half of your usual customers decide to get orange juice instead of lemonade that day. What does this experience tell you about the demand for lemonade (in terms of elasticity) at SUBR?

2.       What are the effects on the equilibrium price and quantity of steel if the wages of steelworkers rise and, simultaneously, the price of aluminum rises?

Answer 1

1. Price of Lemonade is increased from $ 1 to $ 1.25.

The change in quantity demanded = - 50%

As we know elasticity of demand is measured using the following formula

The elasticity of demand is greater than 1(absolute value) ignore negative value.

Hence, the demand is elastic.

2. Labour is an important input in production of steel. Therefore, an increase in the wages will shift the supply curve to its left.

Assume aluminium is substitute to steel. Then an increase in price of aluminium will increase the demand for steel.

Hence, the equilibrium quantity as well as equilibrium price increases..

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