Question

In: Economics

6. Currently, the cake market is operating at $8 per cake. If they change their price...

6. Currently, the cake market is operating at $8 per cake. If they change their price to $10:
a. What is the elasticity of supply? _____________________
b. What is the elasticity of demand? ___________________
c. What is the rule for knowing if a product is elastic or inelastic? ___________________________________________________
d. Is the product elastic for supply? ____________________
e. Is the product elastic for demand? __________________

Price Quantity Demanded Quantity Supplied
$2   900 0
$4   700 250
$6 500 500
$8 300 750
$10 100 1000
$12    0 1250


Solutions

Expert Solution

At P = $8, Qd = 300 and Qs = 750

At P = $10, Qd = 100 and Qs = 1000

a)

(Ps1, Qs1) = (8, 750)

(Ps2, Qs2) = (10, 1000)

The elasticity of supply = [(Qs2 - Qs1)/(Ps2-Ps1)]*(Ps1/Qs1)

=[(1000-750)/(10-8)]*(8/750)

=1.33

Hence, the elasticity of supply = 1.33

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b)

(Pd1, Qd1) = (8,300)

(Pd2, Qd2) = (10, 100)

The elasticity of demand = [(Qd2 - Qd1)/(Pd2-Pd1)]*(Pd1/Qd1)

=[(100-300)/(10-8)]*(8/300)

= - 2.67

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c)

If an increase in price causes a decrease in total revenue and vice-versa, then a demand can be said to be elastic.

If an increase in price causes an increase in total revenue and vice-versa, then a demand can be said to be inelastic.

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d)

(Ps1, Qs1) = (8, 750)

(Ps2, Qs2) = (10, 1000)

The elasticity of supply = 1.33 > 1 , implying supply is elastic.

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e)

(Pd1, Qd1) = (8,300), TR1 = 8*300 = 2400

(Pd2, Qd2) = (10, 100), TR2 = 10*1000 = 1000

The elasticity of demand = [(Qd2 - Qd1)/(Pd2-Pd1)]*(Pd1/Qd1)

=[(100-300)/(10-8)]*(8/300)

= - 2.67

Thus, in absolute terms, price elasticity of demand = 2.67 > 1 , hence, demand is elastic

Also, an increase in price from $8 to $10 causes a decrease in total revenue from $2400 to $1000, hence, the demand can be said to be elastic.


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