Application of elasticities

Instructions

Review the study material in this module before working on each situation or exercise.Each one has a value of 7 points.It is important to answer each of the questions presented in each exercise.

1 If the price of milk increases by 20% and the quantity of demand for milk decreases by 4%, answer:

a Find the price elasticity of demand.Is the demand elastic, inelastic, or unit?Explain your answer.

b Will this product have an easy or hard to find substitute?Why?

2 The quantity demanded by product A increases 8% when the price of product B increases 16% and the other variables stay the same.

a Calculate the cross elasticity of demand.Products A and B, are they complementary or substitutes?Why?

b By drawing a graph, show the change in the demand curve for product A as a result of the change in the price of product B.

3 Can it be possible that for a particular product the demand curve is perfectly inelastic, regardless of price?Explain your answer in detail.

4 Consider the relationship between demand for the following products: vodka and grains.

a What happens to the demand for vodka when the price of grains increases?

b These products, are they complementary or are they substitutes?Explain your answer.

5 A company increases the price of its product from $ 210 to $ 240 per unit and keeps 30,500 units of this product in stock each month.

a Is the elasticity elastic, inelastic, perfectly inelastic, or unitary?Why?

b Please indicate which could be an example of this product.Why?

6 What is the income elasticity of demand and how is it measured?Explain in your own words with an example;remember to cite the source you used.

7 You should look for information in sources other than the study material of the module;you can use the Virtual Library.