Price Elasticity Questions:

1) A market researcher notices that, when the price of good A is increased from $1 per unit to $2 per unit, the quantity demanded falls from 6000 to 5400 units of A per day.

Questions:

(a) Define the term "Price Elasticity of Demand."

(b) Calculate the price elasticity of demand for good A in the price range given.

(c) Is the demand for good A elastic or inelastic? Explain.

(d) Based on your answer in part (c), what are some of the characteristics of a good A? Explain.

2) (a) Suppose that good has a price elasticity equal to 0 (Ed=0). What does this mean? Draw a demand curve to illustrate.

(b) What does it mean if a good has a price elasticity equal to 1?

3) An economist determines that the price elasticity of demand for restaurant meals is 1.25. Interpret this value using the price elasticity of demand formula (using the method done in class)

4) (a) Suppose Ed=0.5 for a given good. If there's a 5% change in price, what is the change in quantity demanded (Qd)?

(b) Suppose once again that Ed=0.5, but there's now a 15% change in price (all else equal). Calculate the change in quantity demanded.

(c) Suppose that the price elasticity of demand (Ed) for a given good is 1.5. If the quantity demanded increases by 2%, what is the percentage change in price? Please show work.

5) Briefly explain how total revenue (TR) will be affected in each of the following cases (use the TR formula):

(a) Demand is elastic and price increases

(b) The price elasticity of demand (Ed)=0.7 and price increases

(c) Demand is elastic and price decreases

(d) Demand is perfectly inelastic (Ed=0) and price increases

(e) Demand is inelastic and price decreases

6) "If a good is price inelastic, then increasing the good'sprice will result in a decrease in total revenue."

Is the above statement true or false? Explain.

7) Explain how businesses use price elasticity, in general, to price their products. Use the TR formula in your answer

Cross Elasticity and Income Elasticity Questions:

1) (a) Define the term "Cross Elasticity of Demand."

(b) What does this measure tell you about the two goods involved?

(c) Suppose that the price of oranges increases from 60 cents per pound to $1.25 per pound as a result of a frost in Florida. As a result, the market demand for apple increased from 5000 pounds to 8000 pounds. Calculate the cross elasticity of oranges with respect to apples.

(d) Are the two goods above substitutes or complements? Use your answer in part (c) to explain.

2) Consider the following chart that shows price and sales data for two goods (DVD players andDVDs):

Price of DVD Players............Quantity of DVD Players P DVDS..........Demand forDVDs

$120.................................................5000..............$15..............18000

70..................................................9500..............$15..............32200

Questions:

(a) Calculate the Cross Elasticity between DVD players andDVDsbased on the data provided

(b) Are these two goods substitutes or complements? Use your answer in part (a) to explain.

3) Kevin has just received a large promotion and his income has risen from $200 to $400 per week. As a result, his demand for good A has fallen from 10 units per week to 3 units per week.

(a) Calculate Kevin's income elasticity of demand for good A

(b) Is good A a normal or inferior good for Kevin? Explain.

4) Marcus experiences an increase in income from $400/week to $450 per week. His consumption of chips goes up from 2 bags per week to 5 bags per week.

(i) Calculate Marcus' income elasticity of chips

(ii) Are chips a normal or inferior good for Marcus? Explain.