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Tutorial 3

This document contains sample questions and answers related to concepts of elasticity from an economics tutorial. It includes calculations of price elasticity of demand, cross elasticity of demand, and income elasticity of demand. Key points covered are: 1) Demand for goods like seeing a dentist is price inelastic with a steeper demand curve, while demand for goods like tea bags is price elastic with a flatter curve. 2) If quantity demanded changes less than price, price elasticity of demand is greater than one. 3) When price increases, revenue from price inelastic goods like train fares also increases. 4) Goods with positive income elasticity like luxury bags are normal goods,

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Shivarni Kumar
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28 views

Tutorial 3

This document contains sample questions and answers related to concepts of elasticity from an economics tutorial. It includes calculations of price elasticity of demand, cross elasticity of demand, and income elasticity of demand. Key points covered are: 1) Demand for goods like seeing a dentist is price inelastic with a steeper demand curve, while demand for goods like tea bags is price elastic with a flatter curve. 2) If quantity demanded changes less than price, price elasticity of demand is greater than one. 3) When price increases, revenue from price inelastic goods like train fares also increases. 4) Goods with positive income elasticity like luxury bags are normal goods,

Uploaded by

Shivarni Kumar
Copyright
© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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Economics (MCR001)

Tutorial Homework for Lecture 3 (Elasticity)

1. Calculate PED if the price of iPhones goes up 12%, but the quantity demand falls only 3%.

1. Ans: PED = % change in Qd / % change in P = 3% ÷ 12%= 0.25.

2. If the quantity demanded (Qd) of running shoes falls from 300 to 280 when the price (P) increases
from $140 to $160, what is the PED?

2. Ans:

P1 P2 Q1 Q2
$140 $160 300 280

(𝑄2 − 𝑄1) (𝑃2 + 𝑃1)


**PED = (𝑄2 + 𝑄1) × (𝑃2 − 𝑃1)
(280 − 300) ($ 160 +$ 140) −20 300
PED = × = 580 × = -0.52 = |0.52|<1, therefore, price inelastic.
(280 + 300) ($ 160 −$ 140) 20

3. The price (P) of hamburger increases by 25 percent and the quantity demanded (Qd) of
hamburgers falls by 50 percent. The price elasticity of demand (PED) is _________.

3. Ans: PED = 2; -2 (|2|) >1, therefore it’s price elastic.

4. If the quantity demanded changes less than the price, then PED is less than or greater than one?

4. Ans: PED is GREATER than one, therefore it’s price elastic.

5. Which one of the following (seeing a dentist or a box of teabags) is more elastic? Which one has a
steeper demand curve?
Explain your answer.

5. a) Ans: Seeing a dentist: Less elastic; steeper demand curve.


Explanation: essential item, therefore relatively price inelastic.

5. b) Ans: A box of teabags: more elastic; flatter demand curve.


Explanation: plenty of substitutes, therefore relatively price elastic.

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6. Sydney Trains is considering a fare increase for its train services. At the current fare of $ 4.40,
100K tickets are sold daily. Sydney Trains estimates that if it raises fares to $ 6.00, sales will decline
to 80K tickets.
a) What is the price elasticity of demand (PED)? Is demand elastic or inelastic?

6a. Ans: PED =

P1 P2 Q1 Q2
$4.4 $6 100K 80K

(𝑄2 − 𝑄1) (𝑃2 + 𝑃1)


*PED = (𝑄2 + 𝑄1) × (𝑃2 −𝑃1)

(80−100) ( $6+$4.4) −20 10.4


PED = × = 180 × = - 0.72 = |0.72|< 1,
(80+100) ($6−$4.4) 1.6

therefore train fares are price inelastic.

b) If Sydney Trains wants to raise more revenue from its train system, what should it do to the price
of train fares? Why?

6b. Ans: As train fares are price inelastic; when the price goes up, total revenue also goes up.
Therefore, if Sydney Trains wants to raise higher revenue, it should raise its train fares.

7. If the change in quantity supplied (Qs) is 12% when the price (P) change is 9%, what is the PES? If
the percentage response in quantity supplied is larger / less than the percentage change? If so, is it
supply elastic or supply inelastic? If a supply curve is horizontal, upward sloping or infinity?

7. Ans: PES = 12% / 9% = 1.33, PES > 1,


therefore, it’s Supply elastic. The supply curve is upward sloping.

8. The cross elasticity of demand (CED) between beer and peanuts is -1.8, therefore, beer and
peanuts are __complements__ (only). (Explanation: Pa goes up, Qb goes down)
(Hints: price elastic or price inelastic OR substitutes or complements OR normal goods or inferior
goods)

% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑄𝑨
𝐶𝐸𝐷 =
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓𝑩

Note: CED between two goods can be positive (Substitutes) or negative (Complements)
The CED between beer and peanuts is -1.8, therefore they are complements.

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9. The income elasticity of demand (IED) for LV handbags is +2.4, LV handbags are ____________
goods.
(Hints: price elastic or price inelastic OR substitutes or complements OR normal goods or inferior
goods)

% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑄𝑥
9. 𝐴𝑛𝑠: 𝐼𝐸𝐷 =
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 (𝐼 𝑜𝑟 𝑌)
Note: IED can be positive (Normal Goods) or negative (Inferior goods)
LV’s IED is positive, therefore is Normal Goods

10. If your demand for brandy increases when the price of whisky goes up, do brandy and whisky
have a positive or a negative cross elasticity of demand (CED)?
(hint: brandy and whisky are alcohol).

Therefore, brandy and whisky are:.

10. Ans: substitutes

Note: CED between two goods can be positive (Substitutes) or negative (Complements)
The CED between brandy and whisky is + (increase & rise), therefore they are substitutes.

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11. If a 14 percent rise in the price of scallops decreases the quantity demanded of scallops by 24
percent and increases the quantity demanded of prawns by 20 percent, calculate the
a) Price elasticity of demand (PED) for scallops.
b) Cross elasticity of demand (CED) for scallops with respect to the price of prawns.
c) Therefore, scallops and prawns are:
(Hints: Price Elastic or Price Inelastic OR complements / substitutes OR normal goods / inferior
goods).

11 a. Ans:
PED for scallops = = 24% ÷ 14% = 1.7. PED is 1.7>1, scallops are price elastic.

11 b. Ans:
CED for scallops and prawns

= Quantity demand of prawns up by 20% ÷ Price increases in scallops by 14%


= up by 20% ÷ up by 14% = +14.29.

11 c. Ans:
therefore, scallops and prawns are substitutes.

*12. More exercise: Revise lecture 4, Class Exercise on slide P.32.

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