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Economics: Price elasticity questions

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This analysis assessment has three parts. It is required to show the formula prior to your complete calculation.

Part I. Using the midpoint method, calculate and interpret the price elasticity of demand for the following situation: a.When the price of oranges increases from $1.00 per pound to $1.50 per pound, quantity demanded falls from 500 pounds to 400 pounds. Calculate the price elasticity of demand.
b.Is the demand for oranges price elastic, inelastic, or unit elastic? Explain.
c.Calculate total revenue before and after the price change. How does that relate to the elasticity interpretation?
Part II. Given the following information, calculate the income elasticity of demand using the midpoint formula.a.Nancy's income increases from $20,000 to $30,000 and her consumption of spaghetti changes from 10 pounds per month to 2 pounds per month. Calculate the income elasticity of demand.
b.Interpret the result.
Part III. Given the following information, calculate the cross-price elasticity of demand.a.The quantity of Pepsi purchased rises by 15% when the price of Coca-Cola rises by 30%. Calculate the cross-price elasticity.
b.Interpret the result.

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Solution Summary

The problem set deals with question in economics regarding price elasticity.

See Also This Related BrainMass Solution

ECO212 Supply and Demand and Elasticity

1. If a 20% decrease in the price of long distance phone calls leads to a 35% increase in the quantity of calls demanded, we can conclude that the demand for phone calls is:
a. elastic.
b. inelastic.
c. unit elastic.
d. stretchy elastic.

2. Which of the following pairs are examples of substitutes?
a. Popcorn & Pepsi
b. Automobiles & Bicycles
c. Boats & Fishing Tackle
d. Wine & Cheese

3. When we say that a price in a competitive market is "too high to clear the market" we usually mean that (given upward-sloping supply curves).
a. no producer can cover the costs of production at that price
b. quantity supplied exceeds quantity demanded at that price
c. producers are leaving the industry
d. consumers are willing to buy all the units produced at that price

4. Which of the following statements is incorrect? Assume upward-sloping supply curves.
a. If the supply curve shifts left and the demand remains constant, equilibrium price will rise.
b. If the demand curve shifts left and the supply increase, equilibrium price will rise.
c. If the supply curve shifts right and the demand curve shifts left, equilibrium price will fall.
d. If the demand curve shifts right and the supply curve shifts left, price will rise.

Section Two: Short Answer (250 words or less)
1.Define "Elasticity of Demand". Give an example.

2.Define the "Law of diminishing Marginal utility". Give an example.

3.Demonstrate, using supply and demand analysis, the impact on the equilibrium price and quantity of new Hybrid automobiles when the following occurs. Using graphs as we did in the notes we worked with in Week 1, describe the change in the equilibrium price and quantity, and explain your answer. Is the equilibrium price higher, lower, or is the change indeterminate? Is the equilibrium quantity higher, lower, or is the change indeterminate?

a.Incomes increase
b.Interest rates decrease
c.The price of batteries used in the production of these vehicles decreases.
d.The price of gasoline decreases

4.Determine if the demand for the following products is price elastic or price inelastic, and explain your answer.

a.Box of cereal sold in a grocery store
b.Gasoline as a commodity
c.Gasoline sold at a local gasoline station
d.Fast food sold at a restaurant
e.Hotel rooms for people planning a vacation
f.Hotel rooms for people on business to meet an important client
g.Clothes sold in a discount retailer

5.Name three types of market systems and give an example of each.

6.Define the "Law of Demand" and the "Law of Supply". Give an example for each.

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