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    Ws 2

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    Sanjeev Ravindran
    1. The price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. It gives the percentage change in quantity demanded resulting from a one percent change in price. 2. The UK government announced that a 10% rise in cigarette prices would lead to a 6% fall in demand, implying a price elasticity of 0.6. 3. Specific brands are likely to have more elastic demand than broad product categories due to availability of substitutes.

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    Ws 2

    Uploaded by

    Sanjeev Ravindran
    94 views3 pages
    1. The price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. It gives the percentage change in quantity demanded resulting from a one percent change in price. 2. The UK government announced that a 10% rise in cigarette prices would lead to a 6% fall in demand, implying a price elasticity of 0.6. 3. Specific brands are likely to have more elastic demand than broad product categories due to availability of substitutes.

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    1. The price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. It gives the percentage change in quantity demanded resulting from a one percent change in price. 2. The UK government announced that a 10% rise in cigarette prices would lead to a 6% fall in demand, implying a price elasticity of 0.6. 3. Specific brands are likely to have more elastic demand than broad product categories due to availability of substitutes.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    94 views3 pages

    Ws 2

    Uploaded by

    Sanjeev Ravindran
    1. The price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. It gives the percentage change in quantity demanded resulting from a one percent change in price. 2. The UK government announced that a 10% rise in cigarette prices would lead to a 6% fall in demand, implying a price elasticity of 0.6. 3. Specific brands are likely to have more elastic demand than broad product categories due to availability of substitutes.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    1.

    (a) The price elasticity of demand measures the responsiveness of


    the quantity demanded / price to a change in the quantity demanded / the quantity supplied / price.

    [Delete wrong words.]

    (b) Give the (conceptual) formula for price elasticity of demand.

    .......................................................................................................................................................

    2. In the mid 1990s, the government in the UK announced that for every 10 per cent rise in the price of
    cigarettes, the demand is likely to fall by 6 per cent. If this information is correct, what is the value of
    the price elasticity of demand for cigarettes?
    .......................................................................................................................................................

    3. In each of the following pairs, tick which of the two items is likely to have the more elastic demand.
    Give reasons for your answer.
    (a) Petrol (all brands) Esso petrol
    .......................................................................................................................................................
    .......................................................................................................................................................

    (b) Holidays abroad Bread


    .......................................................................................................................................................
    ......................................................................................................................................................

    (c) Salt Clothing


    .......................................................................................................................................................
    .......................................................................................................................................................
    4. Using the example from the lecture (Q = 50-5P), calculate the price elasticity of demand
    a) Between £8 and £9
    b) At a price of £6
    c) At a price of £5
    d) At a price of £2
    e) At a price of £1
    f) Using your answers to the previous questions explain what happens to the price elasticity of demand
    as you move upwards along a demand curve. Sketch the demand curve to help illustrate your answer.

    5. A local bus company fearfully raised its prices two years ago by 10 per cent in an attempt to cover
    increased costs. It was pleased to see its revenues rise by 5%. This year it confidently raised its prices
    again and was surprised and dismayed to find that its revenue fell by 2%. The manager was reported
    in the local press as saying “It is hard to do business when our customers are so erratic” Having
    studied elasticity do you believe that the customers behaved erratically? Explain your answer. (Hint
    look at your answers to question 4).

    6. An executive of a professional association introduced a motion at the annual general meeting “to
    increase dues by 10% so as to increase our revenue by 10 per cent”. Using the concept of elasticity do
    you think his views were over optimistic? Explain your answer.

    7. Suppose demand and supply are given by the following equations:


    Qd = 110 - 5P
    Qs = 6P
    Where Qd = Quantity demanded
    Qs = Quantity supplied
    P = the price
    a) Using algebra, determine the market equilibrium price and quantity.
    b) Find the inverse demand and supply functions making P the dependent variable.
    c) Sketch the inverse demand and supply curves, clearly labelling the slope, the intercept and the
    equilibrium price and quantity.
    d) Calculate elasticity of demand at the equilibrium price
    8.

    (a) What is the formula for income elasticity of demand?

    .......................................................................................................

    (b) Which of the following would you expect to have a demand which is elastic with respect to income?

    (There are more than one.)

    (i) Flour ....................................................................................................... Yes / No / Possibly

    (ii) Ready-prepared meals for the microwave ............................................ Yes / No / Possibly

    (iii) Champagne ............................................................................................ Yes / No / Possibly

    (iv) Socks ..................................................................................................... Yes / No / Possibly

    (v) Designer jeans........................................................................................ Yes / No / Possibly

    (vi) Electricity ............................................................................................... Yes / No / Possibly

    (vii) Bus journeys........................................................................................... Yes / No / Possibly

    (viii) Insurance ................................................................................................ Yes / No / Possibly

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