Practice Questions For Final Exam Assignment Due Last Day of Classes

Practice Questions for Final Exam—Assignment: Due Last Day of Classes
Isadora Raboni Ferreira (101441658); Carolina Rosa Prebitz (101225259); Cassandra Skyers (100946004)
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."
Price Elasticity of Demand is a measure of the responsiveness of the quantity demanded of a good or
service to a change in its price.
(b) Calculate the price elasticity of demand for good A in the price range given.
Price Elasticity of Demand = ((Q2 - Q1) / ((Q2 + Q1) / 2)) / ((P2 - P1) / ((P2 + P1) / 2))
Q1 = Initial quantity demanded = 6000 units; Q2 = New quantity demanded = 5400 units
P1 = Initial price = $1 per unit; P2 = New price = $2 per unit
Price Elasticity of Demand = ((5400 - 6000) / ((5400 + 6000) / 2)) / (($2 - $1) / (($2 + $1) / 2))
Price Elasticity of Demand = (-600 / 5700) / (1 / 1.5)
Price Elasticity of Demand = -0.105
The price elasticity of demand for good A in the given price range is -0.105.
(c) Is the demand for good A elastic or inelastic? Explain.
Based on the price elasticity of demand for good A, which is -0.105, we can conclude that the demand for
good A is inelastic because ED < 1.
(d) Based on your answer in part (c), what are some of the characteristics of good A? Explain.
A change in the price of good A will not have a significant impact on the quantity demanded by
consumers because a 1% change in the price of product A will lead to less than a 1% change in the
quantity demanded. There are only a few substitutes for good A. They are usually necessities, and people
can't avoid buying them, and they represent a small percentage of income spent. Lastly, it requires less
advertising, as people will buy them anyway.
2) (a) Suppose that a good has a price elasticity equal to 0 (Ed=0). What does this mean? Draw a
demand curve to illustrate. Cassandra
Perfectly inelastic demand) Ed=0. (A 1% change in price leads to no change in quantity demanded (0%
change)
(b) What does it mean if a good has a price elasticity equal to 1?
Unitary Elastic demand (Ed=1). A 1% change in price leads to an equal 1% change in quantity demanded.
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)
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
Assuming that there is a change in price of 5% = 0.05
1.25 = (% Change in Quantity Demanded) / 0.05
1.25 * 0.05 = % Change in Quantity Demanded
% Change in Quantity Demanded = 0.0625 = 6.25%
A 5% change in price leads to a 6.25% change in quantity demanded
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)?
Change in Price of 5% = 0.05
0.5 = % Change in Quantity Demanded / 0.05
% Change in Quantity Demanded = 0.5 x 0.05 = 0.025 = 2.5%
A 5% change in price results in a 2.5% change in quantity demanded, assuming Ed is 0.5 for the
good.
(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.
Change in Price of 15% = 0.15
0.5 = % Change in Quantity Demanded / 0.15
% Change in Quantity Demanded = 0.5 x 0.15
% Change in Quantity Demanded = 0.075 = 7.5%
The change in quantity demanded is 7.5%.
(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…
Change in Quantity Demanded of 2% = 0.02
1.5 = 0.02/ % Change in Price
% Change in Price = 0.02 / 1.5
% Change in Price = 0.0133 = 1.33%

The percentage change in price is 1.33%.
5) Briefly explain how total revenue (TR) will be affected in each of the following cases (use the TR
formula): Cassandra
(a) Demand is elastic and price increases
Elastic Demand (Ed>1) A 1% change in price leads to a greater than 1% change in quantity demanded
(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's price will result in a decrease in total
revenue." Is the above statement true or false? Explain.
The statement is false. When a good price is inelastic, it means that the quantity demanded of
the good is not very responsive to changes in its price. Therefore, if the price of the good is increased, the
demand for the good will not decrease as much as the price increase, resulting in an increase in revenue.
7) Explain how businesses use price elasticity, in general, to price their products. Use the TR formula in
your answer Cassandra
Cross Elasticity and Income Elasticity Questions:
1) (a) Define the term "Cross Elasticity of Demand." Two goods. Measure of the responsiveness of a
change in the demand for good A to a change in the price of the other good, B.
(b) What does this measure tell you about the two goods involved?
If EaPb>0 (Positive), a and b are substitutes (positive relationship). If EaPb<0 (Negative), a and b are
complements (used together)
(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 apples increases 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.
EaPb=0.47 (Positive), Oranges and Apples are substitutes (positive relationship)
2) Consider the following chart that shows price and sales data for two goods (DVD players and DVDs):
Price of DVD Players............Quantity of DVD Players P DVDS..........Demand for DVDs
$120.................................................5000..............$15..............18000
70..................................................9500..............$15..............32200
Questions:
(a) Calculate the Cross Elasticity between DVD players and DVDs based on the data provided
(b) Are these two goods substitutes or complements? Use your answer in part (a) to explain.
EaPb=-1.08, DVD and DVD player are complements (used together)
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.
Ey= -1.61 (negative), good A are an inferior good
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...
Ey= 7.17 (positive), chips are a normal good

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Practice Questions for Final Exam—Assignment: Due Last Day of Classes

Price Elasticity Questions:

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

P1 = Initial price = $1 per unit; P2 = New price = $2 per unit

Price Elasticity of Demand = (-600 / 5700) / (1 / 1.5)

Price Elasticity of Demand = -0.105

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

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

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

Assuming that there is a change in price of 5% = 0.05

1.25 = (% Change in Quantity Demanded) / 0.05

1.25 * 0.05 = % Change in Quantity Demanded

% Change in Quantity Demanded = 0.0625 = 6.25%

A 5% change in price leads to a 6.25% change in quantity demanded

Change in Price of 5% = 0.05

0.5 = % Change in Quantity Demanded / 0.05

% Change in Quantity Demanded = 0.5 x 0.05 = 0.025 = 2.5%

Change in Price of 15% = 0.15

0.5 = % Change in Quantity Demanded / 0.15

% Change in Quantity Demanded = 0.5 x 0.15

% Change in Quantity Demanded = 0.075 = 7.5%

The change in quantity demanded is 7.5%.

Change in Quantity Demanded of 2% = 0.02

1.5 = 0.02/ % Change in Price

% Change in Price = 0.02 / 1.5

% Change in Price = 0.0133 = 1.33%

(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

Cross Elasticity and Income Elasticity Questions:

EaPb=0.47 (Positive), Oranges and Apples are substitutes (positive relationship)

Price of DVD Players............Quantity of DVD Players P DVDS..........Demand for DVDs

EaPb=-1.08, DVD and DVD player are complements (used together)

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

Ey= -1.61 (negative), good A are an inferior good

(i) Calculate Marcus' income elasticity of chips

Ey= 7.17 (positive), chips are a normal good

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