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6) 1This set of questions focus on elasticity.

a. John’s demand for bananas increases from 4 bananas to 6 bananas when his hourly wage rises from $18 to $30. What is his income elasticity of demand for bananas? Use the standard formula of percentage change to calculate this income elasticity. Are bananas normal or inferior goods for John?

b. John’s demand for bananas dropped from 10 bananas to 6 bananas when the price of apples decreased from $6 per apple to $5 per apple. What is his cross-price elasticity of bananas for apples? Use the arc elasticity formula for the percentage change to calculate this cross-price elasticity. Based upon your value for the cross-price elasticity of demand of bananas for apples, are these two goods substitutes or complements? Explain your answer.

c. Suppose at $4 per banana, Ben can supply an infinite quantity of bananas, but he will supply none at a price below $4. What do you know about his supply when price rises above $4? What is Ben’s price elasticity of supply?

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Divya Singh
Divya SinghLv10
28 Sep 2019
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Related questions

15. The inverse demand function for bananas is pa=20-9d and the inverse supply function is Ps= 9s, where prices are measured in cents and bananas are measured in pounds. a. If there are no taxes or subsidies, what is the equilibrium quantity? What is the equilibrium market price? (3 marks) b. If a subsidy of 2 cents per pound is paid to banana growers, what is the new equilibrium price and quantity? How much do growers receive per pound? How much do consumers pay per pound? (4 marks) c. Compute the change in the consumer and producer surplus? Show clearly on the graph? Does the subsidy cause a deadweight loss? If so, how large. Explain using a suitable diagram. (5 marks) Express the change in price as a percentage of the original price. If the cross-elasticity of demand between bananas and apples is +0.5, what will happen to the quantity of apples demanded as a consequence of the banana subsidy (assume the price of apples stays constant). State your answer in terms of a percentage change. (4 marks)

You are a produce grocer who sells two products: apples and bananas (you sell them in bushels, but we’ll just consider a bushel to be one unit of fruit). Each costs you $1 per bushel wholesale, which is your only cost. You can prevent resale among your customers, of which there are three, each with unit inelastic demand. Consumer 1 has a willingness to pay of $2 per apple (bushel) and $8 per banana (bushel). For Consumer 2, the willingness to pay is $4 for apples and $6 for bananas. Consumer 3 would pay up to $9 for apples but only $1 for bananas.

A. Suppose you price apples and bananas separately. What is the profit-maximizing price for each?

B. What is the profit-maximizing price if you sell the two fruit as a pure bundle?

C. What leads to higher profits – selling separately or offering a pure bundle? Explain how this answer relates to the correlation in consumers’ willingness to pay across apples and bananas.

D. Can you do better by mixed bundling? Explain why or why not?

E. Does your answer to part (d) change if your production cost is $3 per unit instead?

1. If there has been a 10% increase in Consumer income between two periods, what was the percentage change in demand for foreign travel? For tobacco products? For flour? (Hint use the income elasticity values in Table 4-4.)


2. Agricultural commodities are known to have a price-inelastic demand and to be necessities. How can this information allow you to explain why the income of farmersfalls (a) after a good harvest? (b) In relation to the incomes in other sectors of the economy?


3. Suppose that the cross-price elasticity of demand between McIntosh and Golden Delicious apples is 0.8, between apple and apple juice is 0.5, between apples and cheese is 0.4, and between apples and beer is 0.1 What can you say about the relationship between each set of commodities?


4. (a) If price of pork increases by 10 percent, by how much does demand for beef change? (b) If price of pork increases by 10 percent, by how much does demand for food change? (hint use the cross-price elasticity values in Table 4-5.)

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