ECO100Y1 Lecture Notes - Sport Utility Vehicle, Inferior Good, Normal Good

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aquamarinesalmon257

10 Feb 2014

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Topic 4 elasticity of demand (week 3-4 sep 29th oct 4th) You own the only spring in town, which produces sparkling water that you sell for a bottle; You have no costs, so that your profit equals your total revenue (price x quantity sold); Q1: if you raise your price: consumer who continues to buy your water would pay more; you earns more money per bottle, there will be fewer customer due to the law of downward-sloping demand. Revenue = price x quantity; price goes up while quantity sold goes down. Thus introduced the concept of price elasticity of demand . Elasticity of demand measures the responsiveness of quantity demanded to a change in price. Formula: elasticity of demand = % change in quantity demanded = % qd. % change in price % p (due to the law of downward-sloping demand, the elasticity will be negative; just ignore the negative sign. : mid-point convention (calculating %change)

Related Questions

I. When the question requires a supply or demand graph, you are required to draw the graph(s) to answer the question. Do not forget to label your graphs completely and correctly.

II. If the question has multiple parts, like a, b, and c; you need to draw a graph for each part that requires one and separate your answers as a, b, and c.

III. When you draw graphs, you are also required to label them completely in order to earn full credit for your answers.

Separate your answers with their question number.

Question 1: Patrick owns a bagel business in Seattle and he wants to increase his total revenue. He knows that when bagels are $1.00, he sells 250 an hour, and when lowers the price to $0.75 he sells 275 an hour.

a. Using the midpoint formula and showing your work, calculate the price elasticity of demand for Patrick's bagels.

b. Using the price elasticity of demand for Patrick's bagels, explain whether he should raise or lower the price to generate more revenue.

c. Andrew's bakery moves in across the street from Patrick's shop. Explain what is likely to happen to the price elasticity of demand for Patrick's bagels.

Question 2: If we know that the price elasticity of demand is:

a. 5, graph the demand curve.

b. 0.5, graph the demand curve.

c. infinite, graph the demand curve

Question 3: A firm knows that the price elasticity of demand for its service is 0 (zero).

a. Graph this demand curve.

b. What should the firm do to the price of its good to raise total revenue?

Question 4: In a recession, there are many unemployed workers. Employers find that when the price of labor is $9.00, the quantity supplied is 200 workers. When they lower the wage to $8.50, 175 workers are willing to work.

a. Using the midpoint formula and showing your work, calculate the price elasticity for workers.

b. Over time, technology becomes more efficient as a substitute for workers. What happens to a firm's demand for workers? Explain.

rosereindeer205

1. Using supply-and-demand diagrams, show the effect of the following events on the market for sweatshirts.

(a) A hurricane in South Carolina damages the cotton crop.

(b) The price of leather jackets falls.

(d) New knitting machines are invented.

2. (a) What is the definition of quantity demanded?

(b) What is the definition of quantity supplied?

(d) Choose one of the factors from part (b) and consider the market for bananas. On a well-labeled diagram, demonstrate what will occur in this market if there is a change in this factor.

(e) List the 4 factors that cause the supply curve to shift to the left or the right.

(f) Choose one of the factors from part (e) and consider the market for scooters. On a well-labeled diagram, demonstrate what will occur in this market if there is a change in this factor.

(g) Choose one factor from part (b) and another from part (e) and consider the market for minivans. On a well-labeled diagram, demonstrate what will occur in this market given the change in both factors. (Hint: Draw separate diagrams for parts (d), (f), & (g))

3. Suppose that the price of basketball tickets at your college is determined by market forces. Currently, the demand and supply schedules are as follows:

page1image3877024

(a) Draw the demand and the supply curves. What is unusual about this supply curve? Why might this be true?

(b) What are the equilibrium price and quantity of tickets?

(c) Your college plans to increase total enrollment next year by 5,000 students. The additional students will have the following demand schedule:

page1image3870304

Now add the old demand schedule and the demand schedule for the new students to calculate the new demand schedule for the entire college. What will be the new equilibrium price and quantity?

4. Market research has revealed the following information about the market for chocolate bars: The demand schedule can be represented by the equation QD = 1600 − 300P, where QD is the quantity demanded and P is the price. The supply schedule can be represented by the equation QS = 1400 + 700P, where QS is the quantity supplied.

(a) Sketch a graph representing the market for chocolate bars. Identify the equilibrium point on your graph.

(b) Calculate the equilibrium price and quantity in the market for chocolate bars.

5. For each of the following pairs of goods, which good would you expect to have more elastic demand and why?

(a) Required textbooks or mystery novels

(b) Beethoven recordings or classical music recordings in general

(d) Root beer or water

(e) Insulin or Tylenol

(f) Food or bananas

6.Consider the following information from the market for lemonade:

Price	Quantity Demanded	Quantity Supplied
$1	500 cups	150 cups
$2	200 cups	310 cups

(a) As the price changes from $1 to $2, what is the value of price elasticity of demand?

(b) As the price changes from $1 to $2, what is the value of price elasticity of supply?

(c) Sketch a diagram demonstrating the market for lemonade. Are the supply and demand curves relatively inelastic or elastic? Explain.

(d) Suppose that when the price of lemonade increases from $1 to $2, the quantity demanded of orange juice increases from 150 cups to 190 cups. Calculate cross-price elasticity of demand for orange juice.

(e) Are orange juice and lemonade substitute or complementary goods? Explain.

7. Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston:

page2image1834528

(a) As the price of tickets rises from $200 to $250, what is the price elasticity of demand for (i) business travelers and (ii) vacationers? (Use the midpoint method in your calculations)

(b) Why might vacationers have a different elasticity from business travelers?

8. Suppose the price elasticity of demand for heating oil is 0.2 in the short run and 0.7 in the long run.

(a) If the price of heating oil rises from $1.80 to $2.20 per gallon, what happens to the quantity of heating oil demand in the short run? In the long run? (Use the midpoint method in your calculations)

(b) Why might this elasticity depend on the time horizon?

9. The Government has decided that the free-market price of cheese is too low.

(a) Suppose the government imposes a binding price floor in the cheese market. Draw a supply-and-demand diagram to show the effect of this policy on the price of cheese and the quantity of cheese sold. Is there a shortage or surplus of cheese?

(b) Farmers complain that the price foor has reduced their total revenue. Is this possible? Explain

(c) In response to farmer's complaints, the government agrees to purchase all the surplus cheese at the price floor. Compared to the basic price floor, who benefits from this new policy? Who loses?

blushwildebeest194

You have been hired as a business analyst by Big Daddyâs Quik-ee Mart. Big Daddy has collected demand data on 3 products that he sells: Gasoline, Milk and Little Mamaâs Chocolate Cookiesâ¢. The data is presented in the tables on the next page. Currently all three of these products are priced at $3.50 per unit. Big Daddy would like you to use this data and your knowledge of the price elasticity of demand to make suggestions about pricing strategies that might increase revenues for the Quik-ee Mart.

There is one problem. When Junior (Big Daddyâs son) collected the data, he forgot to label the columns in the spread sheet, so now there is no way to tell which data goes with which of the 3 goods.

Big Daddy is very well known in the local community, so performing well on this job will guarantee you many more consulting jobs in town. Even though there is an important piece of information missing you must still try to help Big Daddy.

Use the data to calculate the arc elasticity of demand for each product using each pair of prices and quantities. (That is, calculate the arc elasticity between $2.00 and $2.50, between $2.50 and $3.00, etc.).

Given what you know about the price elasticity of demand, can you now guess which set of data belongs to which product? Explain your reasoning.

Assuming that you are correct in your guesses, provide some sales and marketing advice to Big Daddy. What sort of pricing changes could Big Daddy implement to increase total revenue?

Format of your answers:

You should present your conclusions and suggestions to Big Daddy in the form of a memo. Remember when drafting the memo that Big Daddy is a busy business executive. Give him your suggestions, and explain your reasoning, succinctly and in as non-technical terms as possible. Attach an appendix that includes your completed data tables with the arc elasticities, along with a sample calculation showing how the elasticities were found. The appendix can also include any other background material you feel is relevant and include references to any external resources you may have consulted in preparing your report.

Extra Credit:

In addition to the price elasticity of demand, Chapter 3 discusses several other demand elasticities. Might any of these be relevant to this problem? Explain. If possible, suggest additional data that Junior could collect to add to this analysis and what findings you would expect (again, based on your knowledge of gasoline, milk and cookies).

Data for Good 1

Price	Quantity Demanded	Arc Elasticity
$2.00	280	-
$2.50	260	-0.3333
$3.00	240	-0.44
$3.50	220	-0.56521
$4.00	200	-0.7143
$4.50	180	-0.8947

Data for Good 2

Price	Quantity Demanded	Arc Elasticity
$2.00	230	-
$2.50	225	-0.0989
$3.00	220	-0.1236
$3.50	215	-0.1494
$4.00	210	-0.1765
$4.50	205	-0.2048

Data for Good 3

Price	Quantity Demanded	Arc Elasticity
$2.00	510	-
$2.50	413	-0.9458
$3.00	315	-1.4808
$3.50	218	-2.3659
$4.00	120	-4.3491
$4.50	23	-11.5315

*I was able to calculate all of the math (hopefully correct), but am having issues with the guesses; economics has always really stumped me and I seriously get confused about inelasticity and cpuld really use some help figuring that out. I'm also a little confused by what he means by memo, my professor is really vague most of the time.

ECO100Y1 Lecture Notes - Sport Utility Vehicle, Inferior Good, Normal Good

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