ELASTICITY

1. Suppose the price of a commodity falls from Rs6 to Rs4 per unit and hence the quantity demanded increases from 80 units to 120 units. Find out the demand elasticity. (Ans: Ep= -1) 2. The demand for handkerchiefs produced by a firm has been estimated to be p = 30 Q/300. Compute the point elasticity at P=10 and at P=15. (Ans: Ep= -0.5, Ep= -1) 3. The international price of oil is $30 per barrel & the price elasticity is constant & equal to -0.5. An oil embargo reduces the quantity availability by 20%. Use the arc elasticity formula to calculate the % increase in the oil prices. (Ans: P2=47.14) 4. Suppose a seller of a textile cloth wants to lower the price of its cloth from Rs 150 per meter to Rs 142.5 per meter. If its present sales are 2000 meters and further it is estimated that the price elasticity of demand is 0.7. Show whether or not his total revenue increase as a result. Also calculate the exact magnitude of its new total revenue. (Ans: TR2=295416.75)

5. According to a Honda press release on October 23, 2006, sales of the fuel-efficient four-cylinder
Honda Civic rose by 7.1% from 2005 to 2006. Over the same period, according to data from the U.S. Energy Information Administration, the average price of regular gasoline rose from $2.27 per gallon to $2.57 per gallon. Calculate the cross-price elasticity of demand between Honda Civics and regular gasoline. According to your estimate of the cross-price elasticity, are the two goods complements or substitutes? (Ans: Cross-price elasticity=0.6) 6. The accompanying table lists the cross-price elasticities of demand for several goods, where the percent quantity change is measured for the first good of the pair, and the percent price change is measured for the second good. Good Air-conditioning units and kilo watts of electricity Coke and Pepsi High-fuel-consuming sport-utility vehicles (SUVs) and gasoline McDonalds burgers and Burger King burgers Butter and margarine Cross-price elasticities of demand -0.34 +0.63 -0.28 +0.82 +1.54

a. Explain the sign of each of the cross-price elasticities. What does it imply about the relationship between the two goods in question? b. Compare the absolute values of the cross-price elasticities and explain their magnitudes. For example, why is the cross-price elasticity of McDonalds burgers and Burger King Burgers less than the cross-price elasticity of butter and margarine?

c. Use the information in the table to calculate how a 5% increase in the price of Pepsi affects the
quantity of Coke demanded. (Ans: 3.15%) d. Use the information in the table to calculate how a 10% decrease in the price of gasoline affects the quantity of SUVs demanded. (Ans: 2.8%)