Assignment: Markets in Action

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.

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

2. In the mid-1990s, the government in the US 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) Gasoline (all brands)                  Shell gasoline
(b) Holidays abroad                        Bread
(c) Salt                                         Clothing

4. The formula for price elasticity of demand is as follows:

Proportionate (or percentage) change in quantity demanded / Proportionate (or percentage) change in price

This can be summarised as (arc price elasticity - note that mid means average): (ΔQ_d / mid Q_d) / (ΔP/mid P)

The following table shows the quantity of a product demanded at two different prices:

P          Q_d
16        25
14        35

(a) Calculate the proportionate change in quantity demanded when price falls from $16 to $14. (Use the first part of the formula, i.e. AQd / mid Qd , to do your calculation.)

(b) Calculate the proportionate change in price when price falls from $16 to $14. (Use the second part of the formula, i.e. AP /mid P, to do your calculation.)

(c) What is the price elasticity of demand between $16 and $14?

5. The following diagram shows two demand curves that cross at a price of P_o.

Which of the following statements are true?

(a) Curve D₁ is inelastic and curve D₂ elastic. True /False
(b) Demand is more elastic between P₀ and P₁ along curve D₂ than along curve D₁ True /False
(c) The price elasticity of demand between P₀ and P₁ in the case of curve D₂ is equal to:

{(Q2 - QO) / mid Q} / {(PO - P1) / mid P} ............................. True / False

(d) For any given change in price there will be a larger proportionate change in quantity along curve D₁ than along curve D₂. ....... True /False

6. Fill in the rest of the following table - keep in mind that mid means average:

(For the final column use the formula: (ΔQ_d / mid Q_d) / (ΔP / mid P)

7. (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
(i) 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