1. Using midpoint formula, compute price elasticity of demand for following problem:
Assume price of twelve-pack of Coke is increased from $5.00 to $5.50. As a result, the sales level at nearby convenience store decreases from 100 to 75 per day.
This is the midpoint formula:
(Q1 - Q2)/(Q1 + Q2) divided by (P1 - P2)/(P1 + P2),
where:Q1 = the "old" quantity, Q2 = the "new quantity, P1 = the "old" price, and P2 = the "new" price.
2. Suppose McDonald's decreases price of large order of fries by 10%. As a result, consumers increase their purchases of Big Macs by 5%. Compute the cross-price elasticity of demand. Are these products complements or substitutes? Is result elastic or inelastic? Illustrate the arithmetic you used.
3. Compute the income elasticity of demand using the general formula for elasticity:
% Change in Quantity Demanded divided by % Change in Price
Earlier this year you received a 10% pay raise.Consequently, your household began ordering 30% more pizza each month. Compute income elasticity of demand. Is result elastic or inelastic? Is pizza a normal or inferior good? Once again, use general formula for elasticity (above) and illustrate your work.