Homework Help: Economics: Price Elasticity

Posted by Anonymous on Thursday, October 2, 2008 at 6:56am.

Please check my answers whether they are correct or not. If not, please help me why they are wrong. Thank you.

Question 1:
Point: A (300, 1000)
Point B: (200, 1200)
According to the midpoint method, the price elasticity of demand for hot dogs between point A and point B is approximately ______, which suggests that the demand for hot dogs is __________ between the two points.

My Answer 1:
2.2, price elastic

Question 2:
Points:
A (20, 20)
B (18, 30)
C (10, 70)
D (8, 80)

According to the midpoint method, the price elasticity of demand points D and C is approximately ____ (1.67, 0.26, 0.6 or 3.8).

Suppose the price of basketballs is currently $20 per ball. Because the price elasticity of demand between points B and A is _________ (elastic, inelastic or unit elastic), a $10-per-ball rise in price will lead to ______ (no change, decrease or increase) in total revenue per year.

In order for a price decrease to cause a decrease in total revenue, demand must be _____ (elastic, unit elastic or inelastic).

My Answer 2:
0.6
inelastic
no change
elastic

Question 3:
Data collected in the imaginary economy of Jojokabaha reveals that a 3% increase in income leads to the following changes:
9% decrease in the quantity demanded of bahaha
5% increase in the quantity demanded of bojojo
14% increase in the quantity demanded of rarabi

The income elasticity of demand for rarabi is ___________. (Be careful to keep track of the direction of change. Like the cross-price elasticity of demand, the sign of the economic elasticity of demand can be positive or negative, and important information is conferred by the sign.)

According to the income elasticity of demand, bahaha is _____ good and bojojo is _____ good.

Which of the following three goods is most likely to be classified as a luxury good?
a) Bahaha
b) Bojojo
c) Rarabi

My Answer 3:
4.67
Normal Good
Normal Good
Bahaha

Economics: Price Elasticity - economyst, Thursday, October 2, 2008 at 9:20am
You have point A as (300,1000). ASSUMING that the first number, 300, is quantity and the second number, 1000, is price, and ASSUMING that you are allowed to express a price elasticity as a positive number, THEN I agree with your answer. (Note: plz check my first assumption as you seem to flip the order in the second problem)

2) price elasticity from C to D (midpoint method).
(%change in Q)= -2/9 = -22.22%
(%change in P)= 10/75 = 13.33%
elasticity is 22.22/13.33 = 1.67
From point A to point B, following this method, price elasticity is .26, which is inelastic. Total revenue is P*Q. So, if P goes up by 40% and Q goes down by about 10%, then total revenue must go up.

Similarly, if price goes down by 40% and Q goes up by 10%, total revenue mus go down. So, in answer to the last question in 2: In order for a price decrease to cause a decrease in total revenue, demand must be INELASTIC.

3) a) I agree, income elasticity for rarabi is 4.67.
b) Income goes up and demand for bahaha goes down, bahaha is an inferior good.
c) Income goes up by 3% and demand for bojojo goes up by 5%. In some economic definitions, bojojo is a normal good. In other definitions, bojojo is a superior good as demand increased by more than income.
d) Rarabi has the highest income elasticity and therefore the most likely to be classified as a luxury good.
Economics: Price Elasticity - Anonymous, Thursday, October 2, 2008 at 9:35pm
Thank you so much for helping me. I think I need to study this chapter, elasticity, a bit more to understand what the heck is going on...

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