Question

7)

a.

Imagine when Juul increases the average price of their Juul pods from $40 to $45, the quantity demanded for Juul pods decreases from 200 to 195 users per day. Calculate the price elasticity of demand. Based on your results, would you say Juul pods are elastic, inelastic or unit elastic? What does this mean in terms of consumers responsiveness to price changes? Round your answer to two decimal places.   

b.

Suppose when the average price of Uber fares increases from $3.50 to $3.75, the quantity demanded for Lyft rides increases from 110 to 115 rides per week. Calculate the cross elasticity of demand. Based on your results, would you say Uber and Lyft are substitutes, complements, or unrelated? Round your answer to two decimal places.

c.

You’ve just gotten a raise where your income has increased from $450 to $525 per week. Because of this, the number of vacations you can take has now increased from 7 to 8 per year. Calculate the income elasticity of demand. Based on your results, would you say vacations are a normal or an inferior good? Round your answer to two decimal places.  

Thank you in advance

Answer 1

a. According to the mid-point formula, the price elasticity of demand for a product is given by:

Ed = (Q2 – Q1) / [(Q2 + Q1)/2] / (P2 – P1) / [(P2 + P1)/2]

Here P1 = 40 P2 = 45 Q1 = 200 Q2 = 195

ed = (195 - 200)/((195 + 200)/2) divided by (45 - 40)/((40 + 45)/2)

= -0.22

Juul pods are inelastic because 0 < ed < -1.  This implies that the degree of consumers responsiveness is relatively low to price changes.   

b. P1 = 3.50 P2 = 3.75 Q1 = 110 Q2 = 115

ed = (115 - 110)/((115 + 110)/2) divided by (3.75 - 3.50)/((3.75 + 3.50)/2)

= +0.64

The cross elasticity of demand is 0.64. Since the value is positive, Uber and Lyft are substitutes,

c.

M1 = 450 M2 = 525 Q1 = 7 Q2 = 8

em = (8 - 7)/((8 + 7)/2) divided by (525 - 450)/((450 + 525)/2)

= +0.87

This is the income elasticity of demand. Since this value is positive, vacations are a normal good