Question

1. Suppose the price elasticity of demand for shampoo is 1.8. If the price of shampoo increases by 20%, what would we expect to happen to the quantity of shampoo demanded?

Increase by 9%

Increase by 36%

Decrease by 9%

  Decrease by 13%

Decrease by 36%

2. Suppose we know that the income elasticity of demand for fast-food meals is -0.5. If a household’s income increased by 100%, the number of fast-food meals they consume will decrease by 200%. True or False.

3. Which of the following is the most unlikely to involve an external cost (negative externality)?

a. Smoking in a restaurant.

b. Talking during a movie.

c. Driving automobiles on city streets.

d. Landing aircraft at airports.

e. Eating bread at home.

Answer 1

1.

PED=% change in quantity demanded = ((New quantity-old quantity)/old quantity)) x 100

PED is 1.8 ( given).

% change in price (given) = ((New price-old price)/old price)) x 100 = 20%

Let percentage increase in quantity be X.

Substituting in formula,

(X/20%)=1.8

X= 20% x 1.8=%.

Answer is quantity demanded would increase by 36%.

2.

Income elasticity of demand=

% change in quantity demanded/% change in consumers income

Income elasticity of demand=-0.5

% change in consumers income=100%

Number of fast-food meals ( Quantity) they consume will decrease by 200%.

Income elasticity of demand= (-200%/100%)=-2.

False.

3. Eating bread at home.