Question

Determine the price elasticity of demand, the cross-price elasticity of demand or the income elasticity in...

Determine the price elasticity of demand, the cross-price elasticity of demand or the income elasticity in the following scenarios.

a. Consider the market for coffee. Suppose the price rises from $4 to $6 and quantity demanded falls from 120 to 80. What is price elasticity of demand? Is coffee elastic or inelastic?

b. John’s income rises from $20,000 to $22,000 and the quantity of hamburger he buys each week falls from 2 pounds to 1 pound. What is his income elasticity? Is hamburger a normal or inferior good?

c. The price of apples rises from $1.00 per pound to $1.50 per pound. As a result, the quantity of oranges demanded rises from 8,000 per week to 9,500. What is the cross-price elasticity of apples? Are these goods substitutes or complements?

Homework Answers

Answer #1

(a) Price of coffee rises from $4 to $6, as a result the quantity demanded falls from 120 to 80.

% change in price of coffee = [(6 -4) / 4]*100 = 50

% change in quantity demand = [(80 - 120)/120]*100 = -33.33

Price elasticity of demand = (% change in quantity demand for coffee / % change in price of coffee)

=> Price elasticity of demand = (-33.33 / 50)

=> Price elasticity of demand = -0.67

The absolute value of price elasticity of demand for coffee is 0.67, which is less than one. It means demand for coffee is inelastic.

-------------------------

(b) John’s income rises from $20,000 to $22,000 and the quantity of hamburger he buys each week falls from 2 pounds to 1 pound.

% change in income = [(22000 - 20,000)/ 20,000]*100 = 10

% change in demand of hamburger = [(1-2) /2]*100 = -50.

Income elasticity = (% change in demand for hamburger / % change in income)
=> Income elasticity = (-50 / 10)

=> Income elasticity = -5.

Since, the income elasticity is negative, implies hamburger is an inferior good.

---------------------

(c) The price of apples rises from $1.00 per pound to $1.50 per pound. As a result, the quantity of oranges demanded rises from 8,000 per week to 9,500.

% change in price of apple = [(1.50 - 1) / 1]*100 = 50

% change in demand for oranges = [(9500 - 8000)/ 8000]*100 =18.75

Cross price elasticity = (% change in demand for oranges / % change in price of apple)

=> Cross price elasticity = (18.75 / 50)

=> Cross price elasticity = 0.375

Since, the cross price elasticity between oranges and apple is positive, implies apple and oranges are substitute goods.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
1) The income elasticity of demand for Good Z is –0.2, while the cross-price elasticity of...
1) The income elasticity of demand for Good Z is –0.2, while the cross-price elasticity of demand between Good Z and Good Y is 1.63. Which of the following statements is correct regarding Good Z? Group of answer choices Good Z is a inferior good, and Goods Z and Y are complements. Good Z is an inferior good, and Goods Z and Y are substitutes. Good Z is a normal good, and Goods Z and Y are complements. Good Z...
a) Using the percentage change method, calculate the cross elasticity if the price of margarine falls...
a) Using the percentage change method, calculate the cross elasticity if the price of margarine falls from $2 to $1.60 and the quantity of butter demanded falls from 500 to 450. Are these two products substitutes or complements? b) If the income elasticity of a product is 2, how much would income need to change for quantity to increase by 20%? Is this a normal or inferior good?
Calculate the cross price elasticity of demand (CPED), specify if the goods are complements or substitutes...
Calculate the cross price elasticity of demand (CPED), specify if the goods are complements or substitutes and justify why: a) A 10% increase in the price of pizza lead to a 12% decrease in the quantity demanded of beer. b) A 15% increase in the price of apples lead to a 30% increase in the quantity demanded of oranges. NOTE: This is a FILE UPLOAD question. Work your answer on a word or excel file, or write down your solution...
40) The cross elasticity of demand for butter and margarine is likely to be A) positive...
40) The cross elasticity of demand for butter and margarine is likely to be A) positive because they are substitutes. B) positive because they are complements. C) negative because they are substitutes. D) negative because they are complements. E) positive because they are normal goods. 41) If an increase in the price of green ketchup increases the demand for red ketchup, then A) red and green ketchup are substitutes. B) red and green ketchup are normal goods. C) the cross...
If the cross-price elasticity of demand between two goods is -0.5, two goods are __________. If...
If the cross-price elasticity of demand between two goods is -0.5, two goods are __________. If the income elasticity of a good is -2, that good is a ___________. Substitutes: Normal good Complements: Inferior Complements: Necessity Substitutes: Luxury
A measure of the rate of percentage change of quantity demanded with respect to price, holding...
A measure of the rate of percentage change of quantity demanded with respect to price, holding all other determinants of demand constant is a. Income elasticity of demand b. Own price elasticity of demand c. Price elasticity of market equilibrium d. Cross price elasticity of demand The value of the income elasticity of demand coefficient for Good X is  given as 0.1. This means that a. as income increases by 10 percent, quantity demanded rises by 1 percent. b. as income...
In each case below, what is the value of the price elasticity of demand? Is demand...
In each case below, what is the value of the price elasticity of demand? Is demand perfectly inelastic, inelastic, unit elastic, elastic or perfectly elastic? Price falls by 10%, quantity demanded rises by 8% Price rises by 3%, quantity demanded falls by 3% Price rises by 1%, quantity demanded falls by 5% Price rises by 5%, quantity demanded collapses to zero Price falls by 2%, quantity demanded does not change
Economists estimated that the cross - price elasticity of demand for beer and wine is -...
Economists estimated that the cross - price elasticity of demand for beer and wine is - 0.83 and the income elasticity of wine is 5.03. This means that A. beer and wine are complements and wine is a luxury good B. beer and wine are substitutes and wine is a luxury good. C. beer and wine are complements and wine is an inferior good. D. beer and wine are substitutes and wine is an inferior good. Can someone please explain?...
A study reports that the estimated cross price elasticity of demand between lettuce and tomatoes is...
A study reports that the estimated cross price elasticity of demand between lettuce and tomatoes is -1.1 and the estimated income elasticity of demand for lettuce is 0.4. Which of the following is true? Group of answer choices Tomatoes and lettuce are substitutes, and lettuce is a normal good Tomatoes and lettuce are substitutes, and lettuce is an inferior good. Tomatoes and lettuce are complements, and lettuce is a normal good. Tomatoes and lettuce are complements, and lettuce is an...
Price Elasticity of Demand for good X: −0.34 Income Elasticity of Demand for good X: 0.56...
Price Elasticity of Demand for good X: −0.34 Income Elasticity of Demand for good X: 0.56 Cross Price Elasticity of Demand for goods X and Y: 0.04 Given the information above, determine the following: 1. whether good X is elastic, unit elastic, or inelastic 2. whether good X follows the “law” of demand 3. whether good X is normal or inferior 4. whether good X is a luxury or a necessity 5. whether good X and good Y are complements,...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT