Question

When the price of Milo increases from RM2 to RM3, the quantity demanded decreases from 200 to 150 glasses per month. The demand for Nescafe increases from 50 to 100 glasses per month. (a) Calculate the price elasticity of demand using the midpoint formula. [10 marks] (b) If the price of Milo decreases, what will happen to the total revenue of Milo? Explain. [8 marks] (c) Calculate the cross elasticity of demand between Milo and Nescafe. Based on the answer, explain the relationship between them.

Answer #1

(a) Price elasticity = (Change in quantity / Average quantity) / (Change in price / Average price)

= [(150 - 200) / (150 + 200)] / [(3 - 2) / (3 + 2)]

= (- 50 / 350) / (1 / 5)

= - 0.71

(b) Absolute value of price elasticity being less than 1, demand is inelastic, so if price decreases, total revenue will decrease.

(c) Cross-price elasticity = (Change in quantity of Nescafe / Average quantity of Nescafe) / (Change in price of Milo / Average price of Milo)

= [(100 - 50) / (100 + 50)] / [(3 - 2) / (3 + 2)]

= (50 / 150) / (1 / 5)

= 1.67

Since cross-price elasticity is positive, Milo and Nescafe are substitutes.

The price of suntan lotion increases from $6 to $8 per bottle
and quantity demanded decreases from 900,000 bottles to 845,000
bottles. Use the midpoint method to calculate the price elasticity
of demand for suntan lotion.
Is demand elasticity or inelastic? How do you know?
What factors might be responsible for you answer in (b)
above?

The price of peanut butter increases from $3.50 to $4.00 per
jar, and the quantity of jelly demanded falls from 35 jars to 28
jars. Using the midpoint formula, calculate the cross-price
elasticity of demand. Report your answer to two decimal places.

When the price of a
skateboard
increases by
4
percent, the quantity of
elbow pads
demanded decreases by
1
percent.
Calculate the cross elasticity of demand for
elbow pads
with respect to the price of a
skateboard.

Suppose the price of apples increases from $20 to $28, and in
response quantity demanded decreases from 100 to 84. Using the
mid-point formula, what is the price elasticity of demand? (Note:
your answer should be correct to two decimal places; and be sure to
express your answer as a positive number.)

1. If the price decreases by 4 percent. As a result, the
quantity demanded increases by 12 percent. The price elasticity of
demand is………...
2. What is the relationship between elasticity and revenue?
3. A 7 percent reduction in the price of a product has zero
effect on the dollar amount of consumer expenditure on the product.
The price elasticity of demand is………
4. What does the price elasticity of demand coefficient
measures?
5. What is characteristic of the demand...

Explain the law of demand, and why as price increases quantity
demanded decreases; and, as price decreases, quantity demanded
increases? If taxes were more progressive, would total output be
affected?

When the price of a cruise rises from $19,500 to $20,500, the
quantity demanded decreases from 2,100 to 1,900 travelers.
Use this information to calculate the price elasticity of
demand.
The percentage change in the price of a cruise is——？
The percentage change in the quantity of cruises demanded is
——？percent.
>>> Report your answer as a positive number.
The price elasticity of demand for cruises is——?

Consider the following combinations of price and quantity
demanded for an unnamed good. These questions ask you to perform
several percentage change an elasticity calculations. When
calculating percentage change, some questions ask you to use the
traditional formula and some ask you to use the midpoint formula.
For clarity, these two formulas are given below. The values you
calculate should be between -100 and 100 (not -1 to 1). Please
include the sign (if negative) in all of your responses....

Q1: If a 10 percent rise in the price of coffee
increases the quantity of tea demanded by 25 percent and decreases
the quantity of coffee demanded by 20 percent,
Calculate price elasticity of coffee
Q2:
Calculate the cross-elasticity of demand between coffee
and tea.

If the quantity demanded decreases by %15 and the price goes
from 1.25 to 1.75 what is the elasticity of demand? Is it elastic
or inelastic?
If the price goes down by 20% and the quantity sold increases
from 80 to 120 units what is the elasticity of demand? Is it
elastic or inelastic?

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