Question

1) “When we sold tortilla chips for $5/bag, we sold 210 six-packs of soda and 320 bags of potato chips. When we put tortilla chips on sale at $4/bag, we sold 220 six-packs of soda and 250 bags of potato chips.”

What was elasticity of the quantity demanded of soda with respect to the price of tortilla chips? (Use the midpoint method)

2) “When we sold tortilla chips for $5/bag, we sold 210 six-packs of soda and 320 bags of potato chips. When we put tortilla chips on sale at $4/bag, we sold 220 six-packs of soda and 250 bags of potato chips.”

What was elasticity of the quantity demanded of potato chips with respect to the price of tortilla chips? (Use the midpoint method)

3) If you want to use good B as a loss-leader to sell more of good A, you should hope that the elasticity of the quantity demanded of A with respect to the price of B is:

A) A big positive number e.g. +10

B) A small positive number     +0.25

C) a big negative number       -10

D) A small negative number    -0.25

4) "A typical household making $50,000 per year buys 500 gallons of gasoline per year. A typical household making $100,000 per year buys 550 gallons of gasoline per year.”

What is the income elasticity of demand for gasoline?

  (Please use the midpoint method. Enter any % as a decimal with the correct sign, so that -25% is "-0.25")

5) (Slightly tricky.) When a good’s income elasticity is between 0 and 1, higher income households consume ________ of the good than lower income households and spend a _______ fraction of their income on the good?

	more; lower
	less; lower

	more; higher
	less; higher

Answer 1

1. Elasticity of demand for soda with respect to the price of tortilla chips = % change in demand for soda/% change in price of tortilla chips

According to the midpoint method, the average of new and old quantity and new and old price are taken as the base to calculate the % change. The average of new and old quantity of soda = (210 + 220)/2 = 430/2 = 215.

The average of new and old price of tortilla chips = (5+4)/2 = 4.5

% change in the quantity of soda = (220-215)/215 * 100 = 5/215 * 100 = 0.023 * 100 = 2.3%

% change in the price of tortilla chips = (5-4.5)/4.5 * 100 = 0.5/4.5 * 100 = 0.1111 * 100 = 11.11%

Elasticity of demand for soda with respect to the price of tortilla chips = 2.3/11.11 = 0.21 (ignoring the negative sign)