Question

2). Identify whether demand in the case of the following products is likely to be inelastic, elastic or unit elastic

1. A luxury item with many close substitutes
2. An item that represents a large portion of consumers incomes and has many close substitutes
3. A necessity whose demand is being viewed in a short time frame
4. A luxury item that represents a large portion of consumers’ incomes

3). Calculate the numerical value of cross elasticity in each of the following situations using the mid- point method. In each case identify whether the two products are substitutes or complementary products.

1. The price Julia pays each month for access to internet decreases from $80 to $40, causing the quantity demanded of e-magazines she reads on her computer to rise from 3 to 5.

2. The quantity demanded of do-it – yourself hair- cutting sets increase from 5,000 to 10,000 when the average price of hairstylist’s cut rises from $40 to $60 per hour.

3. A fall in the average price of smartphones from $600 to $400 increases purchases of smartphone apps from 1 million to 3 million per month.

Answer 1

Answer 2:

A. Elastic. Since the product is elastic and has many close substitutes avaialbale in the market, the demand of the good tend to be elastic.

B. Elastic. When significant portion of the consumer's income is spent on the good, then the demand of the good tend to be elastic.

C. Inelastic. A good which is a necessity generally has relatively inelastic demand.

D. Elastic. Since the good represents large portion of the consumer's income, the demand of the good tend to be elastic.