Question

17. At 40 cents apiece, Mr. Jones sells 250 candies per week. If he drops his price by 10 cents, his weekly sales will increase to 300 candies per week. Calculate the elasticity of demand for candies. Write your answer in answer slot #17 (accurate to 3 decimal places).

18. Your answer to question #17 suggests that demand for candies is

• a) Elastic.

• b) Inelastic.

• c) Unit elastic.

• d) Perfectly elastic.

• e) Perfectly inelastic.

19. Using the total revenue test, Mr. Jones ______ total revenue in the amount of ______ as a result of the 10 cent price decrease which confirms that demand for candies is ________.

• a) Lost; $10; elastic.

• b) Gained; $10; inelastic.

• c) Lost; $10; inelastic.

• d) Gained; $100; elastic.

• e) Lost; $100; inelastic.

20. Suppose that as the price of wakeboards increases from $270 to $300 the quantity sold of water-skis increases from 1200 to 1400 per month. Calculate the cross-price elasticity of demand between wakeboards and water-skis. Write your answer in answer slot #20 (accurate to 3 decimal places).

Answer 1

Ans:

17) the elasticity of demand for candies = -0.8

Explanation

Price elasticity of demand = % change in quantity demanded / % change in price

% change in quantity demanded = ((300-250) / 250) * 100

= (50 / 250) * 100  

= 20%

% change in price = (-10 cents/ 40 cents) * 100

= -25%

Price elasticity of demand = 20% / -25%

= -0.8

Since the price elasticity of demand is less than one we can say that the demand is inelastic.

18)

Option B

Inelastic

Explanation

Price elasticity of demand = % change in quantity demanded / % change in price

% change in quantity demanded = ((300-250) / 250) * 100

= (50 / 250) * 100  

= 20%

% change in price = (-10 cents/ 40 cents) * 100

= -25%

Price elasticity of demand = 20% / -25%

= -0.8

Since the price elasticity of demand is less than one we can say that the demand is inelastic.

19)

Option C

Lost; $10; inelastic.

Explanation

Total revenue test

Total revenue( before decrease in price) = (250 * 40 cents)

= $100

Total revenue( after decrease in price) = (300 * 30 cents)

= $90

when the price elasticity of demand is inelastic, total revenue will increase as price increases.

20)

cross-price elasticity of demand between wakeboards and water-skis = 1.5

Explanation

cross-price elasticity of demand = % change in the quantity demanded of one good / % change in the price of the other good.

% change in the quantity demanded of one good = ((1400 - 1200) / 1200) * 100

= (200 / 1200) * 100

= 16.67%

% change in the price of the other good = (($300 - $270) / $270) * 100

= ($30 / $270) * 100

= 11.11%

cross-price elasticity of demand = 16.67% / 11.11%

= 1.5