Refer to the table below to answer the next 4 questions. Assume that factors tha

Question

Refer to the table below to answer the next 4 questions. Assume that factors that may change demand but are not listed in the table do not change between the months listed of Month Income Price of Mik Quantity Demanded of MIk Price of Cookies 100 $1 $2 December $100 January$200 $3 $4 $4 February 200$1 14. What is the price elasticity of demand for milk (after taking absolute value)? A) 1/4 B) 4 C) 32 D) 23 ltcannot be calculated accurately based on te data given. 15. What is the price elasticity of demand for cookies (after taking absolute value)? A) 23 8) 4 C) 3/2 E) It cannot be calculated accurately based on the data given (Pl 16. What is the income elasticity of demand for milk? A) -2/3 B) 3/2 C)-32 D) 2/3 E) It cannot be calculated accurately based on the data given. 17. Which of the following statement is true about cookiles and milk? A) Cookies and milk are both inferior goods. B) Cookies and milk are both normal goods C) Cookies are an inferior good and milk is a normal good. D) Cookies are a normal good and milk is an inferior good. E) This cannot be determined accurately based on the data given

Explanation / Answer

14) Price elasticity is measured using mid point

Ed = (Q2 – Q1) / [(Q2 + Q1)/2] / (P2 – P1) / [(P2 + P1)/2]

Here quantity rises from 2 to 4 and price falls from 3 to 1. This gives elasticity = 0.67 which is 2/3

b) Using the same formula, we can find price elasticity for cookies. But the price is unchanged so there is no elasticity

c) Now income rises by 100 and quantity falls from 6 to 4. This implies milk is inferior good and elasticity is 1.5 or -3/2

d) Cookies are normal goods because increase in income increases their consumption but decreases the consumption of milk. Hence Milk is inferior good.  

Cases Q1 Q2 P1 P2 Q2-Q1 (Q2+Q1)/2 %Q P2-P1 (P1+P2)/2 %P Ed Milk 2.00 4.00 3.00 1.00 2.00 3.00 66.67 -2.00 2.00 -100.00 -0.67

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