4.Elasticity of demand and supply 1. Which of the following pairs of goods would

Question

4.Elasticity of demand and supply 1. Which of the following pairs of goods would you expect to have the more elastie demand? a) Water or Diamonds b) Insulin or nasal decongestant spray c) Food in general or breakfast cereal d) Gasoline over the course of a week or gasoline over the course of a year e) Personal computers or IBM personal computers You are a Ford dealer and you know that the price elasticity of demand for Ford cars is 1.5. What will happen to your total revenue from Ford car sales if you raise your price? 2. Suppose a Pizza parlor is interested in increasing total revenue by adjusting its prices should it raise or lower its prices. 3. Which would likely have the less elastic supply, commercial property in New York city or hot dogs in New York city? Why? 4. Peter a fisherman goes out with a boat and a net early morning at 7:00 am. Peter takes his day's eatch to the fish market and sells it at the market price. As a result of new info about the beneficial effects of a fish rich diet, the demand for fish increases. How will Peter's supply of fish respond to the increased demand and higher price for his product in the short run and long run? 5. u are an economist working for the telephone company.You discover that demand for phone calls during business is inelastic, and demand for phon during evening hours is elastic. How could your compan increase its total revenue? 6. Yo e calls y use this information to Page 4

Explanation / Answer

Question 1

(a) Water or Diamond

Water is a necessity or necessary good while diamond is a luxury good.

Necessities have less elastic demand while luxury goods have more elastic demand.

So, diamonds would have the more elastic demand.

(b) Insulin or nasal decongestant spray

The good which have lesser number of substitutes generally has less elastic demand while the good that has greater number of substitutes generally has more elastic demand.

In comparison to insulin, nasal decongestant spray has more number of substitutes available.

Thus, nasal decongestant spray would have the more elastic demand.

(c) Food in general or break fast cereal

Good with fewer substitute or no substitute has less elastic demand while the good with more number of substitutes has more elastic demand.

Food in general does not have any substitute while breakfast cereals have substitute like eggs, toast etc.

Thus, breakfast cereal would have the more elastic demand.

(d) Gasoline over the course of a week or gasoline over the course of a year

Greater the time period involved in consumption of a good, higher will be the elasticity of demand for it and vice-versa.

Gasoline over the course of a year involves greater time period with respect to consumption of gasoline.

Thus, gasoline over the course of a year would have the more elastic demand.

(e) Personal computer or IBM personal computers

Good with fewer substitute or no substitute has less elastic demand while the good with more number of substitutes has more elastic demand.

Personal computers have fewer substitutes in comparison to IBM personal computers.

Thus, IBM personal computers would have the more elastic demand.

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