Hi ples help with explanation Thanks. Q3 For each case, choose the condition tha

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Hi ples help with explanation Thanks.

Q3 For each case, choose the condition that characterizes demand: elastic demand, inelastic demand, or unit-elastic demand. a. Total revenue decreases when price increases. b. The additional revenue generated by an increase in quantity sold is exactly offset by revenue lost from the fall in price received per unit. c. Total revenue falls when output increases. d. Producers in an industry find they can increase their total revenues by coordinating a reduction in industry output. e. As the price of margarine rises by 20%, a manufacturer of baked goods increases its quantity of butter demanded by 5%. Calculate the cross-price elasticity of demand between butter and margarine. Are butter and margarine substitutes or complements for this manufacturer? f. After Malia’s income increased from $12,000 to $18,000 a year, her purchases of album downloads increased from 10 to 40 downloads a year. Calculate Malia’s income elasticity of demand for albums. g. Expensive restaurant meals are income-elastic goods for most people, including Sanjay. Suppose his income falls by 10% this year. What can you predict about the change in Sanjay’s consumption of expensive restaurant meals?

Explanation / Answer

(a) Elastic

For elastic demand, higher price lowers total revenue.

(b) Unit elastic

For unit elastic demand, change in quantity equals change in revenue.

(c) Elastic

When output increases, price must fall by more than proportionate amount to lower total revenue. This is possible when demand is elastic.

(d) elastic

When output decreases, price must rise by more than proportionate amount to increase total revenue. This is possible when demand is elastic.

(e) Cross--price elasticity = % change in quantity of butter / % Change in price of margarine

= 5% / 20%

= 0.25

Since cross-price elasticity is positive, butter and margarine are substitutes.

(f) Income elasticity = % Change in quantity demanded / % Change in income

= [(40 - 10) / 10] / [$(18,000 - 12,000) / 12,000]

= [30 / 10] / [6,000 / 12,000]

= 3 / 0.5

= 6

(g) Since expensive meals are income-elastic, as income falls by M%, quantity demanded of expensive meals will fall by more than M%.

So, when income falls by 10%, consumption of such meals will fall by more than 10%.

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