For each of the following statements, state the relevant elasticity and state wh
ID: 1200208 • Letter: F
Question
For each of the following statements, state the relevant elasticity and state what its value should be (negative, positive, greater than one, zero, and so on). a. The demand for BMWs in an area increases during times of rising incomes just slightly faster than income rises. b. The quantity of lobsters demanded falls when lobster prices rise (ceteris paribus), but the revenue received by restaurants from the sale of lobsters stays the same. c. Demand for many goods rise when the price of substitutes rise. d. Land for housing development near Youngstown, Ohio is in plentiful supply. At the current price, there is essentially an infinite supply.Explanation / Answer
(a) Income elasticity of demand will be positive and higher than 1.
Income elasticity = % Change in quantity demanded / % Change in income
In this case, as income rises, quantity demanded rises more than proportionately. So, income elasticity is higher than 1.
(b) Price elasticity of demand equals - 1.
Price elasticity = % Change in quantity demanded / % Change in Price
Here, as price rises, quantity demanded falls exactly by the same percentage so that total revenue remains unchanged.
(c) Cross price elasticity of demand is positive.
Cross price elasticity measures % change in quantity demanded of good X, for a % change in price of good Y. When X and Y are substitutes, an increase in price of X will increase the quantity demanded, therefore cross-price elasticity is positive. But it cannot be said if it is higher than or lower than 1.
(d) Elasticity of supply is infinite.
When supply of a good is infinite, its elasticity of supply is infinity.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.