Chapter 4 Homework (BE SURE TO EXPLAIN YOUR ANSWERS. DON’T PROVIDE JUST A NUMBER

Question

Chapter 4 Homework (BE SURE TO EXPLAIN YOUR ANSWERS. DON’T PROVIDE JUST A NUMBER) Two point questions:

1 Rain spoils the strawberry crop. As a result, the price rises from $5 to $6 a box and the quantity demanded decreases from 1,000 to 800 boxes a week. Over this price range,

a. What is the price elasticity of demand (use the mid-point formula)?

b. Is the demand for strawberries elastic or inelastic.

2. If a 10 percent drop in the price of orange juice increases the quantity of orange juice demanded by 12 percent and decreases the quantity of apple juice demanded by 8 percent, calculate the

a. Price elasticity of demand for orange juice.

b. Cross elasticity of demand for apple juice with respect to the price of orange juice.

3. Your price elasticity of demand for bananas is 2. If the price of bananas falls by 20 percent, what is

a. The percentage change in the quantity of bananas you buy?

b. Does your expenditure on bananas increase or decrease?

4. A price change causes the quantity demanded of a good to decrease by 10 percent, while the total revenue of that good increased by 10 percent. Over this price range is the demand for this good elastic, inelastic or unitary elastic? Explain.

5. Use the revenue test on the numbers in the table below to answer the two questions. You do not need to calculate the elasticities to answer the questions. Price per ticket Quantity demanded Revenue $26 1,000 $22 2,000 $18 3,000 $14 4,000 $10 5,000 $6 6,000

a. Over the $22-$18 price range, is the demand elastic or inelastic? How do you know this?

b. Over the $14-$10 price range, is the demand elastic or inelastic? How do you know this?

Explanation / Answer

1 a)mid-point for q= 1800/2=900
mid-point for p=5+6=11/2=5.5
Ed=(1000-800)/900 / (5-6)/5.5
=2/9 / -1/5.5
=-0.22/0.18
=-1.22

b)It is highly inelastic

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