13. If a 20% increase in the price of gas causes a 35% decrease in the demand fo
ID: 2429010 • Letter: 1
Question
13. If a 20% increase in the price of gas causes a 35% decrease in the demand for standard sized autos, then the cross-price elasticity of demand is:
14. If the price elasticity of demand of gasoline is 0.9, then a 15% increase in quantity demanded is caused by a:
15. A 10% increase in the price of 40 inch LCD televisions which have a price elasticity of 0.6 will cause a:
16. A business newscast claims that the median home price of existing homes fell from $275000 to $195000. Over the same time period the quantity of these homes sold also fell from 3150000 to 2950000. Using the arc elasticity formula, calculate the arc elasticity implied.
17. The demand for a product is income elastic with an elasticity coefficient of 2.4. If there is a 20% increase in income, what must the increase in demand be?
18. The cross price elasticity of biscotti demand with respect to the price of Lattes is -1.5 (Lattes and biscotti are complementary goods). If the price of Lattes increases 20% what would you expect to happen to biscotti demand?
19. Write your first derivative of the following function in the space on the answer sheet.
Y = 2X2+5X3–X +10
20. Write your first derivative of the following function in the space on the answer sheet.
Y = 3X1/3+4X5/4 -2X2+10X
Explanation / Answer
13. Cross price Ed = % change in quantity demanded of X / % change in price of Y
= % change in quantity demanded of standard size autos / % change in price of gas
= - 35/20 = - 1.75
14. Price Ed = % change in quantity demanded / % change in price
- 0.9 = 15/% change in price
% change in price = - 15/0.9 = - 16.67
16.67% decrease in the price of gasoline.
15. - 0.6 = % change in quantity demanded / 10
% change in quantity demanded = - 0.6 x 10 = - 6%
Increase in price causes 6% fall in the quantity demanded.
16. P1 = 275000, P2 = 195000, Q1 = 3150000 and Q2 = 2950000
Arc Ed = (P1 + P2)/(Q1 + Q2) x (Q2 - Q1)/(P2 - P1)
= 470000/6100000 x - 200000/- 80,000 = 47/610 x 20/8 = 940/4880 = 0.19
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