24 Questions
What is the effect on the demand for organic potatoes if the consumer incomes are expected to fall by 10 percent over the next three years, given an income elasticity of demand of 2.26?
The demand for organic potatoes will decrease by 22.6%.
What is the effect on the demand for raincoats if the daily amount of rainfall increases by 10 percent, given a demand function of ln Qx d = 10 − 1.2 ln Px + 3 ln R − 2 ln Ay?
The demand for raincoats will increase by 30%.
What is the effect on the demand for good Y if the amount of advertising directed towards good Y decreases by 10 percent, given a demand function of ln Qx d = 10 − 1.2 ln Px + 3 ln R − 2 ln Ay?
The demand for good Y will increase by 20%.
What does an own price elasticity of demand of -3 indicate about the demand for Invigorated PED shoes?
The demand for Invigorated PED shoes is relatively elastic, meaning that a small change in price will lead to a large change in demand.
What does a cross-price elasticity of demand of 4 indicate about the demand for Invigorated PED shoes with respect to good Y?
Goods X and Y are substitutes, meaning that an increase in the price of good Y will lead to an increase in demand for good X.
What does an income elasticity of demand of 0.01 indicate about the demand for Invigorated PED shoes with respect to average consumer income?
The demand for Invigorated PED shoes is normal, meaning that an increase in income will lead to an increase in demand.
What is the effect on the demand for Invigorated PED shoes if the price of good Y increases by 10 percent, given a cross-price elasticity of demand of 4?
The demand for Invigorated PED shoes will increase by 40%.
What is the effect on the demand for Invigorated PED shoes if the amount of advertising spent on shoes increases by 10 percent, given an advertising elasticity of demand of 2?
The demand for Invigorated PED shoes will increase by 20%.
What is the total revenue when the price of laptops is $30?
TR = $600
What is the own price elasticity of demand when the price of laptops increases from $10 to $15?
Elasticity = -40%
What is the cross-price elasticity of demand between coffee and juice if a 20% increase in juice price leads to a 10% increase in coffee sales?
Elasticity = 0.5
How will a 10% increase in consumer income affect the demand for coffee if the income elasticity of demand is 1.2?
Demand will increase by 12%
What is the expenditure share of laptops in a consumer's budget if the own price elasticity of demand is -2?
Expenditure share = 0.5
What is the effect of available substitutes on the own price elasticity of demand?
Increases own price elasticity
What is the effect of time on the own price elasticity of demand?
Increases own price elasticity
What is the demand analysis application of cross-price elasticity in the context of the grocery store?
Helps in predicting the effect of price changes on related products.
What is the own price elasticity of demand, and how is it calculated?
The own price elasticity of demand is a measure of the responsiveness of the quantity demanded of a good to a change in the price of that good, calculated as the percentage change in quantity demanded divided by the percentage change in the price of the good.
What is the difference between elastic and inelastic demand, and how are they classified based on the absolute value of the own price elasticity?
Elastic demand occurs when the absolute value of the own price elasticity is greater than 1, while inelastic demand occurs when the absolute value of the own price elasticity is less than 1. Unitary elastic demand occurs when the absolute value of the own price elasticity is equal to 1.
What is the significance of the sign of the own price elasticity of demand?
The sign of the own price elasticity of demand indicates the direction of the response to a price change. A negative sign indicates that an increase in price leads to a decrease in quantity demanded, and vice versa.
What is the difference between perfectly elastic and perfectly inelastic demand, and how do they relate to the demand curve?
Perfectly elastic demand occurs when the own price elasticity is infinite in absolute value, resulting in a horizontal demand curve. Perfectly inelastic demand occurs when the own price elasticity is zero, resulting in a vertical demand curve.
How does the own price elasticity of demand relate to the demand function?
The own price elasticity of demand is a measure of the responsiveness of the quantity demanded to a change in price, which is reflected in the demand function.
What is the significance of cross-price elasticity in demand analysis, and how does it differ from own price elasticity?
Cross-price elasticity measures the responsiveness of the quantity demanded of one good to a change in the price of another good, whereas own price elasticity measures the responsiveness of the quantity demanded to a change in its own price.
How does income elasticity of demand relate to the responsiveness of quantity demanded to changes in income?
Income elasticity of demand measures the responsiveness of the quantity demanded to a change in income, indicating how changes in income affect the demand for a good or service.
What are the applications of demand analysis in real-world scenarios, and how do elasticity concepts contribute to these applications?
Demand analysis has applications in pricing, production, and investment decisions, and elasticity concepts such as own price elasticity, cross-price elasticity, and income elasticity contribute to these applications by providing insights into the responsiveness of demand to changes in price and income.
Study Notes
Elasticity Concepts
- Elasticity is a measure of the responsiveness of one variable to changes in another variable
- It is the percentage change in one variable that arises due to a given percentage change in another variable
Types of Elasticity
- Own Price Elasticity of Demand:
- Measures the responsiveness of the quantity demanded of a good to a change in the price of that good
- Percentage change in quantity demanded divided by the percentage change in the price of the good
- Cross Price Elasticity:
- Measures the responsiveness of the demand for a good to changes in the price of a related good
- Percentage change in the quantity demanded of one good divided by the percentage change in the price of a related good
- Income Elasticity:
- Measures the responsiveness of the demand for a good to changes in consumer income
- Percentage change in quantity demanded divided by the percentage change in income
Factors Affecting Elasticity
- Availability of substitutes
- Time
- Expenditure share
Elastic and Inelastic Demand
- Elastic demand:
- Demand is elastic if the absolute value of the own price elasticity is greater than 1
- Inelastic demand:
- Demand is inelastic if the absolute value of the own price elasticity is less than 1
- Unitary elastic demand:
- Demand is unitary elastic if the absolute value of the own price elasticity is equal to 1
- Perfectly elastic demand:
- Demand is perfectly elastic if the own price elasticity is infinite in absolute value
- Demand curve is horizontal
- Perfectly inelastic demand:
- Demand is perfectly inelastic if the own price elasticity is zero
- Demand curve is vertical
Examples and Problems
- An increase in consumer income is expected to fall by 10% over the next three years. As a manager of an organic food retailer, you need to adjust your purchases of organic potatoes accordingly.
- The demand for raincoats is given by ln Qx d = 10 − 1.2 ln Px + 3 ln R − 2 ln Ay. A 10% increase in the daily amount of rainfall would increase demand, while a 10% reduction in the amount of advertising directed toward good Y would decrease demand.
- The daily demand for Invigorated PED shoes is estimated to be Qx d = 100 − 3Px + 4Py −.01M + 2Ax. The own price, cross-price, and income elasticities of demand can be calculated and interpreted.
- A 20% increase in the price of juice is expected to affect the sales of coffee products.
A problem-solving quiz on the impact of economic downturn on consumer income and demand for organic potatoes, from a retailer's perspective.
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