Elasticity Test

Class Test Div.
A Class of 2016
Name of Student:______________________________________ Enrollment No.__________________
Answer the following:
1. You produce jewelry boxes. If the demand for jewelry boxes is elastic and you want to increase your total
revenue, you should reduce price.

2. Suppose that 50 chocolate bars are demanded at a particular price. If the price of candy bars rises by 4 percent,
the number of chocolate bars demanded falls to 46 candy bars. Calculate elasticity and was the decision to
increase price correct? 2 marks
=50-46/46*100= 8.69%, elasticity = 8.69%/ 4% = -2.17. No price should have been reduced.

3. If a 6 percent increase in income results in a 10 percent increase in the quantity demanded of pizza, then the
income elasticity of demand for pizza is 1.667 and it is a luxury item.

4. If the cross-price elasticity of demand is +1.25, then the two goods would be substitutes and relatively elastic.

5. You own a small town movie theatre. You currently charge $5 per ticket for everyone who comes to your
movies. Your friend who took an economics course in college tells you that there may be a way to increase your
total revenue. Given the demand curves shown, answer the following questions.

a. What is your current total revenue for both groups? Adult = $250 and Children = $ 100.
b. The elasticity of demand is more elastic in which market? Children market
c. What is the elasticity of demand between the prices of $5 and $2 in the adult market? Is this elastic or
inelastic? = 10/3*3.5/45 = 0.26 inelastic
d. What is the elasticity of demand between $5 and $3 in the childrens market? Is this elastic or inelastic?
=20/2*4/30= 1.33 elastic
e. Given the graphs and what your friend knows about economics, he recommends you increase the price
of adult tickets to $8 each and lower the price of a childs ticket to $3. How much could you increase
total revenue if you take his advice? = (8*40)+(3*40)=$440

Class Test Div. A Class of 2016
Answer the following:
1. Sony is considering a 10 percent price reduction on its color television sets. If the demand for sets in this price
range is inelastic then what will be impact on total revenue? Total revenue will fall

2. Your younger sister needs Rs.2000 to buy a new cycle. She has opened a lemonade stand to make the money
she needs. She currently is charging Rs.20 per glass, but wants to adjust her price to earn the money faster. If
you know that the demand for lemonade is elastic, what is your advice to her? Reduce the price to increase the
total revenue.

3. Suppose the government increases the tax on petrol in order to raise revenue. Since raising the petrol tax would
increase the price of petrol, the government must be assuming that the demand is inelastic.

4. A tax will be borne completely by consumers if .demand is inelastic or supply is elastic.

5. According to a Honda press release on October 23, 2006, sales of the fuel-efficient four-cylinder Honda Civic
rose by 7.1% from 2005 to 2006. Over the same period, according to data from the Indian Energy Information
Administration, the average price of regular petrol rose from Rs.48 per litre to Rs.51 per litre. Calculate the
cross-price elasticity of demand between Honda Civics and regular petrol. According to your estimate of the
cross-price elasticity, are the two goods gross complements or substitutes? Does your answer make sense? 3
marks. = (51-48)/48*100 = 6.25% Cross price elasticity = 7.1/6.25 = +1.136. Seem to be substitutes with + sign
but actually are complements. Behave like substitutes as the car is a fuel efficient car so when the price of petrol
increases, demand for fuel efficient cars rises.

6. To determine whether a good is considered normal or inferior, one would consider the goods

Income
Quantity of Good X Purchased Quantity of Good y Purchased
Rs. 30,000 2 20
Rs. 40,000 5 10
Using the table above, calculate income elasticity of good X and good Y and comment on the nature of the two
goods. 3 marks
Income elasticity for good X = 3/10000*35000/3.5 =3 Normal good
Income elasticity for good Y = -10/10000*35000/15 =-2.3 Inferior good

Class Test Div. A Class of 2016
1. To determine whether a good is considered normal or inferior, one would consider the goods

Income
Quantity of Good X Purchased Quantity of Good Y Purchased
Rs. 30,000 5 20
Rs. 40,000 8 10
Using the table above, calculate income elasticity of good X and good Y and comment on the nature of the two
goods. 3 marks
Income elasticity for good X = 3/10000*35000/6.5 =1.61 Normal good
Income elasticity for good Y = -10/10000*35000/15 =-2.33 Inferior good

2. Knowing that the demand for wheat is inelastic, if all farmers voluntarily plowed 10 percent less of their wheat
crop, then their total revenue would increase. 1 mark

3. Suppose a producer is able to separate customers into two groups, one having a price inelastic demand and the
other having a price elastic demand. If the producers objective is to increase total revenue, she should do what
to increase total revenue. Increase price for inelastic customers and reduce price for elastic customers.

4. A cable car operator in Kashmir is experiencing a decline in the number of cable car tickets sold, falling revenues,
and inadequate profits. The average price of a cable car ticket is Rs. 200 and there are 2,500 tickets sold daily on
average. The estimated price elasticity of demand is 1.5 and the cable cars are currently operating at an average
of 75 percent of capacity. What would you recommend to increase the cable car operator's revenues and
profits. 2 marks
1.5 = 25%/ x%, x = 16.667% hence the cable car operator should reduce price by 16.667 to use his excess
capacity and increase total revenue and profits. 100% capacity is 3333 tickets @ Rs. 167, total revenue will
increase.

5. According to a Skoda press release on October 23, 2006, sales of the fuel-efficient four-cylinder Skoda rose by
6.5% from 2005 to 2006. Over the same period, according to data from the Indian Energy Information
Administration, the average price of regular petrol rose from Rs.48 per litre to Rs.51 per litre. Calculate the
cross-price elasticity of demand between Skoda and regular petrol. According to your estimate of the cross-price
elasticity, are the two goods gross complements or substitutes? Does your answer make sense? 3 marks
= (51-48)/48*100 = 6.25% Cross price elasticity = 6.5/6.25 = +1.04. Seem to be substitutes with + sign but are
complements. Behave like substitutes as the cars are fuel efficient cars.

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