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Exercises Elasticity

This document provides exercises on elasticity concepts for a microeconomics class. It includes 6 exercises calculating various elasticities using demand and supply functions. The exercises calculate price elasticity of demand, income elasticity of demand, and cross-price elasticities. The document also includes multiple choice questions testing understanding of elasticity concepts like perfectly inelastic, unit elastic, and total revenue changes with elasticity.

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221 views4 pages

Exercises Elasticity

This document provides exercises on elasticity concepts for a microeconomics class. It includes 6 exercises calculating various elasticities using demand and supply functions. The exercises calculate price elasticity of demand, income elasticity of demand, and cross-price elasticities. The document also includes multiple choice questions testing understanding of elasticity concepts like perfectly inelastic, unit elastic, and total revenue changes with elasticity.

Uploaded by

AA BB MM
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Beirut Arab University

Faculty of Business Administration – Tripoli


Microeconomics – BECO201
Noma Ziadeh Mikati
Fall 2017/2018

-Practical exercises: Elasticity-

Objectives
• Definition and classification of price elasticity of demand
• List the different types of price elasticity (Perfectly Inelastic, Inelastic, Unit
elastic, Elastic, Perfectly elastic)
• Price elasticity of demand and revenue
• Determinants of price elasticity of demand (availability of substitutes, time
dimension, the price)
• Cross price elasticity of demand
• Elasticity of supply

Concepts
Elastic demand
Inelastic demand
Perfectly elastic demand
Perfectly inelastic demand
Unitary elasticity
Price elasticity of demand
Midpoint formula
Income elasticity of demand
Elasticity of supply

  1  
I. Elasticity
 
Exercise 1
The demand function for Beef is as follow: Qb=286-20p
a. Calculate the elasticity of demand at the equilibrium point: p=3.3$ and
Q=220. Give an interpretation of your answer
b. Prove that the price elasticity of demand is not constant all along the demand
curve (you can calculate PED at 2 different points)

(Hint: PED= dQ/Dp*P/Q)

Exercise 2
The demand function for pork is as follow:
Q=171-20p+20pb+2Y
p: price of pork
pb: price of beef
Y: annual revenue
Given that Q*=220 million Kg per yeatr, pb=4$ per Kg, Y= 12.5
• Calculate the income elasticity of demand
• Calculate the cross price elasticity between the price of beef and the quantity
of pork

Note: income elasticity of demand permit to see how your demand for a specific good
change when your income change. Normal goods have positive income elasticity of
demand. Goods that consumer consider as necessity has income elasticity of demand
near zero and inferior goods has negative elasticity.

Exercise 3
Consider 3 goods, X, Y and Z the demand function for X is as follow
Qxd=-13px-8py+10pz+360
Given that: px=22; py=15; pz=20
• Calculate Qx
• Calculate the cross price elasticity between the price of Y and the quantity of
X
• Calculate the cross price elasticity between the price of Z and the quantity of
X
• What can you conclude

QX=-13*22-8*15+10*20+360=174
Cross price elasticity(X,Y)= Dqx/Qx/DPy/py = -8 * 15/174

Cross price elasticity(X, Z)= DQx/Qx /QPz/Pz= 10* 20 / 174

  2  
Exercise 4 (with solution)
For each of the following pairs of goods, identify which one you would expect to
have more own-price elastic demand. Please explain your reasoning.
(a) Computers (generally) vs. Apple MacBook Pro laptops.
Apple MacBook Pro, because it is a specific brand and has more
substitutability.
(b) Stereo headphones (generally) vs. hearing aids.
Stereo headphones, since they tend to be less of a necessity good than hearing
aids.
 
Exercise  5  
The following functions represent the demand and supply for chairs in an industrial
company:
Q = 1200 – 30P
Q = 1000 + 10P

1. Determine the price and the quantity at the equilibrium


2. Calculate the price elasticity of demand at P = 15. Explain its meaning
3. Calculate the price elasticity of demand at P = 15, and use P = 16 as your second
reference point).

Exercise 6
Suppose you are the manager of a restaurant that serves an average of 400 meals per
day at an average price per meal of $20. On the basis of a survey, you have
determined that reducing the price of an average meal to $18 would increase the
quantity demanded to 450 per day.

1. Compute the price elasticity of demand between these two points.


2. Would you expect total revenues to rise or fall? Explain.
3. Compute total revenue at the two meal prices. Do these totals confirm your answer
in (b) 

Multiple-choice questions

1. According to figure 1, the demand for tickets is


A) perfectly price elastic.
B) perfectly price inelastic.
C) unit price elastic.
D) perfectly income inelastic.

  3  
2. When the price of radios decreases 5%, quantity demanded increases 5%. The price
elasticity of demand for radios is ________ and total revenue from radio sales will
________.
A) elastic; decrease
B) elastic; increase
C) inelastic; decrease
D) unit elastic; not change

Figure 2

3. Refer to Figure 2. If the price of a hamburger is increased from $8 to $10, the price
elasticity of demand equals ________. Use the midpoint formula.
A) -0.33
B) -3.0
C) -30.
D) -300

4. Refer to Figure 2. If the price of a hamburger is increased from $6 to $8, the price
elasticity of demand equals ________. Use the midpoint formula.
A) -0.24
B) -1.0
C) -1.4
D) -2.0

5. According to the law of demand there is ________ relationship between price and
quantity demanded.
A) a positive
B) a negative
C) either a positive or negative
D) a constantly changing

  4  

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