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Worksheet 5 - Elasticity

This document contains 18 questions related to price elasticity of demand. The questions cover calculating price elasticity using percentage change in quantity demanded and price, unit elasticity, total expenditure method, income elasticity, cross elasticity of demand between substitutes and complements, and using price elasticity to determine optimal pricing strategies.

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Aditya Singh
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172 views3 pages

Worksheet 5 - Elasticity

This document contains 18 questions related to price elasticity of demand. The questions cover calculating price elasticity using percentage change in quantity demanded and price, unit elasticity, total expenditure method, income elasticity, cross elasticity of demand between substitutes and complements, and using price elasticity to determine optimal pricing strategies.

Uploaded by

Aditya Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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1.

  If the price of a good increase by 8% and the quantity demanded decreases by 12%, what is
the price elasticity of demand?  Is it elastic, inelastic or unitary elastic?

2. Anna owns the Sweet Alps Chocolate store. She charges $10 per pound for her hand made
chocolate. You, the economist, have calculated the elasticity of demand for chocolate in her town
to be 2.5. If she wants to increase her total revenue, what advice will you give her and why?  Be
able to explain your answer.
 
3. The price of a commodity falls from Rs 50 to Rs 30, resulting in an increase in the purchase of
the commodity from 200 units to 220 units. Calculate the price elasticity of demand.

4.  If the cross elasticity of demand between peanut butter and milk is -1.11, then are peanut
butter and milk substitutes or complements?  Be able to explain your answer.
 
5.  A 10 percent increase in income brings about a 15 percent decrease in the demand for a good.
What is the income elasticity of demand and is the good a normal good or an inferior good?  Be
able to explain your answer.
 
6. The quantity demand of a commodity at price Rs 8 per unit is 600 units. Its price falls by 25%
and quantity demand rises by 120 units. Calculate price elasticity of demand. Is its demand
elastic.

7. Calculate the quantity demand of a commodity when the price increases from Rs 4 to Rs 6.
The original quantity demanded was 40 units and the price elasticity of demand is 0.5.

8. The price elasticity of demand of a good is 0.5. The consumer buys 50 units of the good at a
price of Rs 10 per units. At what price will the consumer willing to buy 60 units.

9. A consumer buys 40 of a good at a price of Rs 3 per unit. When price rises to Rs 4 per unit, he
buys 30 units. Calculate ep by the expenditure method.

10. When prices of a good rise from Rs 5 per unit to 6 per unit, Its demand falls from 20 units to
10 units. Use the Expenditure Method of measuring price elasticity of demand to determine
whether demand is elastic or inelastic.

11. Price elasticity of demand of a good is (-) 1.The consumer buys 8 units of that good when its
price is Rs 7 per unit. How many units will be demanded by the consumer if its price rises to Rs
8 per unit? Answer the question with the help of the Total Expenditure Method of measuring
price elasticity of demand.
12. A local firm produces three types of Pizza, for delivery to homes in the area. The owners
have completed research, to discover the demand curves for each of the three pizzas. The
schedules are shown below: (Quantities are per week).
Price Pizza A (Qd) Pizza B (Qd) Pizza C (Qd)

12 800 0 100

11 840 0 200

10 880 400 300

9 920 800 400

8 960 1200 500

7 1000 1600 600

6 1040 2000 700

5 1080 2400 800

Plot the three demand curves, on one graph.

a. Calculate PED for all three pizzas over the price range £9 to £10.
b. For Pizza C only, what price must be charged if the firm wishes to maximize its sales
revenue?

13. Work out the Price Elasticity of Demand for each, and comment on your result.

a. The price of DVDs today is £200, and the quantity demanded is 4m. Next year the price
falls to £180 and the quantity demanded rises to 6m.
b. The price of Pens today is £1, and the quantity demanded is 1m. Next year the price rises
to £1.10 and the quantity demanded falls to 950,000.
c. The price of The Times today is 40p, and the quantity demanded is 2m. Next year the
price falls to 30p and the quantity demanded rises to 2.2m

14.  Discount stores sell relatively elastic goods.  Ceteris paribus, explain why selling at a
relatively low price is profitable for them?

15. A consumer buys 50 units of a good at Rs 4 per unit. If its price falls by 25 per cent, its
demand rises to 100 units. Calculate its price elasticity of demand.

16. At a price of Rs 4 per unit a consumer buys 50 units of a good. The price elasticity of
demand is ( - ) 2.How many units will the consumer buys at a price of Rs 3 per unit?
17. If demand increases by 50 % due to an increase in income by 75 %,calculate the income
elasticity of demand.

18. RCO Ltd is a UK based electronics manufacturer and retailer. Its main products are Netbook
computers, PCs and Electronic Calculators.  The current price of the Netbook is £500, the PC is
£800 and the calculator is £40. This year the firm sold 10,000 Netbooks, 20,000 PCs and 1
million calculators.
In an attempt to improve revenue the managers of the firm have decided to increase all prices by
10%. Market research has suggested that the price elasticity of demand for each product is:
Netbook: (-) 1.5; PC : (-) 2.5; Calculator:  (-) 0.6
You have been asked to evaluate the planned price increases.

a. Comment on the planned price changes.


b. Would a 10% price reduction have been better for some or all of the products?
c. What benefit (if any) would advertising bring to the firm?

(You should support any arguments with calculations.)

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