Developed by Dr.

Richard Croome
Also includes resources from: https://www.tes.com/teaching-resource/price-elasticity-of-demand-ped-6443836 , and
https://www.tes.com/teaching-resource/price-elasticity-of-demand-calculations-sheet-6117130

ECO 1003 – PRACTICE QUESTIONS - PED, IED & CPED

Calculation Practice

Product A Product B Product C Product D

Original
Price
Conditions $20 $50 $30 $45

Total Revenue 2000 1000

Quantity
Demanded 120 10 88 180

New Price
$19 $55 $25 $60
Conditions

2280 550
Total Revenue

-7.3

Price Elasticity
-5.3
of Demand

Price Elastic or Elastic Elastic

Correct
Management
Response

1
Developed by Dr. Richard Croome
Also includes resources from: https://www.tes.com/teaching-resource/price-elasticity-of-demand-ped-6443836 , and
https://www.tes.com/teaching-resource/price-elasticity-of-demand-calculations-sheet-6117130

1. The original price of petrol per litre = AED 0.80. The new price of petrol per litre = AED 0.88
The original quantity demanded = 220 litres per week. The new quantity
demanded = 205 litres per week. Calculate PED using Mid-Point formula.

PED = ______? Is this elastic or inelastic? What does this mean i.e. what are the
implications for management (what should management do to maximise revenue?)

2. When the cinema charged AED 35 per ticket revenue was AED 4500. When the price fell to
AED 30 revenue was AED 4980. What is the PED? What are the implications for
management (what should management do to maximise revenue?)

3. What does it mean if the PED for potatoes is (-) 2.0?

2
Developed by Dr. Richard Croome
Also includes resources from: https://www.tes.com/teaching-resource/price-elasticity-of-demand-ped-6443836 , and
https://www.tes.com/teaching-resource/price-elasticity-of-demand-calculations-sheet-6117130

4. Last year Ahmed’s salary was AED 37,500 per month and he went to the Texas Steakhouse
restaurant on average 4 times a month.
This year his salary is AED 42,500 and he now goes to the Texas Steakhouse restaurant on
average 5 times a month. From this information,
Calculate the income elasticity of demand for the Texas Steakhouse restaurant.

If you owned a Texas Steakhouse restaurant, where would you open one, in rich suburbs
or poor suburbs?

Look at the following demand curve for pencils

Price
AED
60

40

20
Demand

0 20 40 60 80 100 120
Quantity of pencils

5. Based on the graph above; Calculate the PED when the price goes down from AED 30 to AED 20.
Note: approximate PED is OK.
Is this price elastic or price inelastic? What are the implications for management (what should
management do to maximise revenue?)

3
Developed by Dr. Richard Croome
Also includes resources from: https://www.tes.com/teaching-resource/price-elasticity-of-demand-ped-6443836 , and
https://www.tes.com/teaching-resource/price-elasticity-of-demand-calculations-sheet-6117130

6. Calculate the total revenue earned when the price was AED 30 (remember: revenue = price x
quantity).

7. Calculate the total revenue earned at the new price of AED 20.

8. What has happened to the total revenue as the price has fallen?
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9. What can you conclude about the link between total revenue and elastic PED?
__________________________________________________________________________________
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10. Now think about the market for petrol. Suppose the price falls from AED .90 a litre to AED .80 a
litre, and quantity demanded increases from 40 litres per household per week to 42 litres per
household per week. Calculate PED.

11. What was the total revenue at a price of AED .90? What is the total revenue at the new price of
AED .80?

12. What has happened to the total revenue as the price has fallen?

4
Developed by Dr. Richard Croome
Also includes resources from: https://www.tes.com/teaching-resource/price-elasticity-of-demand-ped-6443836 , and
https://www.tes.com/teaching-resource/price-elasticity-of-demand-calculations-sheet-6117130

__________________________________________________________________________________
__________________________________________________________________________________

13. What can you conclude about the link between total revenue and inelastic PED?
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

14. Last year Mariam’s salary was AED 27,500 per month and she went to Spa & Nails 3 times a
month.
This year her salary is AED 47,500 and she now visits Spa & Nails 8 times a month. From this
information,
Calculate the income elasticity of demand for cosmetics.

Are Spa & Nails a normal or inferior good? _____________________

15. Last year Nouf’s salary was AED 12,500 per month and she visited Burger King 4 times a month.
This year her salary is AED 27,500 and she now visits Burger King 3 times a month. From this
information,
Calculate the income elasticity of demand for McDonalds.

Is Burger King a normal or inferior good? _____________________

15. When Abdul’s salary was AED 25,500 a month, he bought on average 6 pairs of shoes a year.
Now, he has lost his job, and only receives AED 8,000 a month from his father, Abdul only buys 2
pairs of shoes a year.
Calculate the cross price elasticity of demand for shoes.

5
Developed by Dr. Richard Croome
Also includes resources from: https://www.tes.com/teaching-resource/price-elasticity-of-demand-ped-6443836 , and
https://www.tes.com/teaching-resource/price-elasticity-of-demand-calculations-sheet-6117130

Are shoes a normal or inferior good?

16. The manager of Gloria Jeans notices that when she increases the price of her Café Lattes from
AED 20 to AED 25, the sales of chocolate chip cookies decreases from 45 cookies a day to 30.
Calculate the cross price elasticity of demand for Café Lattes and chocolate chip cookies.

Are Café Lattes and chocolate chip cookies compliments or substitutes?

17. Define ‘price elasticity of demand’ and explain how it is measured.

__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

18. Explain the factors which affect PED for a good or service (hint, there are 5). For each case
comment on how it is likely to affect the slope of the demand curve.

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THE END