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Problem Set 3

The document is a problem set for a BUS108 course focusing on price elasticity of demand. It includes questions on calculating elasticity, comparing elasticities of different products, and analyzing demand curves. It also requires students to apply formulas and concepts related to demand and pricing scenarios.

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2 views

Problem Set 3

The document is a problem set for a BUS108 course focusing on price elasticity of demand. It includes questions on calculating elasticity, comparing elasticities of different products, and analyzing demand curves. It also requires students to apply formulas and concepts related to demand and pricing scenarios.

Uploaded by

ronaldrideout1000
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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BUS108 Problem Set 3

1. a) The price elasticity of demand measures the responsiveness of the quantity demanded /
price to a change in the quantity demanded / the quantity supplied / price.
[Circle the correct word]

b) Back in the mid-1990s, the government in the UK announced that for every 10 per cent rise
in the price of cigarettes, the demand was likely to fall by 6 per cent. If this information
was correct, what was the value of the price elasticity of demand for cigarettes at the time?

2. In each of the following pairs, circle which of the two items is likely to have the more elastic
demand. Give reasons for your answer.

a) Petrol (all brands) Esso petrol

b) Holidays abroad Bread

c) Salt Clothing

3. The formula for price elasticity of demand is as follows:

Proportionate (or percentage) change in quantity demanded


= Qd/mid Qd  P/mid P
Proportionate (or percentage) change in price

The following table shows the quantity of a product demanded at two different prices:

P Qd
16 25
14 35

(a) Calculate the proportionate change in quantity demanded when price falls from £16 to £14.
(Use the first part of the formula, i.e. Qd/mid Qd , to do your calculation.)

(b) Calculate the proportionate change in price when price falls from £16 to £14.
(Use the second part of the formula, i.e. P/mid P, to do your calculation.)

(c) What is the price elasticity of demand between £16 and £14?
4. The following diagram shows two demand curves that cross at a price of P0.

Price

P0

P1

D2

D1
Q0 Q1 Q2 Quantity

Which of the following statements are true?

(a) Curve D1 is inelastic and curve D2 elastic. ........................................................... True / False

(b) Demand is more elastic between P0 and P1 along curve D2 than along curve D1 True / False

(c) The price elasticity of demand between P0 and P1 in the case of curve D2 is equal to:

Q2 − Q0 P0 − P1
 .................................................................................................. True / False
mid Q mid P

(d) For any given change in price there will be a larger proportionate change in quantity along
curve D1 than along curve D2.
........................................................................................ True / False

5. The following function gives the demand for a given product:


Qd = 1200 – 20P
where, Q is a quantity supplied or demanded and P is price in GBP.

(a) Create a schedule of demand for prices between £10 and £60.

(b) Show the section of the demand curve where demand is price elastic.

(c) Using the point method, calculate price elasticity of demand if the price increses from £40
to £50.

(d) Should the firm raise the price if it wishes to increse total revenue? Explain.

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