Home > Answers to Workshop 3 Markets in Action 1. (a) The price elasticity of demand measures the responsiveness of the quantity demand
1. (a) The
price elasticity of demand measures the responsiveness of the quantity
demanded to a change
in price.
(b) Give
the formula for price elasticity of demand. See
formula in question 4 below.
2. 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? –0.6 (=
–6%/10%)
3. In
each of the following pairs, tick which of the two items is likely to
have the more elastic demand. Give reasons for your answer.
(a) Petrol
(all brands) Esso petrol
There
is no close substitute for petrol. If the price of petrol went up, the
quantity demanded would fall only slightly, as people would still need
fuel for their cars. If the price of Esso petrol went up, however (assuming
that the prices of other brands had not changed), people could easily
switch to other brands.
(b) Holidays
abroad Bread
People
could easily substitute cheaper holidays, at home or abroad, if the
price of foreign holidays rose. The substitutes for bread are less close,
and people spend a relatively small proportion of their income on bread.
A rise in the price of bread, therefore, is likely to result in only
a small fall in the quantity demanded.
(c) Salt Clothing
People spend such a small proportion of their income on salt that they could easily afford to pay a higher price – and would probably not even be aware that the price had risen. Do you know the price of a drum of salt?
4. The formula for price
elasticity of demand is as follows:
Proportionate (or percentage) change in quantity demanded
Proportionate (or percentage)
change in price
This
can be summarised as:
Q_{d }
/ mid Q_{d } P /
mid P
The
following table shows the quantity of a product demanded at two different
prices:
P | Q_{d} |
16
14 |
25
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. Q_{d }
/ mid Q_{d }, to do your calculation.)
Q_{d }
/ mid Q_{d} = 10/30 = 0.33
(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.)
P_{ }
/ mid P = –2/15 = –0.13
(c) What
is the price elasticity of demand between £16 and £14?
Q_{d }
/ mid Q_{d } P
/ mid P = 0.33/–0.13 =
–2.5
5. The following diagram
shows two demand curves that cross at a price of P_{0}.
Which of the following statements are
true?
(a) Curve D_{1} is inelastic and curve D_{2} elastic. False
The
price elasticity of demand decreases as you move down a straight-line
demand ��curve��, so you can only compare elasticity at particular
points on the two curves or over particular segments.
(b) Demand is more elastic between P_{0} and P_{1} along curve D_{2} than along curve D_{1} True
There
is a bigger change in quantity demanded for the given change in price
along curve D_{2}.
(c) The
price elasticity of demand between P_{0} and P_{1}
in the case of curve D_{2} is equal to:
Q_{2} Q_{0 } P_{0} P_{1}
True mid Q mid
P
(d) For any given change in price there will be a larger proportionate change in quantity along curve D_{1} than along curve D_{2. } False
The opposite is true.
6. Fill in the rest
of the following table:
(For
the final column use the formula: Q_{d }
/ mid
Q_{d } P / mid P)
Quantity demanded (000s) | Price
(£) |
Total consumer expenditure | Elastic or inelastic demand | Price elasticity of demand |
7 9 11 13 |
13 11 9 7 |
91 99 99 91 |
elastic unit
elastic inelastic |
–1.5 –1 –0.67 |
7. (a) What is the formula for income elasticity of demand? Q_{d } / mid Q_{d } Y / mid Y
(where
Y is income)
(b) Which
of the following would you expect to have a demand which is elastic
with respect to income? (There are more than one.)
(i) Flour No
(ii) Ready-prepared meals for
the microwave Yes
(iii) Champagne Yes
(iv) Socks Possibly
(if they were designer socks)
(v) Designer jeans Yes
(vi) Electricity Possibly
(if luxury appliances use a relatively large amount of electricity)
(vii) Bus journeys No
(viii) Insurance Yes
All Rights Reserved Powered by Free Document Search and Download
Copyright © 2011