Page 60 - DECO101_MICRO_ECONOMICS_ENGLISH

Unit 4: Elasticity of Demand

8. When the income elasticity is equal to 1, the good is said to be income inelastic. Notes

9. When the income elasticity is negative, the good is an inferior good.
10. For complementary goods, the cross elasticity will always be positive.

4.8 Review Questions

1. Discuss the factors that determine elasticity of demand.
2. Explain price elasticity of demand with help of examples.
3. Assume that our current consumption of paperback books is 1000 per year at the average

price of ` 1.50 per book. The estimated coefficient of price elasticity is 0.75. The price
increase is 50 paise per book. Calculate the change in the quantity of books demanded,
other things being equal.
4. The market demand function of a commodity is represented by Q = 20 – 2P – 0.5 P + 0.01
B
A
A
Y, where Q is the quantity demanded of A, P is the price of A, P is the price of B, and
B
A
A
Y is the consumer’s income. Calculate price and cross elasticities of demand for A when
P = 5, P = 10 and Y = 1000.
A B
5. When the price of good X falls from ` 10 to ` 9, the demand for good Y increase from
20 Kg. to 25 Kg.
(a) What is the cross elasticity of demand of good Y for good X?
(b) Are goods X and Y compliments or substitutes?
6. You are given market data that says when the price of pizza is ` 60, the quantity demanded
of pizza is 80 slices and the quantity demanded of cheese bread is 120 pieces. When
the price of pizza is ` 30, the quantity demanded of pizza is 100 slices and the quantity
demanded of cheese bread is 100 pieces.
(a) Can the price elasticity of demand be calculated for either good?
(b) If so, calculate the price elasticity of demand for each product.

7. Consider the markets for screw-gauge and vernier caliper. You study survey data and
observe that if a screw-gauge costs ` 50,100 screw-gauges are demanded. You also observe
that if a screw-gauge cost ` 30,150 vernier calipers are demanded and if a screw-gauge
cost ` 40 then 100 vernier calipers are demanded. If a vernier caliper costs ` 20,125 vernier
calipers are demanded.

(a) Can the price elasticity of demand be calculated for either good?
(b) If so, calculate the price elasticity of demand for each good.

8. As a business manager, how do you find the demand elasticity to be useful? Also, can you
forecast you revenues in case you know the demand elasticity?
9. Examine the concept of price elasticity of demand. Which of the two methods of measuring
it is preferred by you and why?
10. When an individual’s income was ` 2000, the demand for rice was 10kg. An increase of
` 500 in the individual’s income leads to a fall in the demand of rice by 2kg. Assuming that
the price of rice remained constant, what is the income elasticity of demand for rice?
11. Think and state one situation where a business manager will use promotional elasticity to
make business decisions.
12. Discuss cross elasticity of demand, prove its utility for business managers.

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