Question

(a) Suppose that when Snarfburger originally charged a price of $5 for their burger, and they sold 1,000 burgers per week. Thinking that they could potentially make more money by charging a higher price, they raised their price by 50 cents. After raising their price, they sold 800 units per week. Find the price elasticity of demand for Snarfburgers. b) Suppose that Francisca received a 20% raise this year as a result of her impressive sprea sheet skills. If she decided to spend an extra 20% on rock climbing gear, what is her income elasticity of demand for rock climbing gear? c) Suppose that the price of yoga mats increased by 50% in 2018 as a result of a spike in demand. If Gaiam, a yoga mat producer, increased their production of yoga mats from 2,000 to 2,800, what is Gaiam's price elasticity of supply for yoga mats? d) Furthermore, suppose that Gaiam currently can't expand production beyond 2,800 mats, but they have plans to build another factory. In that case, would we expect supply to be more or less elastic in the long run that in the short run? 2

Answer 1

ans a)

Price Elasticity of Demand=-2.333

Elasticity=Elastic

Initial Revenue=$5,000.00

Final Revenue=$4,400.00

Revenue Increase=-12 %

Price elasticity of demand measures the responsiveness of customers whilst the price of a good changes. The responsiveness of consumers to a change in a good’s price is the extent to which they alter their demand for that good.

When the consumers are more responsive, they either decrease or augment their demand for the good by a greater degree of response to a smaller rise / fall in the price of the good.

Elasticity of demand = (% change in the quantity demanded) divided by (Percentage change in price)

Price Elasticity of Demand= { (Q₁ – Q₀) / (Q₁ + Q₀) } divided by { (P₁ – P₀) / (P₁ + P₀) }

P₀ = the product’s original price.

P₁ =the product’s new price.

Q₀ = the initial demand.

Q₁ = the demand after the price change.