Question

BUS 202                                                                                                         Thursday, March 12, 2020In-Class Group HW #6  (40pts)                                                                           class time #____         

Questions 1-8 are 2 points each. Question 9 is 10pts. And Q 10 is 14 points.

1. . Use the demand curve diagram above to answer the following question.  What is the own-price elasticity of demand as price increases from $2 per unit to $4 per unit? Use the mid-point formula in your calculation.

a) -1/3.
b) -6/10.
c) -2/3.
d) None of the above.

2. Suppose that a 2% increase in price results in a 6% decrease in quantity demanded. Own-price elasticity of demand is equal to:

a) -1/3.
b) - 6.
c) - 2
d) -3.

3. If own-price elasticity of demand equals 0.3 in absolute value, then what percentage change in price will result in a 6% decrease in quantity demanded?

a) 3%
b) 6%
c) 20%.
d) 50%.

4. Suppose you are told that the own-price elasticity of supply equal 0.5. Which of the following is the correct interpretation of this number?

a) A 1% increase in price will result in a 50% increase in quantity supplied.
b) A 1% increase in price will result in a 5% increase in quantity supplied.
c) A 1% increase in price will result in a 2% increase in quantity supplied.
d) A 1% increase in price will result in a 0.5% increase in quantity supplied.

5. Suppose that a 10 increase in price results in a 50 percent decrease in quantity demanded. What does (the absolute value of) own price elasticity of demand equal?

a) 0.5.
b) 0.2.
c) 5.
d) 10.

6. If goods X and Y are SUBSTITUTES, then which of the following could be the value of the cross price elasticity of demand for good Y?

a) -1.
b) -2.
c) Neither a) nor b).
d) Both a) and b).

7. If pizza is a normal good, then which of the following could be the value of income elasticity of demand?

a) 0.2.
b) 0.8.
c) 1.4
d) All of the above.

8. If goods X and Y are COMPLEMENTS, then which of the following could be the value of cross price elasticity of demand?

a) 0.
b) 1.
c) -1.
d) All of the above could be the value of cross price elasticity of demand.

9. Consider a local car dealership that gathers data on changes in demand and consumer income for its cars for a particular year. When the average real income of its customers falls 20%, the sale of new cars plummets 40%, all other things unchanged. However, the sale of used cars increases by 10%. Calculate and interpret the income elasticity of demand for new and used cars.  Show your work.

10.   The government of Queensland is very serious about drugs. Possession of drugs is illegal and is severely penalized. However, a black market exists which the government has failed to dismantle despite serious attempts. Mr. Green, the health minister, is worried about the situation. In early 2009, a consultant working with health ministry suggested that the government should increase the price of a pack of cigarettes from 200 Queensland dollars (S$) to S$600. A survey conducted in December 2009 suggested that over the year, the quantity demanded of marijuana decreased from 2,000 kgs per day to just 800 kgs. Calculate the cross elasticity of demand for marijuana and explain why the policy is effective or ineffective.   Show your work.

Answer 1

1) There is no diagram, between mid point elasticity is calculated as:

{(Q2 - Q1) / [(Q1 + Q2) / 2]} / {(P2 - P1) / [(P1 + P2) / 2]}

Q2 = New quantity

Q1 = Old quantity

P2 = New Quantity

P1 = Old quantity

2) %increase in price = 2%

%fall in quantity demanded = -6%

Price elasticity of demand = %change in quantity demanded / %change in price

Price elasticity of demand = -6% / 2% = -3

Option D is correct.

3) Price elasticity of demand = -0.3

%change in quantity demanded = 6% = 0.06

Price elasticity of demand = %change in quantity demanded / %change in price

%change in price = 0.06 / 0.3 = 0.2 = 20%

Option C is correct.

4) Own price elasticity of suply = 0.5

Price elasticity of supply= %change in quantity supplied / %change in price

It says that for every 1% change in price there is 0.5% change in quantity supplied. Option D is correct

5) Price elasticity of demand = %change in quantity demanded / %change in price

%change in price = 10%

%change in quantity demanded = -50%

Price elasticity of demand = -50% / 10% = -5

In aboslute value price elasticity of demand 5.

Option C is correct.

6) Cross price elasticity is positive for substitute goods as fall change in price of one good cause rise in quantity consumption of other goods. Option C is correct.

7) Elasticity of demand for normal goods is greater than 1. Option D is correct.

8) Cross price elastiicty of demand for complementary goods is positive. Thus option B is correct.

9) Income elasticity of demand = %change in quantity demanded / %change in income

%change in income = -20%

%change in new car sales = -40%

%change in used cars = 10%

Income elasticity of demand for new cars = -40% / -20% = 2

Income elasticity of demand for used cars = 10% / -20% = -0.5

10) Price of cigarettes increase from $200 to $600

Quantity demanded of marijuana decreased from 2,000 to 800

Cross price elasticity of demand = %change in quantity of marijuana /. %change in price of cigarettes

%change in quantity of marijuana = [(800 - 2,000) / 2,000] * 100= -60%

%change in price of cigarettes = [(600 - 200) / 200] * 100= 200%

Cross price elasticity of demand = -60% / 200% = -0.3

Cross price elastiicty is negative for complementary goods. It can be said that cigarettes and marijuana area used together.