Question

1. Which good in each of the following pairs of goods you would expect to have higher price elasticity of demand?

a. Television sets or LG television sets

b. Required text books or mystery novels

c. Short-run vs Long-run demand for gasoline.

2. Last year, Tess bought 5 handbags when her income was $54,000. This year, her income is $60,000, and she purchased 7 handbags.

a. Using the mid-point method, calculate Tess’s income elasticity of demand for handbags.

b. Based on the elasticity you calculated in 3a, Tess regards handbags as what type of goods? (normal or inferior)

3. Suppose that when the price of good X increases from $800 to $850, the quantity demanded of good Y increases from 65 to 70.

a. Using the midpoint method, calculate the cross price elasticity of demand between good X and Y.

b. Based on the elasticity you calculated in 4a, how are goods X and Y are related? (X and Y are substitutes, X and Y are complements, X and Y are not related)

Answer 1

1.

a. Television: As it is unbranded
b. Mystery novels as it is not a requirement
c. Long run as the requirement would not be immediate

2.

a. Change in Quantity/change in Income = ((7-5)/((7+5)/2))/((60000-54000)/((6000+54000)/2)) = 1.67
b. Normal, as with the increase income the quantity demanded too increases

3.

a. Cross price elasticity =((70-65)/((70+65)/2))/((850-800)/((850+800)/2)) = 1.22
b. Substitutes as the price of one good increases demand for other good increases