1. Suppose the price elasticity of demand for bread is 1.00. If the price of bre

Question

1. Suppose the price elasticity of demand for bread is 1.00. If the price of bread falls by 20%, the quantity demanded will increase by:

2. Suppose that a 20% decrease in the price of good Y causes a 20% increase in demand for good X. The coefficient of cross-price elasticity of demand is:

3. When the price of a quart of milk increased from $1.55 to $2.00 the quantity demanded decreased from 21,000 per day to 19,000 per day. In this range, the price elasticity of demand is:

4. If the elasticity of supply for crude oil is 0.5, how much will the price have to increase to increase production 20%?

5. Demand for X increases from 100 to 125 when the price of Y increases from $5 to $6. The cross-price elasticity of demand is:

6. Demand for X increases from 100 to 125 when the price of Y increases from $5 to $6. The cross-price elasticity of demand is:

Explanation / Answer

Required formulae:

(a) Own price elasticity of demand, eP = (dQ / dP) x (P / Q)

(b) Cross price elasticity of demand between X & Y = (dQx / dPy) x (Py / Qx)

(c) Elasticity of supply, eS = (dQ / dP) x (P / Q)

(1)

eP = 1 (Absolute value)

Assuming eP < 0, if price decreases by 1%, demand increases by 1%.

So, 20% decrease in price will increase demand by 20%.

(2)

Cross price elasticity = Increase in demand of X / decrease in price of Y

= - 20% / 20% = - 1

(3)

eP = [(19,000 - 21,000) / 21,000] / [(2 - 1.55) / 1.55]

= - 0.0952 / 0.2903 = - 0.33

(4)

0.5 = 20% / Change in price

So, Change in price = 20% / 0.5 = 40%

(5)

Cross price elasticity = [(125 - 100) / 100] / [(6 - 5) / 5]

= 0.25 / 0.20 = 1.25

(6) Same as question (5)

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