1) If a 20% increase in the price of gas causes a 35% decrease in the demand for
ID: 1173478 • Letter: 1
Question
1) If a 20% increase in the price of gas causes a 35% decrease in the demand for standard sized autos, then the cross-price elasticity of demand is:
2) If the price elasticity of demand of gasoline is 0.9, then a 15% increase in quantity demanded is caused by a:
3) A 10% increase in the price of 40 inch LCD televisions which have a price elasticity of 0.6 will cause a:
4) The demand for a product is income elastic with an elasticity coefficient of 2.4. If there is a 20% increase in income, what must the increase in demand be?
5) The cross price elasticity of biscotti demand with respect to the price of Lattes is -1.5 (Lattes and biscotti are complementary goods). If the price of Lattes increases 20% what would you expect to happen to biscotti demand?
Explanation / Answer
Solution-
1) If a 20% increase in the price of gas causes a 35% decrease in the demand for standard sized autos, then the cross-price elasticity of demand is:
Cross Price Elasticity of demand = % Change in Quantity demanded of Autos / % change in Price of Gas
= - 35 / 20
= - 1.75
Hence the Cross price elasticity of demand coefficient is - 1.75
2) If the price elasticity of demand of gasoline is 0.9, then a 15% increase in quantity demanded is caused by a:
Let us assume that % change in price be x
Ed = % change in Quantity demanded / % change in Price
0.9 = 15 / x
x = 15 / 0.9
= 16.66
Hence, 15% increased in quantity demanded caused by 16.66% increased in Price because if the PED is lees than 1 then market price will be increased and revenue also.
3) A 10% increase in the price of 40 inch LCD televisions which have a price elasticity of 0.6 will cause a:
Let us assume that % change in quantity demanded be x
Ed = % change in Quantity demanded / % change in Price
0.6 = x / 10
x = 10 x 0.6
= 6
Hence, Price elasticity of 0.6 will cause a increase in quantity demanded by 6% because if PED is less than 1 then market price will increases and lead to an increase in total revene.
4) The demand for a product is income elastic with an elasticity coefficient of 2.4. If there is a 20% increase in income, what must the increase in demand be?
Let us assume that % change in quantity demanded be x
Elasticity of Income = % change in quantity demanded / % change in Income
2.4 = x / 20
x = 20 x 2.4
= 48
Hence, Increase in demand be 48%
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