1. The own price elasticity of demand for apples is 1.5. If the price of apples

Question

1. The own price elasticity of demand for apples is 1.5. If the price of apples increases by 10 percent, what will happen to the quantity of apples demanded? a)It will increase 15 percent. b)It will fall 15 percent. c)It will increase 10 percent. d)It will fall 10 percent.

2. You are the manager of a supermarket, and you know that the income elasticity of peanut butter is exactly 0.5. Due to the economic recession, you expect incomes to increase by 10 percent next year. How should you adjust your purchase of peanut butter?

a)Buy 5 percent more peanut butter.

b)Buy 5 percent less peanut butter.

c)Buy 10 percent more peanut butter.

d) Buy 10 percent less peanut butter.

Explanation / Answer

(1) (b)

Own price elasticity = % Change in quantity demanded / % Change in price

- 1.5 = % Change in quantity demanded / 10%

% Change in quantity demanded = - 1.5 x 10% = - 15%

The negative sign indicates a fall in quantity demanded.

(2) (b)

Income elasticity = % Change in quantity demanded / % change in income

- 0.5 = % Change in quantity demanded / 10%

% Change in quantity demanded = - 0.5 x 10% = - 5%

The negative sign indicates a fall in consumption.

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