13. If a 10% decrease in the price of gas causes a 30% increase in the demand fo
ID: 1226980 • Letter: 1
Question
13. If a 10% decrease in the price of gas causes a 30% increase in the demand for standard sized autos, then the cross-price elasticity of demand is:
14. If the price elasticity of demand of for gasoline is 1.8, then a 15% decrease in quantity demanded is caused by a:
15. A 10% increase in the price of 40 inch LCD televisions which have a price elasticity of demand of 2.5 will cause a:
16. A business newscast claims that the median home price of existing homes fell from $450000 to $350000. Over the same time period the quantity of these homes sold fell from 4100000 to 3900000. Using an arc elasticity formula, calculate the arc elasticity implied. The formula is:
17. The demand for a product is income elastic with an elasticity coefficient of 2.00. If there is a 35% increase in income then what will the increase in demand be?
18. The cross-price elasticity of biscotti demand with respect to the price of Lattes is -2.20 (Lattes and biscotti are complementary goods). If the price of Lattes increases 20% what would you expect the demand for biscotti to be?
Explanation / Answer
13. Cross price elasticity (XED) = % change in demand for standard sized autos / % change in price of gas
XED = 0.30 / (-0.10)(decrease)
Cross price elasticity of demand XED = -3.
14. PED of gasoline = 1.8
1.8 = -(0.15) / P
P*1.8 = -0.15
Price = -0.15/1.8
Price = -0.0833
A 15% decrease in quantity is caused by a 8.33% decrease in price.
15. Price elasticity of demand = 2.5
Increase in price = 10% or 0.1
2.5 = % change in quantity / 0.1
% change in quantity of 40 inch LCD TV demanded = 2.5x0.1 = 0.25
A 10% increase in the price of 40 inch LCD televisions will cause a 25% increase in the quantity demanded.
16. Home prices fell from $450,000 to #350,000
Average mid-point price = 450,000 + 350,000 / 2 = 800,000/2 = $400,000
% change in price = 450,000-350,000 / 400,000
% change in price = -25% (fall)
The quantity of homes fell from 4,100,000 to 3,900,000
Average mid-point quantity = 4,100,000 + 3,900,000 / 2 = 8,000,000/2 = 4,000,000
% change in the quantity of homes = (-) 200,000/4,000,000 x 100 = -5% (fall)
Arc elasticity of demand = -0.05 / -0.25
Arc elasticity of demand = 0.2.
Arc elasticity formula:
Change in Q / Average of Q
-----------------------------------
Change in P / Average of P
17. Inelastic income elasticity = 2.00
% increase in income = 35%
2.00 = % change in quantity demanded / % change in income
2.00 = % change in quantity demanded / 0.35
% change in quantity demanded = 2.00 x 0.35
A 35% increase in income will increase the quantity demanded by 70%.
18. Cross price elasticity = % change in biscotti demanded / % change in price of Lattes
-2.20 = % change in biscotti demanded / 0.2
% change in quantity of biscotti demanded = -2.2 x 0.2 = -0.44
If the price of Lattes increases 20%, the demand for Biscotti will decrease by 44%.
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