ASSIGNMENT ANSWERS
Question 1
Price Elasticity of demand (PED) can be defined as the measure of the relationship that occurs between the difference of the quantity which is demanded for one good and the difference in its price. It helps to discover to what extant good is sensitive to changes of the price (Cordes, Ebel, Gravelle 2005).
The formula for PED = % Change in Quantity demanded / % Change in the Price.
A product is sad to be price elastic or responsive to price changes when a small change in price causes a more than proportionate change in the demand of the product. On the other hand, a product is considered price inelastic when a big change in the price of the product is accompanied by a less than proportionate/ a small change in the quantity demanded.
When the price elasticity is zero, then the demand is perfectly inelastic. When the value of the elasticity lies between zero and one, then the demand is inelastic. And when the elasticity equals one, the demand is unit elastic meaning change in price is exactly equal to the change in the demand.
Question 2
Income Elasticity of demand measures the relationship that exists between the change in the quantity that is demanded for a product and the changes in real income of the consumers. It measures the sensitivity of the quantity of a good demanded in response to the changes in the consumer income.
The formula for the IED = % Change in the quantity demanded / % Change in the Income
The degree of elasticity depends on whether the good is a luxury or a necessity.
The normal goods have got positive elasticity whereas the income growth, the higher quantity of goods is demanded, however at a slow rate if to compare with luxury goods. This is due to the fact that buyers will take advantage of the higher income in order to purchase more luxury. Inferior goods have a negative elasticity where the quantity demanded falls as the consumer income increases.
Question 3.
Cross-Price elasticity measures the responsiveness of the quantity that is demanded of a good when the price of another good changes (MacEachern 2009).
CPE is measured by % Change in the quantity demanded of good A / % change in price of substitute of the good.
The elasticity for substitute goods e.g. tea and coffee will always be positive due to the fact that the demand for good A will grow if the price of the other substitute increases.
The elasticity of complements will have a negative value e.g. tea and sugar because if the price of the good (Tea) increases while other factors remain constant, then the quantity demanded for the complement good (sugar) will go down.
When the elasticity is zero then two goods have no relation.
Question 4
The Total Revenue of a firm is the total sales of the company based on a particular quantity of goods.
It is the total income of the company. It measures how much a company generates from selling its products
Total Revenue = Quantity of goods sold x Price of One good.
Therefore a from can increase their profit by raising the price per unit good or by selling more and more goods.
Question 5
Revenue and Price elasticity of demand are interrelated because they deal in the two variables that is Quantity and Price. When the product has elastic demand, then the revenue can be increased by reducing the price of the good. This means that the price will decrease but more of it will be demanded hence quantity will increase at a higher rate therefore increasing the revenue.
On the other hand when the good has inelastic demand then the prices can be raised which lead to selling slightly less of the good but more revenue will will be earned.
Question 6
In excel
Question 7
Calculate the total revenue for each level of demand and post into the table, Figure 1. (Copy and paste this table into the Microsoft Word document that will form part of your submission.)
Question 8
Using the midpoints formula presented in the textbook, calculate the price elasticity coefficient for each price level, starting with the coefficient for the $4 to $6 level. For each coefficient, indicate each type of elasticity: elastic demand, inelastic demand, or unitary demand. Post your answers into the table, Figure 1.
Question 9
Income Changes by 10%, Demand Changes by 8%
The formula for the IED = % Change in the quantity demanded / % Change in the Income
= 8/10
=0.8
Income Elasticity of demand for good A is 0.8%. This means that this is a normal good because it has a positive income elasticity coefficient.
Question 10
Price decreases by 5%, Quantity demanded decreases by 8%
CPE is measured by % Change in the quantity demanded of good A / % change in price of substitute of the good.
= -5%/-5%
= 1
The cross-price elasticity is positive one.
This means they are substitute goods e.g. tea and coffee which will always be positive due to the fact that the demand for good A will increase if the price of the other substitute increases and vise versa.
References
Cordes, J. J., Ebel, R. D., & Gravelle, J. (2005). The encyclopedia of taxation & tax policy. Washington, D.C.: Urban Institute Press.
MacEachern, W. A. (2009). Economics: A contemporary introduction. Mason, OH: South-Western.
