ECN 1001
ELASTICITY 1
1. If there is a 5 % increase in the price of ice-cream which causes a 3.05 % decrease in the
quantity of ice cream demanded, what is the price elasticity of demand for ice cream? Is the demand for ice
cream elastic or inelastic?
2. Suppose that the price elasticity of supply of carrots is 3 and there is a 15 % decrease in the
quantity of carrots supplied. What must be the percentage change in the price of carrots that caused the decrease
in the quantity supplied of carrots?
3. If the cross-price elasticity of demand between goods X and Y is 0.3, are the two goods
substitutes or complements? What happens if the price of Y increases by 10 %?
4. If the income elasticity of cigarettes is -1.6, are cigarettes superior or inferior good? If
income rises by 5% , how much will the demand for cigarettes increase or decrease by ?
5. Suppose that the demand for hairdryers is perfectly inelastic. What happens to the
equilibrium price and quantity of hairdryers if the supply of hairdryers decreases?
6. Suppose that the supply of bricks is perfectly elastic. How does an increase in the demand
for bricks affect the equilibrium price and quantity of bricks?
7. The price of good A and good B is $ 10 and both goods have a quantity demanded of 100
units/week. When the price of good A falls to $ 9, the quantity demand rises to 200 units/week. However the
price of good B must fall to $ 8 in order to achive sales of 200.
a) In the price ranges given which good has the more elastic demand?
b) Use the total revenue test to confirm that both goods face elastic demand curves.
c) Verify your answer by calculating the price elasticity for good A and good B..
8. Use the following demand schedule to complete the table for the final TR column, put in
“rises”, “falls” or “is constant”.
Price Quantity Total Revenue Elasticity Elasticity As Price rises,
Demanded (in words) Measure TR
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$ 6 10 $ 60
$ 5 20 $ 100
$ 4 30 $ 120
$ 3 40 $ 120
$ 2 50 $ 100
$ 1 60 $ 60
b- Work out a rule, based on your results in the last two columns, linking the change in total revenue and elasticity.
10- Use theinformation in the table to answer the following questions.
Month Income Qd of chicken Qd of steak
Per Month per month per month
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1 $ 400 5 pounds 3 pounds
2 $ 800 3 pounds 5 pounds
3 $ 800 5 pounds 3 pounds
a- Using months 1 and 2, is the income elasticity of chicken positive, negative or zero? What kind of a good is
chicken?
b- Using months 1 and 2, estimate the income elasticity of steak. Is steak a normal good?
c- Intuitively, what sort of demand relationship do you think will exist between chicken and steak?
