Buy Elasticity Discussion Assignment

Buy Elasticity Discussion Assignment

Question 2

a) The table should be completed as shown below. Note that elasticities are computed

“between the rows,” reflecting the change in quantity and prices between points on the

demand curve.

Price QD Expenditure %∆price %∆quantity Elasticity

$11 1 $11

20 100 5

9 3 27

25 50 2

7 5 35

33.3 33.3 1

5 7 35

50 25 1/2

3 9 27

100 20 1/5

1 11 11

b) The diagram of the demand curve is shown below.

c) At points higher up the demand curve, price is relatively high and quantity demanded

is relatively low. Thus a given ∆p (such as the $2 increment shown in the table above) is

a small percentage change, whereas a given ∆Q (such as the 2-unit increment shown in

the table) is a large percentage change. These same absolute changes will be different in

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percentage terms as we move to the right along the demand curve (larger for ∆p and

smaller for ∆Q). Since elasticity is a ratio of the percentage change in quantity demanded

to the percentage change in price, it follows that elasticity falls as we move to the right

along a linear demand curve.

Question 4

The key to this question is to recognize that own-price elasticity of demand is determined

mostly by the availability of substitutes. Notice that the products are listed in order of

decreasing generality. That is, item (e) is a subset of (d), which is a subset of (c), which is

a subset of (b), which in turn is a subset of (a). This means there are fewer substitutes for

food than for leafy vegetables sold at your local supermarket on Wednesdays. Thus we

would expect demand for (a) to be the least elastic and demand for (e) to be the most

elastic.

Question 6

a) The concept is that of the own-price elasticity of demand, since we are considering

changes in the price and quantity of ticket sales. The measure of elasticity in this case is

the percentage change in quantity demanded divided by the percentage change in price.

The average quantity is 1275 and the average price is $12.50. Thus, we have:

η = (150/1275)/(3/12.50) = 0.49

b) The concept is that of the income elasticity of demand because we are relating changes

in income to changes in quantity demanded. The measure of income elasticity is the

percentage change in quantity demanded divided by the percentage change in income.

The average quantity is 61,500. Note that we are given the percentage change in income

equal to 10 percent or 0.10. Thus, we have:

ηY = (11,000/61,500)/(0.10) = 1.79

c) The concept is that of the cross-price elasticity of demand because we are relating

changes in the price of coffee to changes in the quantity demanded of tea. The measure of

cross-price elasticity is the percentage change in the quantity demanded of tea divided by

the percentage change in the price of coffee. The average coffee price is $3.90 and the

average quantity of tea is 7 750 kg. Thus, we have:

ηXY = (500/7,750)/(1.80/3.90) = 0.14

The positive sign reveals that coffee and tea are substitute goods since a rise in the price

of coffee (which presumably reduces the quantity demanded of coffee) leads people to

demand more tea.

Buy Elasticity Discussion Assignment

d) The concept is the Canadian own-price elasticity of supply because we are relating

changes in the world price of pulp to changes in the quantity of pulp supplied by

Canadian firms. The measure of supply elasticity is the percentage change in (Canadian)

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quantity supplied divided bythe percentage change in the world price. The average

quantity is 9.5 million tons. Note that we are given the percentage increase in the price

equal to 14 percent, or 0.14. Thus we have:

ηS = (3/9.5)/(0.14) = 2.26

Question 8

a) The four scale diagrams are shown below. Note that all four diagrams have the same

scale on the vertical axes but different scales on the horizontal axes.

b) The own-price elasticity of supply is equal to the percentage change in quantity supplied

divided by the percentage change in the price. The calculations for cases (i) through (iv)

are :

i) average p = $30, average Q = 15. ηS = (10/15)/(20/30) = 1

ii) average p = $30, average Q = 7.5. ηS = (5/7.5)/(20/30) = 1

iii) average p = $30, average Q = 6. ηS = (4/6)/(20/30) = 1

iv) average p = $30, average Q = 3. ηS = (2/3)/(20/30) = 1

Note that in each case the supply curve is a straight line from the origin. As we mentioned

in footnote