Transcript Slide 1

ECON1001
Tutorial 4
Q1. When the price of hot dog is $1.50 each, 500
hot dogs are sold every day. After lowering the
price to $1.35 each, 510 hot dogs are sold every
day. At the original price, what is the price elasticity
of demand for hot dogs?
A)
B)
C)
D)
E)
66.67
5
1
0.2
0.015
Ans: d
Calculating Price Elasticity of
Demand
%Q

%P
 QNew  QOld   PNew  POld 



QOld

  POld

Q P Q P




Q
P
P Q
Price Elasticity of Demand for Hot
Dogs
QOld  500, QNew  510
POld  $1.50, PNew  $1.35
Q  510  500  10
P  $1.35  $1.50  $0.15
Q POld
10 1.50



P QOld 0.15 500
 0.2 (D)
Q2. For which of the following products is
demand likely to be least price elastic?
A)
B)
C)
D)
E)
Frozen Food
Soft Drinks
Groceries
Diet Coke
Not enough information provided to answer
this question
Ans:c
What affects Price Elasticity of
Demand?
• One major factor is the availability of
substitutes.
• If there are many substitutes for Good X
available in the market, people tend to be
very responsive to changes in PX, and
hence, higher elasticity.
• In this question, we check out which option
is the most difficult to be substituted.
• (A)Frozen food can easily be replaced by
fresh food. So as (B).
• (D) Not difficult to find substitutes to soft
drinks, especially a particular brand.
• (C) Groceries are the hardest to be
replaced as they are necessities.
Q3. If the price is $2 in both locations, the Price
Elasticity of Demand for a candy bar at an
airport is likely to be
the price elasticity
for a candy bar in a grocery store.
A)
B)
C)
D)
E)
Less than
Equal to
Greater than
The reciprocal of
Not enough information to determine
Ans: a
What affects Price Elasticity of
Demand?
• Number of sellers within reach.
• Suppose there exists only one kind of candy bar.
• In busy areas where you can find grocery stores,
it is more likely that you can find more than one
shop selling candy bars.
• However, in isolated areas such as airports,
there may only be one seller. (In fact, it is
usually the case for certain shops to be the only
authorised dealer in places like airports and
MTR stations)
• In other words, one will find it difficult to
locate an alternative seller of a certain
goods (e.g. candy bars) at the airport.
• A person will still have to buy candy bars
from that seller at the airport even if prices
are raised.
• Hence, quantity demanded is less
responsive to price changes compared to
shops are other locations.
Q4. The Price Elasticity of Demand for apartments
is 1.3, while the Price Elasticity of Demand for
toothpicks is 0.4. The likely reason for the
difference is because
A) There are few substitutes for toothpicks
B) Apartments are chosen over a long period of time
C) The fraction of income spent on toothpicks is
minuscule
D) Toothpicks are a necessity
E) Apartments are a luxury
Ans: c
• Demand for apartments are more price
elastic than that for toothpicks. Why?
• (A & D) are not true because there exist
good substitutes for toothpicks, e.g. dental
floss and fingernails.
• (B) is true for many consumers, but is
irrelevant, as we are comparing the Price
Elasticities at the same point of time.
• (E) is relevant only if we are talking about
Income Elasticities.
• (C) is the correct answer.
• People tend not to respond to changes in price
of toothpicks because they are too cheap. $0.20
a dozen and $0.40 a dozen do not bother
consumers as they probably do not even notice
the difference.
• However, buying an apartment is a major choice
in life. People spend most of their savings on
acquiring their own homes, and changes in price
of properties are certainly noticeable. As a result,
consumers are more responsive to changes in
prices of apartments.
Q5. Assume the price of gasoline doubles tonight
and remains at that price the next 2 years.
The Demand for gasoline measured tomorrow
will be
when compared with the demand
for gasoline measured 2 years from now.
A)
B)
C)
D)
E)
More Elastic
Larger in Absolute Value
The Same
More Inelastic
Less Elastic
Ans: d
• It takes time for people to react to changes
in price.
• People wake up tomorrow and find out
price of gasoline is doubled, but they do
not have enough time to find substitutes
for gasoline, and hence, the amount of
usage will be more or less the same.
• But, given more time, people can explore
other alternatives (e.g. public transport)
Q6. Ignoring the negative sign, the slope of
the demand curve is
A)
B)
C)
D)
E)
1/50
1/5
1/2
2
5
Ans: d
Calculating Slope of a Straight Line
Height
Slope =
Width
For example, between A
and B…
500-300
Slope =
50-150
 2 (D)
P
500
A
B
300
C
100
50
150
250
Q
Q7. The Price Elasticity of Demand at Point
B is
A)
B)
C)
D)
E)
2
4/3
1
3/4
1/2
Ans: c
Calculating Price Elasticity of
Demand
%Q

%P
 QNew  QOld   PNew  POld 



QOld

  POld

Q P Q P




Q
P
P Q
Calculating ε at Point B
Q P


P Q
1
P


Slope Q
P
500
A
B
1 300
 
2 150
300
C
100
 1 (C)
50
150
250
Q
Q8. Betsy raised the price of earrings at her
boutique, and her Total Revenue from earrings
increased. This suggests that:
A)
B)
Betsy has a monopoly in earrings.
The Demand for Betsy’s earrings at the original price
must be elastic
C) There are too many other boutiques competing with
Betsy.
D) There was Excess Demand for earrings at original
price.
E) The Demand for Betsy’s earrings at the original price
was Inelastic.
Ans: e
Price Elasticity & Total Revenue
• If ε>1, when P↑, TR↓.
• Becuase the %∆Q is greater than %∆P :
• people are very sensitive to any changes
in price.
• If ε<1, when P↑, TR↑.
• Becuase the %∆Q is smaller than %∆P
• people are not sensitive to any changes in
price.
Q9. The Cross Price Elasticity for cable TV
and satellite TV is estimated to be -0.3.
This implies cable and satellite TV are:
A)
B)
C)
D)
E)
Normal Goods
Substitutes
Elastic Goods
Complements
Unrelated
Ans: d
Cross Price Elasticity
• Measures the responsiveness of quantity
demanded for a good to a change in price
of the other good.
-∞
Perfect
Complements
∞
0
Unrelated
Perfect
Substitutes
• What does the ‘sign’ represent?
Q10. In surveying their alumni, State U’s
economics department discovered that
ramen noodle consumption declined as soon
as students graduated and found jobs. One
conclusion the survey team might draw from
this result is that
A) There is Excess Demand for ramen noodles.
B) Equilibrium Price for ramen noodles is too high.
C) College graduates have a high reservation price for
ramen noodles.
D) Ramen noodles are an inferior good.
E) Ramen noodles are not nutritious.
Ans: d
• (A&B) are not the correct answers – No
price adjustments were mentioned.
• (C) is not relevant at all because we are
not calculating consumer surplus.
• (E) is not even economics.
• The question talks about Income Elasticity
of Demand for ramen noodles.
• Graduates graduating and finding a job
implies an increase in real income.
• The survey relates real income and
quantity demanded for noodles.
• Income ↑, causing Qd ↓.
• This means ramen noodles are an inferior
good (D).