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1.             Use the determinants of price elasticity of demand to judge and explain whether the demand for the following products is price elastic or inelastic:

a.     Cigarettes

The demand for the following products is price elastic. This is because many people are addicted to cigarettes and it becomes a habit such that they will need it no matter what, hence even if price increases, they will still need to buy thus the demand for the product is price elastic.

b.     A particular brand of cigarettes

The demand for that particular brand of cigarettes is price inelastic. This is because there are plenty of brands of cigarettes, if one particular brand increases, people will just move to other brands of cigarettes to buy instead of the one which increase. In this manner, the profit will drop making the price inelastic.

c.     Butter

The demand for the product is price elastic. This is because, butter sometimes it is a necessity, hence even if price increases, people will still need to buy it.

d.     Salt

The demand for the product is price elastic. This is because, there are no close substitute for salt. There are soy sauce or other sauces that can replace it, however salt is in a solid form whereas its substitute is a liquid form hence people might still want to stick with salt as it will not cause a color change hence the price for salt is price elastic.

e.     A two-week trip to Switzerland

The demand for a two-week trip to Switzerland is price inelastic. This is because, there are plenty of other countries that people can travel to, hence if the trip is Switzerland, there will most likely choose another location hence the price for a two-week trip to Switzerland is price inelastic.

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In a price elasticity of demand of a good which is of a straight-line demand curve, the difference is that in a straight-line demand curve, in the upper end of the demand curve, the demand is more price elastic this means that when demand is more price elastic, a decrease in price will bring about a larger proportionate increase in quantity so total revenue increases. While at the lower end of the demand curve, the demand is more plastic inelastic, which means that when demand is more price inelastic, a decrease in price will bring about a smaller proportionate increase in quantity so total revenue decreases. Lastly, there is the mid point of the demand curve, which means that demand is unit elastic. When the demand is unit price inelastic, a decrease in price will bring about an exact proportionate increase in quantity so total revenue remains unchanged and at the maximum.

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I) ((4/6)x100)/((2000/4000)x100)
=1.33
II) ((-2/21)x100)/((2000/4000)x100)
= -0.19
III) Alex demand for fancy restaurants is income elastic while his demand for bus ride is income inelastic

IV) The nature of fancy restaurants is normal goods as the income elasticity of demand is more than one and the demand for it increase when price increase. On the other, hand the nature of bus rides is inferior goods as the income elasticity is less than one and when income increase, the demand for it decrease.

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(i) ((4/6)x100)/((2000/4000)x100)
= 1.33 (Fancy Restaurant)

(ii) ((-2/21)x100)/((2000/4000)x100)
=-0.19 (Bus ride)

Demand for fancy restaurants(luxury) is income elastic while demand for bus ride(necessity) is income inelastic.

Nature of fancy restaurants is normal goods  as the income elasticity of demand is more than zero/is positive and the demand for it increase when income increase.

The nature of bus ride is inferior good.  This is because the income elasticity of demand is less than zero and when income increase, demand decreases.

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A price floor on designer sunglasses will not be effective. As, designer sunglasses are luxury, it is an elastic demand. When price floor is implemented, there will be an increase in the price but the quantity demanded will definitely decrease as consumer care about the price change. As the presence of a designer sunglasses doesn’t affect their life.

Price floor is to ensure producers a higher and more stable income but it will not succeed as it will only cause consumer to stay away from the product leading to fall in revenue. And it will in turn cause surplus which means government intervention is needed to prevent downward pressure on price and they often steps in to buy up surplus as part of its support program towards producers.

Therefore, it is not effective

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ANS:

A price floor on milk will be effective. As milk is an inelastic demand, it is a necessity, consumers will still purchase them regardless of their price change. Thus, this means that producers’ total revenue will increase due to high price and quantity demanded staying relatively constant.

Price floor is the minimum legal price below which a particular good or service cannot be sold. Price floor is to ensure producers a higher and more stable income, which was succeeded.

Therefore, it is effective.

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ANS:

The total revenue earned by the film selling good A were increase. When the demand is inelastic, the percentage increase in price is more than the percentage decrease in quantity. There is more gain than loss, thus, increase in price will increase total revenue.

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ANS:

The price elasticity of demand for good A is always negative due to the inverse relationship between price and quantity demanded of a good, ceteris paribus.

The demand will be price elastic as the absolute value of |Ed| will become more than 1 as the percentage change in quantity demanded is more than percentage in price. It means that consumers are very responsive to the price change.

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A price floor on milk would be effective as milk is a necessity and there is no replacement for milk. Milk is an inelastic demand which means that a change in the price of milk would most likely not affect the consumers much and thus, a price floor would be effective and since demand for milk is inelastic, price floor will be effective and the total revenue will increase.

A price floor on a pair of designer sunglasses, however, would be ineffective as a pair of designer sunglasses is a luxury and it is an elastic demand. There are many substitutes for sunglasses. Since Demand for sunglasses is inelastic, the price floor will cause the total revenue to decrease and thus, it is not effective.

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The demand for good A is price inelastic. The absolute value of Ed is less than 1 and this shows that the percentage change in quantity demanded is less than the percentage change in the price of the good. When the price of good A increased from $4 to $6, the quantity demanded fell from 1,000 to 900 which isn’t much of a difference. This shows that the increase in price of good A did not really affect the consumer’s willingness to purchase good A and consumers are not very responsive to the change in the price.

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[(900-1000)/950  x 100 ] DIVIDE BY
[(6-4)/5 x 100]
= -0.263