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Hi Group Please find the solution to the elasticity tutorial 

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Hi Group Please find the solution to the elasticity tutorial 

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Qn 5:

Ed =  [(4/6) x 100]/[(2000/4000) x 100]

= 1.33
(to 3 s.f)

The |E| ˃ 1 and it shows that Alex’s income elasticity of demand for meals at fancy restaurants is elastic. The nature of the meals at fancy restaurants to Alex is considered as a normal good because Alex’s demand increases when income increases.

Ed = [(-2/21) x 100]/[(2000/4000) x 100]
= -0.190
(to 3 s.f)

The |E| ˂ 1 and it shows that Alex’s income elasticity of demand for bus rides is inelastic. The nature of taking bus rides to Alex is considered an inferior good because Alex’s demand decreases when his income increases.

Qn 6:

At the upper part of the demand curve, the percentage change in quantity is more than the percentage change in price. When the demand is more price elastic, a decrease in price will bring about a larger proportionate increase in quantity and therefore, the total revenue will increase. At the mid-point of the demand curve, the percentage change in quantity is equivalent to the percentage change in price. 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 its maximum. At the lower part of the demand curve, the percentage change in in quantity is less than the percentage change in price. When demand is more price inelastic, a decrease in price will bring about a small proportionate increase in quantity so total revenue decreases.

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5.         Last year, Alex’s income increased from $3,000 to $5,000 per month.  Alex increased his visits to fancy restaurants from 4 to 8 a month and reduced the number of bus rides he took from 22 to 20 a month.  Calculate Alex’s income elasticity of demand for i) meals at fancy restaurants and ii) bus rides, using the midpoint formula.  Is Alex’s demand for the goods income elastic or inelastic ?  What can you infer about the nature of the goods to Alex – normal or inferior ?  Why ?

i) Alex’s income elasticity of demand for meals at fancy restaurants

= {[(8-4)/6] x100%} / {[(5000-3000)/4000] x100%}

= 66.666/50

= 1.333332

= 1.33

ii) Alex’s income elasticity of demand for bus rides

= {[(20-22)/21] x100%} / {[(5000-3000)/4000] x100%}

= -9.5238/50

= -0.19047

= -0.19

Alex’s demand for the goods income is elastic.

I can infer that Alex’s demand for meals at fancy restaurant is normal, whereas the demand for the bus rides is inferior.

6.         Explain how price elasticity of demand of a good differs along different segments of a straight-line demand curve and how this affects a firm’s total revenue.

Price elasticity on a straight line demand curve has a constant gradient, but the price elasticity varies along the demand curve. At the upper end of the curve, the price demand of the good is more elastic. When demand is more price elastic, a decrease in price will bring about large proportionate increase in quantity so total revenue increases. Whereas, at the lower end of the curve, the price demand of the good is more price inelastic. When demand is more price inelastic, a decrease in price will bring about a smaller proportionate increase in quantity so total revenue decreases.

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5.  Last year, Alex’s income increased from $3,000 to $5,000 per month.  Alex increased his visits to fancy restaurants from 4 to 8 a month and reduced the number of bus rides he took from 22 to 20 a month.  Calculate Alex’s income elasticity of demand for i) meals at fancy restaurants and ii) bus rides, using the midpoint formula.  Is Alex’s demand for the goods income elastic or inelastic ?  What can you infer about the nature of the goods to Alex – normal or inferior ?  Why ?

Ed =  [(4/6) x 100]/[(2000/4000) x 100]

= 1.33
(to 3 s.f)

The |E| ˃ 1 and it shows that Alex’s income elasticity of demand for meals at fancy restaurants is elastic. The nature of the meals at fancy restaurants to Alex is considered as a normal good because Alex’s demand increases when income increases.

Ed = [(-2/21) x 100]/[(2000/4000) x 100]
= -0.190
(to 3 s.f)

The |E| ˂ 1 and it shows that Alex’s income elasticity of demand for bus rides is inelastic. The nature of taking bus rides to Alex is considered an inferior good because Alex’s demand decreases when his income increases.

6.         Explain how price elasticity of demand of a good differs along different segments of a straight-line demand curve and how this affects a firm’s total revenue.

A straight-line demand curve has a constant gradient but the price elasticity varies along the demand curve. At the upper end of the curve, demand is more price elastic and a decrease in price will bring about a larger proportionate increase in quantity, resulting in the increase of a firm’s total revenue. At the lower end of the curve, demand is more price inelastic and a decrease in price will bring about a lower proportionate increase in quantity, resulting in the decrease of a firm’s total revenue. At the mid-point of the curve, the demand is unit elastic and a decrease in price will bring about an exact proportionate increase in quantity, resulting in the total revenue being unchanged and at the maximum.

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5.  Last year, Alex’s income increased from $3,000 to $5,000 per month.  Alex increased his visits to fancy restaurants from 4 to 8 a month and reduced the number of bus rides he took from 22 to 20 a month.  Calculate Alex’s income elasticity of demand for i) meals at fancy restaurants and ii) bus rides, using the midpoint formula.  Is Alex’s demand for the goods income elastic or inelastic?  What can you infer about the nature of the goods to Alex – normal or inferior?  Why?

i) Income elasticity of demand for meals
=  8-4/6 x 100 % /  5000-2000/4000 x 100%
= 1.33

Income elastic as income elasticity of demand is more than 1.

Normal goods as income elasticity of demand is positive.

ii) Income elasticity of demand for bus rides
= 20-22/21 x 100% /  5000-2000/4000 x 100%

= -0.19

Income inelastic as income elasticity of demand is less than 1.

Inferior goods as income elasticity of demand is negative.

6. Explain how price elasticity of demand of a good differs along different segments of a straight-line demand curve and how this affects a firm’s total revenue.

At the upper end of demand curve, the demand is more price elastic. When demand is more price elastic, a decrease in price will bring about a larger proportionate increase in quantity so total revenue increases. At the lower end of demand curve, the demand is more price inelastic. When demand is more price inelastic, a decrease in price will bring about a smaller proportionate increase in quantity so total revenue decreases. At mid-point of demand curve, the demand is unit elastic. When 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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5.         Last year, Alex’s income increased from $3,000 to $5,000 per month.  Alex increased his visits to fancy restaurants from 4 to 8 a month and reduced the number of bus rides he took from 22 to 20 a month.  Calculate Alex’s income elasticity of demand for i) meals at fancy restaurants and ii) bus rides, using the midpoint formula.  Is Alex’s demand for the goods income elastic or inelastic ?  What can you infer about the nature of the goods to Alex – normal or inferior ?  Why ?

(i) 4/6(change in demand)/ 5000-3000/4000

= 1.33

(ii) -2/21/2000/4000

=-0.19

iii)Alex demand for the visits to fancy restaurant is elastic. Alex demand for no.of bubs rides is inelastic.

iv)The nture of the goods to alex is inferior since the income elasticity of demand is negative. This means that the change in percentage of demand is inversely proportional to the change in percentage of income.

6.     Explain how price elasticity of demand of a good differs along different segments of a straight-line demand curve and how this affects a firm’s total revenue.

When demand is more price elastic, a decrease in price will bring about a larger proportionate increase in quantity so TR increases. When demand is more price inelastic, a decrease in price will bring about a smaller proportionate increase in quantity so TR decreases. (inelastic)

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5.         Last year, Alex’s income increased from $3,000 to $5,000 per month.  Alex increased his visits to fancy restaurants from 4 to 8 a month and reduced the number of bus rides he took from 22 to 20 a month.  Calculate Alex’s income elasticity of demand for i) meals at fancy restaurants and ii) bus rides, using the midpoint formula.  Is Alex’s demand for the goods income elastic or inelastic ?  What can you infer about the nature of the goods to Alex – normal or inferior ?  Why ?

i)   Ed =  8-4/6  x 100 / 5000-3000/4000  x100

= 1.33

Alex’s demand for the goods income is elastic as the absolute value of │Ed│is more than 1. The nature of the goods to Alex is normal as it is positive.

ii)  Ed = 20-22/21 x 100 / 5000-3000/4000  x100

= -0.19

Alex’s demand for the goods income is inelastic as the absolute value │Ed│is less than 1. The nature of the goods to Alex is inferior as it is negative.

6.         Explain how price elasticity of demand of a good differs along different segments of a straight-line demand curve and how this affects a firm’s total revenue.

At the upper part of the demand curve, the percentage change in quantity is more than the percentage change in price. When the demand is more price elastic, a decrease in price will bring about a larger proportionate increase in quantity and therefore, the total revenue will increase. At the mid-point of the demand curve, the percentage change in quantity is equivalent to the percentage change in price. 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 its maximum. At the lower part of the demand curve, the percentage change in in quantity is less than the percentage change in price. When demand is more price inelastic, a decrease in price will bring about a small proportionate increase in quantity so total revenue decreases.