Microeconomics questions (elasticity)

danny-saf

1.When the price of popsicles rose from $10 to $11, consumer expenditures on them dropped by 10%, indicating that:
A. Demand for popsicles had a price elasticity of -1
B. Demand for popsicles was price-elastic
C. Popsicles are a normal good
D. Popsicles are an inferior good
E. More than one answer is correct

2. (5 points) At a price of $10, Jane would buy 8 CDs. At a price of $12, Jane would buy 6 CDs. Her price elasticity of demand would then be:
A. -1/2
B. -11/7
C. -5/4
D. -5/8
E. -4/5

Explain!

rootX

What is price elasticity?

CRGreathouse

Price elasticity is delta quantity over delta price, where the changes (deltas) are measured in percent terms. Generally, if revenue decreases with a price increase the demand was elastic (< -1); if it increases, it was inelastic (> -1).

rootX

I was just asking the OP because both questions are simply using the Price elasticity definition. And, OP didn't care even to provide its def.

CRGreathouse

My first sentence was directed to the OP as much as you. My second sentence partially answers the OP's first question (I try not to answer homework questions for others, just help them).

imiyakawa

Price elasticity is the (delta)% change in Qd/ (delta)% change in P. You're measuring the change in quantity demanded ("dependant variable") in relation to the change in Price ("independant variable")

a)% change in Qd = (Q2 - Q1)/0.5(Q2 + Q1)
b)% change in P = (P2 - P1)/0.5(P2+P1)

Don't forget that when you divide A by B, you have to flip B over and multiple the two (Makes it easier than having a fraction over a fraction).

Then, you have to get the answer and get its absolute value (i.e. the answer can never be negative for PRICE elasticity - if there's a negative just rub it out with your eraser).

E(Qd)(E(p)) = 1 ---> Unitary elastic
<1 ---> Inelastic
>1 ----> elastic

Remember, when you draw your demand curce, price elasticity changes ALONG it. E.G. in the middle it might be unitary elastic, as price increases its elasticity also increases. (Remember, theory tries to mimic reality).

Also, P1 = higher price than P2. Q1 = the lower quantity than Q2. (Easy to get mixed up when thinking of which variables = P1/P2 Q1/Q2 etc.) GL!

imiyakawa

P1 = 12, P2 = 10
Q1 = 6, Q2 = 8.

Figure it out given the formula:

Ed(Ep) = Q2-Q1/05(Q2 + Q1) x 0.5(P2+P1)/P2-P1

Apply same principles to the other question you presented.