ECON1001

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ECON1001

• Tutorial 4

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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?

• 66.67
• 5
• 1
• 0.2
• 0.015
• Ans d

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Calculating Price Elasticity of Demand
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Price Elasticity of Demand for Hot Dogs
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Q2. For which of the following products is demand
likely to be least price elastic?

• Frozen Food
• Soft Drinks
• Groceries
• Diet Coke
• Not enough information provided to answer this
  question
• Ans c

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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.

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• (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.

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• 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) Less than
• Equal to
• Greater than
• The reciprocal of
• Not enough information to determine
• Ans a

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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)

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• 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.

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• 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
• There are few substitutes for toothpicks
• Apartments are chosen over a long period of time
• The fraction of income spent on toothpicks is
  minuscule
• Toothpicks are a necessity
• Apartments are a luxury
• Ans c

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• 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.

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• (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.

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• 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.
• More Elastic
• Larger in Absolute Value
• The Same
• More Inelastic
• Less Elastic
• Ans d

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• 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)

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• Q6. Ignoring the negative sign, the slope of the
  demand curve is
• 1/50
• 1/5
• 1/2
• 2
• 5
• Ans d

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Calculating Slope of a Straight Line
P
A
500
For example, between A and B
B
300
C
100
Q
50
150
250
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• Q7. The Price Elasticity of Demand at Point B is
• 2
• 4/3
• 1
• 3/4
• 1/2
• Ans c

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Calculating Price Elasticity of Demand
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Calculating e at Point B
P
A
500
B
300
C
100
Q
50
150
250
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• Q8. Betsy raised the price of earrings at her
  boutique, and her Total Revenue from earrings
  increased. This suggests that
• Betsy has a monopoly in earrings.
• The Demand for Betsys earrings at the original
  price must be elastic
• There are too many other boutiques competing with
  Betsy.
• There was Excess Demand for earrings at original
  price.
• The Demand for Betsys earrings at the original
  price was Inelastic.
• Ans e

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Price Elasticity Total Revenue

• If egt1, when P?, TR?.
• Becuase the ?Q is greater than ?P
• people are very sensitive to any changes in
  price.
• If elt1, when P?, TR?.
• Becuase the ?Q is smaller than ?P
• people are not sensitive to any changes in price.

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• Q9. The Cross Price Elasticity for cable TV and
  satellite TV is estimated to be -0.3. This
  implies cable and satellite TV are
• Normal Goods
• Substitutes
• Elastic Goods
• Complements
• Unrelated
• Ans d

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Cross Price Elasticity

• Measures the responsiveness of quantity demanded
  for a good to a change in price of the other
  good.

-8
8
0
Perfect Substitutes
Perfect Complements
Unrelated

• What does the sign represent?

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• Q10. In surveying their alumni, State Us
  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
• There is Excess Demand for ramen noodles.
• Equilibrium Price for ramen noodles is too high.
• College graduates have a high reservation price
  for ramen noodles.
• Ramen noodles are an inferior good.
• Ramen noodles are not nutritious.
• Ans d

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• (AB) 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.

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• 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).