List the five factors that make demand for a goodmore or less elastic.

| November 24, 2016

Problem3 Determinants ofelasticity

List the five factors that make demand for a goodmore or less elastic. Give an exampleforeach(preferablyoneIdidn’ttalkaboutinclass).

1.

2.

3.

4.

5.

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Problem4 Elasticity #1

a. Ifyourincomerisesby20%andyoudecidetoincreaseyourpurchasesofclothing by15%, what is your income elasticity of demand for clothing? Is clothing a normal or inferiorgood?

b. Supposetheincomeelasticityofdemandforgadgetsis-2.Answerthefollowing questions:

• If income rises by1%, by what percentage will the demand for gadgets fall orrise?

• If income falls by10%, by what percentage will the demand for gadgetsfall orrise?

• Aregadgetsanormalorinferiorgood?

c. Supposethecrosspriceelasticityofdemandforgadgetsandwidgetsis0.5.Answer the followingquestions:

• If the price of gadgets rises by1%, by what percentage will the demand for widgetsfallorrise?

• If the price of gadgets falls by3%, by what percentage will the demand for widgetsfallorrise?

• Aregadgetsandwidgetscomplementsorsubstitutes?

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Problem5 Elasticity#2

1. If price elasticity of demand is 1.25, and price rises from $8 to $12, bywhat percentage will quantity demanded fall?

2. Ifincomeelasticityofdemandis-0.75,andincomesfallfrom$52,500to$51,000 per capita (per person), then by what percentage will quantity demandedfall orrise?

3. Supposeyou’recurrentlysellingslicesofpizzafor$3each,andthepriceelastic- ityof demand for pizza is 3. By what amount (in dollars and/or cents) would youhavetoreduceyourpricepersliceinordertoincreasenumberofslicesyousell by15%?

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Problem6 RelatedGoods

1. Ifthepriceoflasereyesurgeryfallsby50percentandthequantityofcontact lensesdemandedfallsby25percent,findthecrosspriceelasticityofdemand forthesetwogoods.

2. Arelasereyesurgeryandcontactlensessubstitutesorcomplements?

3. Suppose the price of laser eyesurgery falls from $3,000 to $2,500. By what percentagewillsalesofcontactlensesfalls?

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Problem7 Comparingdemands

Drawademandcurve,D1,thendrawamoreelasticdemandcurve,D2.

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Problem8 Perfection#1

Drawaperfectlyinelasticdemandcurve.

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Problem9 Elasticity andprices

Hint: draw graphsforthese

1. If the demand for a goodis perfectly elastic and its price is $15, howmuchwoulditspricebeifitssupplydoubled?

2. If the demand for a goodis perfectly inelastic and its price is $50, howmuchwoulditspricebeifitssupplydoubled?

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Problem10 Perfection#2

1. Thedemandforaproductisperfectlyinelasticandthesupplyoftheproductis perfectlyelastic.Ifitsequilibriumpriceis$10,drawagraphrepresentingthis market.

2. Onthesamegraph,showanewequilibriumpriceof$20.

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Problem11 Perfection#3

1. Thesupplyofaproductisperfectlyinelasticandthedemandfortheproductis perfectlyelastic.Ifitsequilibriumpriceis$50,drawagraphrepresentingthis market.

2. Onthesamegraph,showanewequilibriumpriceof$25.

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Problem 12 Predictingthe priceof oil

Intheyear2020theworldsupplyofoilpeaksandproductioncontinuesforthenext decadeatthatlevel.Ifthepriceofoilis$80abarrelin2020andworldwidedemand roseby50percentoverthefollowingdecade,abouthowmuchwillthepriceofoilbein2030?(Hint:Drawagraph.)

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Problem 13 Elasticity andcigarettes

Ifthepriceelasticityofdemandforcigarettesamongteenagesis0.5,howmuchwould the price of a pack of cigarettes haveto beraised from $10 to cut teenage smoking by20%?

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