HW3 - Econ 1 Winter 2008 Dr. Narag 1 Homework 3: Elasticity...

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Unformatted text preview: Econ 1 Winter 2008 Dr. Narag 1 Homework 3: Elasticity (1) If the price of roller- blades increase by one percent and the quantity demanded falls by 4 percent, then the price elasticity of demand for roller- blade has a value of (a) (b) (c) (d) (e) 0.04 0.25 0.25% 4 4% (2) 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, the demand for hot dogs is (a) (b) (c) (d) (e) Elastic Inelastic Unitary Elastic Perfectly Elastic Perfectly Inelastic (3) Use the following information to answer question Econ 1 Winter 2008 Dr. Narag (a) Which statement is true about the linear demand curve given above? I. II. III. IV. V. Both slope and price elasticity are constant Slope is constant but price elasticity varies Total Revenue is constant Price elasticity is constant but slope varies Insufficient information to calculate total revenue 2 (4) Suppose that the price elasticity of demand for snow shovels is .1.2. What would have to happen to the price of a snow shovel for the quantity demanded to fall from 2,000 to 1,800? Use the midpoint formula in your calculation. (5) The demand for tobacco is price inelastic. Suppose there is a drought that destroys a large portion of the tobacco crop. What will happen in the market for tobacco? Will the equilibrium price and quantity change? If so, how? What will happen to the total revenue earned by tobacco farmers? (6) For each of the elasticity cases given below, verbally explain what the elasticity coefficient means, and offer an interpretation of the elasticity coefficient. (a) The income elasticity of movies is 3.41. (b) The price elasticity of tobacco is -0.61. (c) The cross price elasticity of popcorn with respect to the price of soft drinks is 2.38. (d) The price elasticity of rail service is 0.89. (e) The income elasticity of dental services is 1.00. (7) State the sign (positive or negative), and the range (less than 1, 1, greater than 1) of the following elasticities. Offer a brief verbal explanation for each elasticity case. (a) The elasticity of demand for ice cream at the point of maximum revenue or expenditure. (b) The cross elasticity of demand for ice cream with respect to the price of frozen yogurt. (c) The income elasticity of demand for Caribbean cruises. (d) The elasticity of supply of gasoline. (e) The cross elasticity of demand for corn ready to be popped with respect to the price of popcorn machines. ...
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