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Unformatted text preview: Assignment #2 Macro 251 November 8, 2007 Assignment #2 1. Demand Curve For Quizznos Subs A. The price elasticity of demand is 2.33 66.7% / 28.6% = 2.33 B. The PEd is elastic because it is > 1. 2. Which is more price elastic? A. Diamonds are more price elastic because they are a luxury item and water is a necessity. When the price of diamonds rises some forego them, but when the price of water rises people still need to buy the water. B. Nasal decongestant spray is more price elastic because its not a necessity like insulin is. No matter what the price of insulin is, people will still need to buy it for their livelihood. C. Breakfast cereal is more price elastic because its more narrowly defined which means there are more substitutions for it. There arent really a lot of substitutions for food in general; food is a necessity so people will have to buy it. D. Gas over a year is more price elastic because in a years time people can find other transportation that doesnt force them to buy gas. They can carpool, bike, take the bus, etc. In the short run over a week its much harder to find alternatives so people are kind of stuck buying the gas. E. Apple personal computers are more price elastic because its more narrowly defined so there are more substitutes for them. There are cheaper computers that people will buy instead of a more expensive Apple computer. 3. Play Station 3 A. The percentage change in price is 33.3% 400 - 600 / 600 = 33.3% B. The percentage change in QD is 50% 12,000 - 8000 / 8000 = 50% C. The price elasticity of demand is 1.5, which is an elastic demand. 50% / 33.3% = 1.5 4. Baileys and Coffee A. The cross price elasticity is - .75 % Change in QD of Coffee 8 - 10 / 10 = - 25% % Change in Price of Baileys 20 - 15 / 15 = 33.3% % Change QD and Price- 25% / 33.3% = - .75 B. The two goods are compliments because the cross price elasticity is less than 0 (negative) which means theyre compliments. C. The cross price elasticity is inelastic because its < 1. D. A 33.3% increase in the price of Baileys lead to a 25% decrease in the demand of coffee....
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- Fall '07
- Price Elasticity