elast1a - 11 -2 -22 (P 2 A + P 1 A ) / 2 9 D and A are...

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Additional Problem 1 : Elasticity (Answer Key) 1. Given : P A = Price of good A Q A = Quantity of good A Q B = Quantity of good B Q C = Quantity of good C Q D = Quantity of good D I = Consumer’s income P A Q A Q B Q C Q D I $10 5 10 10 10 $5,000 $8 6 10 6 12 $6,000 (a) Calculate the price elasticity of demand for good A. (Include the formula you utilized for this calculation.) Price elasticity of D is inelastic Q 2 A - Q 1 A 1 for this price change. —————— —— Ï (Q 2 A + Q 1 A ) / 2 5.5 1 9 9 E P A = ———————— = —— = —— x —— = —— = -.818 P 2 A - P 1 A -2 5.5 -2 -11 —————— —— (P 2 A + P 1 A ) / 2 9 (b) Calculate the cross elasticity of demand for good D with respect to good A. (Include formula.) Q 2 D - Q 1 D 2 Inelastic demand. —————— —— Ï (Q 2 D + Q 1 D ) / 2 11 2 9 18 E DA = ———————— = —— = —— x —— = —— = -.818 P 2 A - P 1 A -2
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Unformatted text preview: 11 -2 -22 (P 2 A + P 1 A ) / 2 9 D and A are complements. 2 (c) Classify goods A and C. Explain the relationship, if any, between these two goods : As P A goes down the Q C goes down, therefore A and C are substitutes. (d) Calculate the income elasticity for good C. (Again, include the appropriately specified formula.) Q 2 C- Q 1 C -4 Elastic demand. (Q 2 C + Q 1 C ) / 2 8 -4 5,500 -22,000 E I = = = x = = - 2.75 I 2- I 1 1,000 8 1,000 8,000 (I 2 + I 1 ) / 2 5,500 C is an inferior good. (e) Classify good B as it relates to the consumers income. Explain how you reached this conclusion : As income rises consumers buy same amount of good B E I = 0 and good B is a neutral good....
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elast1a - 11 -2 -22 (P 2 A + P 1 A ) / 2 9 D and A are...

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