Econ1-Fall2010-PS3-sols

# Econ1-Fall2010-PS3-sols - Econ 1 PS#3 Solutions Fall 2010 1...

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Econ 1 PS #3 Solutions Fall 2010 1. Suppose a 18% fall in the price of strawberries increases the quantity of strawberries demanded by 24% and decreases the quantity of chocolate demanded by 12%. a. What is the price elasticity of demand for strawberries? Interpret your calculation in words. At the current price level, is the demand for strawberries elastic or inelastic? The elasticity of demand for strawberries is |.24/-.18 |= 1.33. A 1 percent increase in the price of strawberries leads to a 1.33 percent decrease in the quantity of strawberries demanded. Equivalently, a 1 percent decrease in the price of strawberries leads to a 1.33 percent increase in the quantity of strawberries demanded. The demand for strawberries is elastic. b. Are strawberries and chocolate complements or substitutes. Briefly explain your reasoning. It suggests that strawberries and chocolate are substitutes. As the price of strawberries decreases, people buy more strawberries and less chocolate. 2. Briefly explain whether the demand for each of the following products is likely to be elastic or inelastic. (These are subjective. Your explanation is more important than the “Elastic”/”Inelastic” answer.) a. Milk Inelastic. Milk is regarded as a necessity by many people. b. Frozen cheese pizza Elastic. There are lots of substitutes for frozen cheese pizza. c. Cola Elastic. There are lots of substitutes for cola. d. Prescription drugs Inelastic. These are necessities. Quantity will probably vary very little when price changes.

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Econ1-Fall2010-PS3-sols - Econ 1 PS#3 Solutions Fall 2010 1...

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