ECO 211 HA5

ECO 211 HA5 - more products more efficiently which results...

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Microeconomics 211 Chapter 5: Elasticity: The Responsiveness of Demand and Supply HA 5 ( #1.2, 1.5, 2.1, 2.2, 2.3) 1.2) The price elasticity of demand for Cap’n Crunch cereal is -2.5. Demand for Cap’n Crunch cereal is elastic since there are many substitutes for Cap’n Crunch. 1.5) a) 4 million / 1.00 = 4,000,000 b) 4.0 / 1.00 = 4.0 c) Avg. qty. = 10 million Avg. price = $2.50 % change in qty. demanded = 12 mil – 8 mil / 10mil = 0.4 = 40% % change in price = $2 - $3 / $2.50 = -0.4 = -40% Price elasticity of demand = 40% / -40% = 1 Demand is unit elastic since the percentage change in quantity demanded is equal to the percentage change in price. Price elasticity is equal to 1 in absolute value. 2.1) The demand for most agricultural products is inelastic. Due to advancements in developing superior strains of products and improvements in farming techniques, farmers are able to produce
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Unformatted text preview: more products more efficiently, which results in a decline in prices. Even with the increases in population and incomes, the demand stays relatively the same. 2.2) The determinants of the price elasticity of demand are availability of close substitutes, passage of time, luxuries versus necessities, definition of the market, and the share of the good in the consumer’s budget. Of these determinants, the availability of close substitutes is the most important because how consumers react to a change in the price of a product depends on what alternatives they have. 2.3) Milk – Inelastic – due to alternatives not really available Frozen cheese pizza – Elastic – due to many substitutes available Cola – Elastic – due to many substitutes available Prescription medicines – Inelastic – limited availability of alternatives...
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ECO 211 HA5 - more products more efficiently which results...

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