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MCD2020 Microeconomics
Tutorial 4: Elasticity and its applications
Chapter 5
Learning Objectives
Tutorial this week will focus on the learning objectives of Topic 3 , which are:
1. Calculate price elasticity of demand and interpret the results
2. Understand the relationship between price elasticity of demand and total
revenue
3. Understand the determinants of price elasticity of demand and their
applications
4. Elasticity and the slope of the demand curve
5. Understand cross-price elasticity of demand and income elasticity of demand.
Exercises marked with ★ are core content, and should be prioritised during class time.
Learning Objective 1
★ Question 1- Mid-point method
The table below shows the demand for toys that Jack’s company is producing. Calculate missing values. Price $ Quantity Total Revenue $
change in Price
Change in Quantity Elasticity Description ( elastic or inelastic) 14 0 12 1 10 2 8 3 6 4 4 5 2 6 0 7 Complete the following paragraph to interpret the results of your calculations i. Demand is considered ……………………….. when the percentage change in ………………. ………………… is greater than the percentage change in ………………... This means consumers are very …………………. to price changes.
- As the price falls from $ 12 to $ 8 , the quantity demanded increases from ….. to ….. units.
- The elasticity values in this range are 13, 3.7, and 1.8, all of which are ………………. than 1 , indicating …………………. ………………..
- Since elasticity is greater than 1 in this range, a small ……………… in price leads to a ……………. increase in quantity demanded. Therefore, the demand is ……………. between $12 and $8 because the ……………… change in quantity demanded is relatively ………….. compared to the percentage change in………. ii. Demand is considered ………….. when the percentage change in quantity demanded is …………….. than the percentage change in ………………. This means consumers are ……….. responsive to price changes.
- As the price falls from $ 4 to $0, the quantity demanded increases from …….. to ……. units.
- The elasticity values in this range are 0.6, 0.3, and 0.1, all of which are …………. than 1, indicating ………….. demand.
- Since elasticity is ……………. than 1 in this range, a ……………. in price leads to a smaller increase in quantity demanded. Therefore, the demand is ………….. between $4 and $ 0 because the percentage change in ………………..is relatively …………. compared to the percentage change in price.
Learning Objective 3
Question 3 – Determinants of price elasticity of demand
Barney owns a bagel business in Melbourne City, and he wants to increase his total revenue. He knows that when bagels are $1, he sells 250 an hour, and when he lowers the price to $0.75, he sells 275 an hour. a) Calculate the price elasticity of demand for Barney’s bagels. Show your work ……………………………………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………… b) Using the price elasticity of demand, you calculated for Barney’s bagels, explain whether he should raise or lower the price to generate more revenue. ………………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………………………… c) A new bakery opens across the street from Barney’s bagel shop. Using your understanding of the determinants of price elasticity of demand, explain how this change is likely to affect the elasticity of demand for Barney’s bagels. . ………………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………
c) Why might holiday makers have a different elasticity than business travellers? Explain using determinants of elasticity d) Which demand curve in the diagram below better represents the demand curve for business travellers? Explain why_._
Learning Objective 4
★ Question 5 – Elasticity and the demand graph
The demand for Jean’s pastry rolls can be represented by the equation: Qd = 10 – 2P a) Draw a sketch graph of the demand equation, and label the x and y intercepts. b) If the price = $4.50, what is quantity demanded? Label on the graph. ………………………………………………………………………..……… If the price = $4.00, what is the quantity demanded? Label on the graph ……………………………………………………………………………………….. c) What is the price elasticity of demand between these two points along the demand curve? Mid-point method? ……………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………… d) Repeat the calculations in parts b) and (c) for prices = $1.00 and $0.50. Label the quantity demanded at each price on the graph. ……………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………
Learning Objective 5:
★ Question 6 – Income elasticity
Suppose that the demand for the cinema tickets per year in your family is as follows: a) Using the midpoint formula calculate price elasticity of demand as the price of the tickets increases from $8 to $10 if (i) your family income is $10000, and (ii) your family income is $ 12000 ………………………………………………………………………………………………… ………………………………………………………………………………………………… ………………………………………………………………………………………………… ………………………………………………………………………………………………… ………………………………………………………………………………………………… b) Using the midpoint method calculate your income elasticity of demand as your family income increases from $10 000 to $12 000 if the price is (i) $12, and (ii) the price is $14. ………………………………………………………………………………………………… ………………………………………………………………………………………………… ………………………………………………………………………………………………… ………………………………………………………………………………………………… ………………………………………………………………………………………………… c) Cinema tickets are what type of a good to your family? Explain using your calculations in parts (a) and (b) ……………………………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………………………… d) Complete the following by circling the correct word: Normal goods have positive/negative income elasticities, while inferior goods have positive/negative income elasticities. Necessities tend to have small/large income elasticities, while luxuries tend to have small/large income elasticities. Price ($) Quantity demanded (income =$10000) Quantity demanded (income =$12000) 8 40 50 10 32 45 12 24 30 14 16 20
Question 7 - Cross price elasticity
a) The price of apples rises from $2.00 per kilogram to $3.00 per kilogram. As a result, the quantity of oranges demanded rises from 8,000 per week to 9,500. Calculate cross-price elasticity (using mid-point method). Are the two goods substitutes? ………………………………………………………………………………………………… ………………………………………………………………………………………………… ………………………………………………………………………………………………… ………………………………………………………………………………………………… ………………………………………………………………………………………………… b) When two goods are close substitutes, is the cross-price elasticity of demand likely to be large or small? Explain your answer to part a) above. ………………………………………………………………………………………………… ………………………………………………………………………………………………… ………………………………………………………………………………………………… ………………………………………………………………………………………………… ………………………………………………………………………………………………… ………………………………………………………………………………………………… ………………………………………………………………………………………………… ………………………………………………………………………………………………… …………………………………………………………………………………………………
