Calculate ries income elasticity of demand

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Reference no: EM1396770

Question 1

The table sets out the demand and supply schedules for banana.

Price (dollars per box)	Quantity demanded	Quantity supplied
	(boxes a week)
6	500	4000
5	1000	3500
4	1500	3000
3	2000	2500
2	2500	2000
1	3000	800

(a) Draw a graph of the market for banana. What are the equilibrium price and quantity? Explain why.

(b) If the price of banana was $1.50 a box. What would be the situation in the banana market (shortage or surplus)? Explain why and how the price and quantity would adjust.

(c) Suppose a cyclone destroyed some banana farms in QLD and the quantity of banana supplied decreased by 500 boxes a week at each price. Explain what would happen to the market supply and demand and how would the equilibrium price and quantity adjust? Illustrate the changes on your graph.

(d) Suppose a cyclone decreased banana supply by 500 boxes a week at each price. But at the same time the demand for banana increased by 500 boxes a week at each price. Explain what would happen to the market equilibrium price and quantity? Illustrate the changes on your graph.

Question 2

The demand schedule for computer chips is in the table.

Price
(dollars
per chip)

Quantity demanded
(millions of
chips per year)

200	50
250	45
300	40
350	35
400	30

(a) What happens to total revenue if the price falls from $400 to $350 a chip and from $350 to $300 a chip? Explain your answer.

(b) At an average price of $300, is the demand for chips elastic, inelastic, or unit elastic? Explain your answer using the total revenue test.

When Rie's income was $3,000, she bought 5kgs of rice and 2kgs of beef a month. Now her income is $4,000 and she buys 4kgs of rice and 3kgs of beef a month.

(d) Calculate Rie's income elasticity of demand for rice. Is rice normal good or inferior good? Show your calculation. Suppose a drought cuts the quantity of wheat grown by 3 per cent.

(e) If the price elasticity of demand for wheat is 0.3, by how much will the price of wheat rise? Show your calculation.

(f) If pasta makers estimate that this change in the price of wheat will increase the price of pasta by 20 per cent and decrease the quantity demanded of pasta by 5 per cent, what is the pasta makers' estimate of the price elasticity of demand for pasta? Show your calculation.

(g) If pasta sauce makers estimate that, with the change in the price of pasta, the quantity of pasta sauce demanded will decrease by 4 per cent, what is the pasta sauce makers' estimate of the cross elasticity of demand for pasta sauce with respect to the price of pasta?

Reference no: EM1396770

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