Description of price and income elasticity

Reference no: EM1316192

1. Using the midpoint formula, calculate the price elasticity of demand for the following problem:

Suppose the price of a twelve-pack of Coke is increased from $5.00 to $5.50. As a result, the sales level at a nearby convenience store decreases from 100 to 75 per day.
This is the midpoint formula:

(Q1 - Q2)/(Q1 + Q2) divided by (P1 - P2)/(P1 + P2),
where:Q1 = the "old" quantity, Q2 = the "new quantity, P1 = the "old" price, and P2 = the "new" price.

2. Assume McDonald's reduces the price of a large order of fries by 10%. As a result, consumers increase their purchases of Big Macs by 5%. Calculate the cross-price elasticity of demand. Are these products complements or substitutes? Is the result elastic or inelastic? Show the arithmetic you used.

3. Calculate the income elasticity of demand using the general formula for elasticity:

% Change in Quantity Demanded divided by % Change in Price

Earlier this year you received a 10% pay raise. Consequently, your household began ordering 30% more pizza each month. Calculate the income elasticity of demand. Is the result elastic or inelastic? Is the pizza a normal or inferior good? Once again, use the general formula for elasticity (above) and show your work.

Reference no: EM1316192

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