Reference no: EM132500445

1. The price elasticity of demand for cigarettes is much higher r for people aged under 25 than it is for people over 40. Suggest reasons why this is the case.

2. Data shows that the price elasticity of demand for coffee (barista-made is very low. Suggest reasons why this is the case. Would you expect the price elasticity of demand for instant coffee to be as low as that of barista-made coffee?

3. A city council operates a car park that is only three-quarters full during normal working hours. The council has conducted a survey that shows the average value of vehicles in the car park is $50 000. The council wants to increase revenue from the car park and has asked for your advice on whether it should raise or reduce parking fees. Explain how your recommendation would lead to an increase in the revenue being collected. Would your answer be different if the survey showed that the average value of vehicles in the car park was $ 10 000?

4. Suppose that a new airline offers very low-cost tickets for flights to and from Singapore. What cross-price elasticities of demand would result from this price change?

5. The enormous popularity of the Disney movie Frozen led to a substantial shift in consumers· tastes and increased demand for two related complementary products: copies of the movie on DVD/Blu-ray and visits to Disneyland Park in California, where a ·Frozen Fun· attraction was opened. Suggest why the elasticity of supply of such theme park attractions would be fairly low. What type of price elasticity would characterise the supply of Frozen DVD/Blu-ray discs? Why would this elasticity differ from that of Disney attractions?

6. Dominic owns a hobby farm on which he has planted a stand of olive trees. Five years after planting, the trees start producing olives, which Dominic harvests and sells to a local olive-oil producer. New information about the health benefits of olive oil increases the demand for olives. How will Dominic's supply of olives respond to the higher prices for his product in the short run and in the long run?

7. Calculate the cross-price elasticity for the following products. Are they substitutes or complements?

a. The price of cinema tickets goes up by 10 per cent, causing the quantity demanded of DVD rentals to go up by 4 per cent.

b. Computer prices fall by 20 per cent, causing the quantity demanded of software to increase by 15 per cent.

c. Thepriceofapplesfallsby5percent, causing the quantity demanded of pears to fall by 5 per cent.

d. The price of ice-cream falls by 6 per cent, causing the quantity demanded of frozen yoghurt to fall by 1 per cent.

8. Consider the market for high-quality jewellery.

a. Would you expect demand to be elastic or inelastic? Why?

b. What effect would you expect a 20 per cent reduction in price to have on quantity demanded?

c. Would you expect supply to be elastic or inelastic? Why?

d. Suppose that a shift in supply reduces quantity demanded by 10 per cent. What would be the likely effect on price? (You will need to compare the equilibrium after the supply shift with the equilibrium before the supply shift.]

9. Refer to the following table of estimated price elasticities of demand.

a. Explain why the price elasticity of demand for fresh tomatoes is so high.

b. Why is the demand for petrol more elastic in the long run than in the short run?

c. Why is the long-run demand for air travel much more elastic than the long-run demand for petrol?

10. Excellent weather in the growing season has produced very large crops. Explain why this might cause problems for farmers.

11. The board of directors of an airline wishes to increase revenue. One group suggests cutting airfares and another group suggests raising airfares. What are the assumptions each group is making about the price elasticity of demand?

1. Answer the following questions: (Hint: You'll have to draw at least one diagram for each question, and use these to explain your answer in written form)

a) Suppose that over the past year increases in the price of milk have increased the retail price of ice cream by 4 per cent. In the same period, ice cream consumption has fallen by 3 per cent. 

· What type of price elasticity of demand is this? Explain how you worked out your answer.
· Suggest reasons why the price elasticity of demand for ice cream would be of the type you specified above.
· Will the revenue received by ice cream sellers have increased or decreased as a result of the price increase? Explain your answer.

b) Suppose research estimates that the price elasticity of demand for carbonated soft drinks is 0.78, while the price elasticity of demand for Coco-Cola is 1.22.

· What type of price elasticities of demand are there for soft drinks and Coco-Cola? Explain how you worked out your answer.
· Coco-Cola is a type of carbonated soft drink, so why isn't its price elasticity of demand the same as the price elasticity of demand for soft drinks as a whole?
· Suppose that increases in the price of a key ingredient increases the price of Coco-Cola. Will the revenue that sellers receive from sales of Coco-Cola increase or decrease as a result of the price increase? Explain your answer.

c) State whether the following statements is TRUE or FALSE, explain your answers briefly.

· A linear, downward-sloping demand curve has a constant elasticity because its slope is constant.
· Income elasticity of demand for a good is always positive.
· If the price elasticity of supply is 2, then 1% increase in price will double the quantity supplied.

d) Drug interdiction is the act of interrupting the drug trade, that is to reduce the supply of drugs in a country. Explain why drug interdiction may increase drug related crime instead of decreasing it.

e) For each of the following statements, say what can you conclude about the price elasticity of demand. Draw an appropriate diagram and use this to explain your answer.

· The photocopy business in the town is very competitive. I would lose half of my customers if I increased the price by as little as 10 percent.
· I always spend exactly $15 on coffee every week.

f) Suppose you run a furniture business, and the income elasticity of demand for furniture is 1.5. You hear in the news that the economy has gone into recession and you are concerned about how a rise in unemployment will affect your furniture business. Holding other things constant, what do you expect to happen to the demand for furniture? Based on the information given, is furniture a normal good?

g) Work through the 'Extra online resources' for Chapter 4. The resources listed here should be viewed after you've listened to the lecture recording, you have read the relevant chapter of the textbook, and after you have completed the activity questions above. Please note that these are not intended as a substitute for listening to the lecture recording, reading the textbook, and working through the activity questions above.