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Q1 P1
; (here price elasticity is negative since, normally, quantity
*
P1 Q1
Q1 Y
*
Y Q1
Q1 P2
*
P2 Q1
2. Question: Demand (Q) is Q - 110 = - 4P, where P is Price. What is price elasticity at
Comment on the result.
P=Rs. 5?
3. Question: The accompanying table shows the price and monthly quantity sold of Arrow T-shirts in the
town according to the average income of the city newly employed youth.
Price of T-shirt
(Rs)
400
5 00
6 00
700
2,400
1,600
800
4,200
3,000
1,800
a. Calculate the price elasticity of demand when the price of a T-shirt rises from Rs. 500 to Rs.600 and
the average income is Rs. 20,000. Also calculate it when the average income is Rs. 30,000.
b. Calculate the income elasticity of demand when the price of a T-shirt is Rs. 400 and the average income
increases from Rs. 20,000 to Rs. 30,000. Also calculate it when the price is Rs.700.
Solution:
a.
dQ P1
; (here price elasticity is negative since, normally, quantity
*
dP Q1
= 6.66
b.
dQ Y1
*
; (here income elasticity is positive since, for normal
dY Q1
5000 3000
20000
*
30000 20000
3000
= 1.33
4. Question: The accompanying table lists the cross-price elasticities of demand for several goods, where
the percent quantity change is measured for the first good of the pair, and the percent price change is
measured for the second good.
Goods
-0.34
+0.63
-0.28
+0.82
+1.54
a. Explain the sign of each of the cross-price elasticities. What does it imply about the relationship
between the two goods in question?
b. Compare the absolute values of the cross-price elasticities and explain their magnitudes. For example,
why is the cross-price elasticity of Dominos Pizza and Jasubens Pizza less than the cross-price elasticity
of Butter and Ghee ?
c. Use the information in the table to calculate how a 5% increase in the price of Pepsi affects the quantity
of Coke demanded.
d. Use the information in the table to calculate how a 10% decrease in the price of diesel affects the
quantity of long-distance diesel car demanded.
Solution:
1. When cross elasticity is negative, the related commodities are commentaries.
When cross elasticity is positive, the commodities are substitutes.
Here, (Air-conditioning units and kilowatts of electricity), (High-fuel-consuming long distance traveling
car and diesel) are complimentaries.
(Dominos Pizza and Jasubens Pizza in Law Garden), (Coke and Pepsi) and (Butter and Ghee) are
substitutes.
Similarly, Air-conditioning units and kilowatts of electricity are more closely related than High-fuel
consuming long distance traveling car and diesel. As cross elasticity of Air-conditioning units and
kilowatts of electricity (absolute value) is more than that of High-fuel consuming long distance traveling
car and diesel.
2.
Here cross elasticity between Dominos Pizza and Jasubens Pizza is 0.82 and that of Butter
and Ghee 1.54. Since cross elasticity of butter and ghee is more than that of Dominos Pizza
and Jasubens Pizza. Butter and ghee are more close substitytes.
5. Consider a competitive market for which the quantity demanded and supplied at various prices as
follows:
P
rice
(Rs.)
60
80
100
120
Quantity Demanded
Quantity Supplied
22
20
18
16
14
16
18
20
1.65 million
Volume of sales after the 10% discount
Calculate price elasticity of demand.
Solution:
eP =
()
()
eP = (
eP =
dQ
dP
)(
Q
()
()
eP = (
1.65 1.55
) (10 %)
1.55
eP = .645
The demand for the book is less elastic.
6. Price elasticity of demand for a wheat is unity. A family with 4 individuals demands 40 kg of wheat
per month when price is 25 per kg. What will be the price if wheat demanded by the family per month is
36 kg?
Solution:
Here,
Initial Price (P1) = Rs. 25 per kg of wheat
Initial Demand (Q1) = 40 kg
Final price (P2) = ?
Final Demand (Q2) = 36 kg
dQ P1
*
=1
dP Q1
Or,
36 40 25
* =1
P2 25 40
Or, P2 = 27.5
8. Ramesh is a fruitarian. He spent his daily money income Rs 220 on apple and orange which are priced
at Rs.50 per unit and Rs.20 per unit respectively. Marginal utilities of both apple and orange obtained
by him are given bellow. Find out the optimal combination of the apple and orange. What is the maximum
utility obtained by Ramesh.
Quantity Consumed
1
2
3
4
5
6
7
Solution:
Given, Price of Apple (PA)= Rs 50 unit
Price of Orange (P0) = Rs 20 per unit
Money income of Ramesh =Rs 220
Quantity(
Q)
1
MU
of
Apple
(MUA)
30
MU of
Orange(
MUO)
20
MUA/PA=50
MUO/PO=20
Total
Utility of
Apple
0.6
30
25
18
0.5
0.9
55
20
16
0.4
0.8
75
15
14
0.3
0.7
90
10
12
0.2
0.6
100
10
0.1
0.5
105
0.02
0.4
106
Total Utility of
Orange
20
38
54
68
80
90
98
= (Necessary condition)
The consumer, maximises satisfaction when = 0.5 where the optimum combination is 2 Apples and
6 oranges.
Maximum Satisfaction or utility obtained by Ramesh
9. A consumer has Rs 22 which he spends on good X and Y at price Rs.5 and Rs.2 respectively. Total
utility obtained by him is given as follows. What is the maximum satisfaction obtained by him?
Quantity Consumed
1
2
3
4
5
6
7
Hints:
Find
Total Utility of X
30
55
75
90
100
105
106
Total Utility of Y
20
38
54
68
80
90
98