ECONOMICS Assignment 2

Hamna Wahab
22443

MCQ’S ANSWERS

1. D
2. B
3. D
4.A
5.A
6.A
7.C
8.C
9.A
10.A
11.C
12.C
13.C
14.A
15 C
16. B
17 C
18 A
19 D
20 D

Answers to the questions:

Ans1
The main advantage of using the mid point method is that it ignores the
difference caused from direction of change. That is we get different answers
depending on from which point we choose to start and at which point we
choose to finish for example, a change of 2, from 4 to 6 will result 50%
whereas from 6 to 4 it will result in 33%. Hence the mid point formula uses the
average of both these numbers as base i.e 6-4/5 x100=40% .

Ans 2
If the elasticity is greater than 1, the demand is elastic which means that the
% change in price results in a larger % change in quantity demanded.
If the elasticity equals 0, the demand is perfectly inelastic which means that
the quantity demanded for a good does not change in response to a change
in price.

Ans 3

A(I) at income=$10000
(q1,p1) = (40,8)
(q2,p2) = (32,10)

{-8/36} / {2/9} = -0.22/0.22 = -1 that is PED unit elastic

(II) at income= $12000

(q1,p1) = (50,8)
(q2,p2) = (45,10)

{-5/47.5} / {-0.12/0.22} = -0.545 that is PED inelastic

b(I) YED at price $12

formula=% change in quantity demanded/ %change in income

Change in quantity demanded = {30-24/24}x100 = 25%

Change in income= {12000-10000/10000}x100=20%

Therefore, 25/20= 1.25 that is normal goods

(II) YED at price $16

Change in quantity demanded= {12-8/8}x100= 50%

Change in income= {12000-10000/10000}x100=20%

Therefore, 50/20= 2.5

ans4:
Income elasticity of demand measures the degree to which consumers
respond to a change in their incomes by buying more or less of a particular
good. The formula for it is % change in quantity demanded/ % change in
income. Where as cross elasticity of demand measures how sensitive
consumer purchases of one product`(say X) are to a change in the price of
some other product (say Y). It is calculated by the formula % change in quality
demanded of product X/ % change in the price of product Y.
Good X is an inferior good since it has a negative income elasticity coefficient.
It could be used clothes, long distance bus tickets or cabbage. hence as the
income of a consumer rises they will the demand for good X will decrease
also since its -3, the three shows that its magnitude is stronger.
Good X and Good Y are substitutes since its CED=2 therefore a decrease in
the price of good Y will cause the consumers to buy more of it than good X,
causing the demand of good X to decrease.

Ans5:
a.the equilibrium price is $6 and the equilibrium quantity is 81 pizza’s

b.if the actual price in the market was above the equilibrium, let’s say $7 the
quantity supplied would exceed quantity demanded by 30 pizzas. Hence the
producers to gain back on sales would decrease its price back to the price
where it makes most profit i.e at $6 and restore the equilibrium.

c.if the actual price in the market were below the equilibrium, let’s say $5 the
quantity demanded would exceed quantity supplied by 51 pizzas causing a
shortage in the market. This means the suppliers could raise the price without
losing on sales and thereby do so settling at $6 and restoring the equilibrium.
In both the cases, the prices will continue to adjust itself until it reaches at $6,
where there’s neither a surplus or a shortage.

Ans 6
a. When a hurricane damages cotton crops it increases input prices which
causes supply to fall, moving the supply curve to the right, lowering quantity
demanded and increasing price.
b. A fall in the price of leather jackets will lead more people to buy later
jackets, a substitute for sweaters. An increase in the amount sold of substitute
goods sold reduces demand for sweatshirts. This reduction in demand shifts the
demand curve to the right lowering both prices and quantity demanded for
sweatshirts.
c. Required use of sweatshirts will increase the demand for sweatshirts,
pushing the demand curve to the right raising quantity as well as price.
d. New knitting machines will increase productivity and thus lower costs of
production and increasing the supply of sweaters. This pushes the supply curve
to the right which will raise quantity and raise prices.

Ans 7
a. negative cross price elasticity of demand means that the two good
are complements. That is an increase in the price of one good
decreases the demand for the other. Here air-conditioning units and
kilowatts of electricity are gross complements, so are sport-utility
vehicles and gasoline. A positive cross-price elasticity of demand
implies that the two goods are substitutes.which means that the sales of
good 1 move in the same direction as the change in the price of good 2.
Here, Coke and Pepsi are gross substitutes, as are McDonald’s and
Burger King burgers as well as butter and margarine.

b. The larger and positive the cross-price elasticity of demand is, the
more closely the two goods are gross substitutes. Since the cross-price
elasticity of butter and margarine is larger than the cross-price elasticity
of McDonald’s burgers and Burger King burgers, butter and margarine
are closer gross substitutes than are McDonald’s and Burger King
burgers. Similarly, the greater (and negative) the cross-price elasticity of
demand is, the more strongly the two goods are gross complements.
Here the cross price elasticity of air conditioning units and kilowatts of
electricity is greater than high fuel consuming sport utility vehicles
making it closer complements.
c. A cross-price elasticity of 0.63 implies that a 1% increase in the price
of Pepsi would increase the quantity of Coke demanded by 0.63%.
Therefore, a 5% increase in the price of Pepsi would increase the
quantity of Coke demanded by five times as much, that is, by 5 × 0.63%
= 3.15%.

d. A cross-price elasticity of −0.28 implies that a 1% fall in the price of

gasoline would increase the quantity of SUVs demanded by 0.28%.
Therefore, a 10% fall in the price of gasoline would increase the
quantity of SUVs demanded by 10 times as much, that is, by 10 ×
0.28% = 2.8%.

Ans8:
Total revenue is the total amount the seller receives from the sale of a product
in a particular time period. It is calculated by multiplying the product price (P)
by the quantity sold (Q).
a. PED=1.9, which means the demand is elastic, hence a 5% increase in price
will cause the total revenue to decrease since the quantity demanded
changes by a larger percentage than the change in price.

b. PED=1.3, which means that the demand is elastic, hence a 5% decrease in

the price will cause the total revenue to increase since the quantity demanded
changes by a larger % than the change in price.

c. PED=<1, this means the elasticity is inelastic, hence a 5% increase in price

will lead to the total revenue increasing, as quantity demanded changes by a
smaller % than price does.

d. PED=<1, this means the elasticity is inelastic, hence a 5% decrease in

price will cause the total revenue to decrease as the quantity demanded
changes by a smaller % than price does.