SCHOOL OF BUSINESS AND MANAGEMENT

BACHELOR OF ACCOUTING PROGRAM

Course: BU511 – Principles of Economics

Tutorial 5: Week commencing 28th March

Topic: Markets – Demand and Supply Elasticities

A. Multiple Choice Questions

1. Which of the following best describes the price elasticity of demand?

A) the ratio of quantity demanded to price of a product
B) the ratio of percentage changes in price to change in quantity demanded
C) Responsiveness of quantity demanded to change in price
D) Responsiveness of price to change in quantity demanded

2. If demand is inelastic:
A) as price rises, total outlay falls
B) total outlay moves in the opposite direction to price
C) total outlay moves in the same direction to price
D) total outlay remains unchanged

3. When the price of a product increases from $5 to $6 the quantity demanded decreases from 400 to
300 units. Which of the following is correct?
A) Demand in inelastic
B) price elasticity of demand is greater than zero but less than one
C) total outlay increases as price increases
D) total outlay decreases as price rises

4. Which of the following statements is incorrect?

A) a downward-sloping demand curve has varying elasticities
B) demand curves running parallel to the x-axis are perfectly elastic
C) demand curves running parallel to the y-axis are perfectly inelastic
D) if a demand curve is flatter, demand is inelastic

5. A product has few substitutes. Which of the following is correct?

A) price elasticity is greater than one
B) price elasticity is less than one
C) cross elasticity is negative
D) the percentage change in price is greater than quantity

6. Cross elasticity of demand for a substitute is:

A) zero
B) positive
C) negative
D) infinite

7. Cross elasticity of demand for a complementary good is:

A) zero
B) positive
C) negative
D) infinite

8. Total outlay will increase if price:

A) falls and demand is inelastic
B) falls and demand is elastic
C) rises and demand is elastic
D) rises and demand is inelastic

9. Which of the following indicates a negative value of cross elasticity of demand between two goods?
A) the two goods are complements
B) the two goods are substitutes
C) the two goods are close substitutes
D) the two goods are unrelated goods

10. Which of the following indicates a positive value of cross elasticity of demand between two goods?
A) the two goods are complements
B) the two goods are substitutes
C) the two goods are close substitutes
D) the two goods are unrelated goods

11. Under which of the following circumstances will a supplier be able to pass a higher proportion of
sales tax on to consumers?
A) unitary elastic demand
B) inelastic demand
C) perfectly inelastic demand
D) perfectly elastic demand

12. Under which of the following circumstances will a supplier be able to pass a lower proportion of
sales tax on to consumers?
A) unitary elastic demand
B) inelastic demand
C) perfectly inelastic demand
D) elastic demand

13. If cross elasticity of demand equals -1, the two goods are:
A) Substitute goods
B) Complementary goods
C) Inferior goods
D) Normal goods
B. Short-Answer Question
1. A consumer normally purchased 100 packets of sausages at price $5 per unit. When the price
fell to $4, he would increase his consumption to 120 packets. Find the price elasticity of demand
using point elasticity measure.
ΔQ P 20 5
Using point method: Ed = x = x = -100 / 100 = - 1
Δ P Q −1 100
Hence demand is unit elastic because Ed = 1

2. The demand schedule for product X is given below

Price per unit ($) Quantity demanded Consumer outlay ($)

8 150 1200
7 200 1400
6 300 1800
5 360 1800
4 450 1800
3 550 1650
2 700 1400

(a) Complete the last column

(b) Use the total outlay method to calculate the elasticity of demand with the following price
ranges:
 $8.00 - $6.00 – Total outlay increase from 1200 to 1400 when price decrease
from $8 to $6. Hence demand is elastic at this price range
 $6.00 - $4.00 - Total outlay remain unchanged at 1800 when price decrease
from $6 to $4. Hence demand is unit elastic at this price range
 $4.00 - $2.00 - Total outlay decrease from 1800 to 1400 when price decrease
from $4 to $2. Hence demand is inelastic at this price range

3. As the price of a product falls from $6 to $5.80 per unit, the quantity supplied decreases from
400 to 300 units. Find the price elasticity of supply using the point elasticity and mid-point
formulas.
ΔQ P −100 6
Using point method: Es = x = x = 600 / 80 = 7.5
Δ P Q −0.20 400

ΔQ ΔP −100 5.9
Using arc method: Es = ÷ == x = 8.4286
(Q 1+Q2)/2 (P 1+ P2)/2 −0.2 350

Hence supply is elastic because Es > 1

4. The supply schedule for product Y is given below

Price per unit ($) Quantity Supplied

 10 10000
12 11000
15 15000

(a) Calculate the price elasticity of supply for increases in prices using the point elasticity
formula
ΔQ P 1000 10
Price $10 - $12: Es = x = x = 10000 / 20000 = 0.5
ΔP Q 2 10000
ΔQ P 1000 12
Price $12 - $15: Es = x = x = 12000 / 33000 = 0.3636
ΔP Q 3 11000
(b) Calculate the price elasticity of supply for changes in prices using the mid-point elasticity
formula
ΔQ ΔP 10 0 0 11
Price $10 - $12: Es = ÷ == x = 0.5238
(Q 1+Q2)/2 (P 1+ P2)/2 2 10500
ΔQ ΔP 1000 13.5
Price $12 - $15: Es = ÷ == x = 0.3462
(Q 1+Q2)/2 (P 1+ P2)/2 3 13000

5. The demand and supply schedule for product X is given below

Price per unit ($) Quantity demanded Quantity supplied

10 500 1100
9 550 1000
8 600 900
7 650 800
6 700 700
5 750 600
4 800 500
3 850 400
2 900 300
1 950 200

(a) Draw the demand and supply curves and label them D 0 and S0
 12
S0
10

6 E Quantity demanded
Quantity supplied
4

2
D0
0
0 200 400 600 800 1000 1200
(b) Find the equilibrium point and mark it E
(c) Mark the equilibrium price and quantity in your diagram
Equilibrium Price = $6 and Equilibrium Quantity = 700

Assume the gov’t imposes a sales tax of $3.00 per unit supplied:

(d) Draw the new supply curve after tax and label it S1
By the shape of the demand and supply curves, we can conclude that they are inelastic.
You can confirm this by computing the elasticity measures.
11
10 S1
9 S0
8
7
6 Quantity demanded
5 Quantity supplied (S0)
Quantity supplied (S1)
4
3
2
1
0
0 200 400 600 800 1000 1200
(e) Find the new equilibrium (label it E1) and indicate the equilibrium price and quantity
New equilibrium Price =$ 8.00 and new equilibrium Quantity = 600
(f) Mark the amount of tax burden on consumers in your graph
Consumers tax burden = (8 – 6 ) x 600 = 1,200
(g) Mark the amount of tax burden on suppliers in your graph
Suppliers tax burden = (6 -5 ) x 600 = 600