Assessment #2 Elasticity concepts

ALWAYS SHOW YOUR STEP BY STEP SOLUTIONS.

Upload your answer sheets (bond paper) in the dropbox provided. Deadline for submission is Oct 7.

A. Guitar Sonic sells acoustic guitars. Last month, they sold about 500 sets at a price of P12,000 per
set. The new sales manager believes that the company needs to generate higher revenue.
Hence, he raised its price to P17,500 per set. At present, the store is now selling only 200 sets at
the new price. What is the price elasticity of demand?

P Qd
P12,000 500
17,500 200
1. Solve for the % change in quantity demanded and % the change in price.
2. Solve for the Price elasticity of demand (Ep).
3. What type of demand are we faced with (Guitar Sonic guitars)?
4. Do you think it would be best to lower the price in order to raise the total revenue?

B. Solve for the Price elasticity of demand (Ep) between these two points.
Suppose a demand curve has the following points:

P QD
P10 50
15 40

C. Suppose movie attendance dropped by 10% as ticket prices rose by 5%. What is the price
elasticity of demand for movie tickets? What type of demand are we faced with here?

D. Suppose the price of a two-pound coffee beans has recently increased to P1,200 per pack.
Before the price increase, Marien used to buy one and a half pack of coffee per month, but
now she only buys a pack. However, her tea consumption has increased along with the price
increase in coffee. When the price of coffee was P1,000 per pack she consumes only ¾ of a
box of tea. Now that the price of coffee has risen, she consumes 2 boxes of tea.

P(coffee) Q(coffee) Q(tea)

P1,000 1.5 0.75
P1,200 1 2

E. A bakeshop noticed that as the price of a doughnut increases from P16 to P18, daily sales of
pastries also increased from 40 to 52 units. Compute for the cross price elasticity coefficient
and determine the relationship between doughnuts and pastries if there is any.

Quantity of Quantity of
P of doughnut doughnut sold pastries sold
 P16 50 40
P18 38 52

F. Ken’s monthly income increased from P30,000 to P40,000 per month. After his promotion, he
found himself buying 3 kilos of beef steak compared to the previous 1 kilo. On the other hand,
he now only purchases 0.5 kilo of fish fillet whereas he used to buy 2 kilos. What is Ken’s income
elasticity for beef? What is his income elasticity for fish fillet? What type of goods are beef and
fish fillets?

Income Q(beef) Q( fish fillet)

P3,000 1 2
P4,000 3 0.5

G. What will happen, in percentage terms, to the quantities of beef demanded given that
cross elasticity of beef and brocolli is = -3; income elasticity (Ei) = 2.
1. if average household income increases by 20 percent?

2. average price of broccoli increases 25 percent?