Practice Problems for Elasticity

GROUP 6
Leader: Arcilla,Bernadeth P.
Members:
Alquero,Florence Mae
America,Lanz Andre
Baluyut,Angelene
Balatbat,Rae Kristine
Calalang,Meriam
Sunga,Aica

Problem 1 : Yesterday, the price of a fasemask was P35 a box, and Blessie was willing to buy
10 boxes. Today, the price has gone up to P50 a box, and Julie is now willing to buy 8 boxes. Is
Julie's demand for facemask elastic or inelastic? What is Julie's elasticity of demand?

In finding Julie’s elasticity of demand, we must need first to divide the precent change in quantity
by the percent change in price.

FORMULA: ( MID POINT)

Q2-Q1
Ed =(Q2+Q1) / 2 =% Q
P2-P1 % P
(P2+P1) /2

GIVEN:
P2- P50 a box
P1- P35 a box
Q1- 10 boxes
Q2- 8 boxes

Ed -?

SOLUTION:
% Change in Quantity =(8-10)/(8 + 10) /2 = -0.22= -22%
% Change in Price = (50-35)/(50+ 35) /2 = 0.35 = 35 %
Elasticity = (-22%)/(35%) = -0.63 = 0.62
 So therefore her elasticity of demand is the absolute value of -0.62 or 0.62 .Julie’s elasticity of
demand is INELASTIC, since 0.62 is less than 1.

Problem2 : If Neil's elasticity of demand for hot dogs is constantly 0.9, and he buys 4 hot dogs when the
price is $1.50 per hot dog, how many will he buy when the price is $1.00 per hot dog?

In this problem, we will use the elasticity to find quantity instead of the other way so we will compute
for the missing quantity that is correspond for the price of $ 1.00 per hot dog. We will compute on how
many hotdog that Neil will buy if the price will be $1.00.we will still use the same formula.

FORMULA: (POINT FORMULA )

Q2-Q1
Ed = Q1 =% Q
P2-P1 % P
P1
But in computing the quantity we will change the Q2 to X in which it means the quantity is missing
that we will find it .
GIVEN:
Q1- 4 hotdogs
P2- $1.00
P1- $ 1.50
Change in Quantity- 0.9(constant)
Q2-? (unknown )
SOLUTION:
Elasticity=0.9= (X-4)/4)/(Change in Price )
% Change in Price =(1.00-1.50)/(1.50)=-33%
0.9= (X -4)/4)/(-33%)
(((X-4)/4) =0.3
0.3=(X-4)/4
X=5.2 or Q2=5.2

So therefore,Since Neil probably can’t buy a fractions of hotdogs or in decimal.We conclude

that Neil will buy 5 hotdogs when the price drop like in this problem in $ 1.00 he will buy 5
hotdogs.

While if we will use the Arc or Mid-point formula we will gonna get 5.76 let us look at the
solution below.
GIVEN:
Q1- 4 hotdogs
P2- $1.00
P1- $ 1.50
Change in Quantity- 0.9(constant)
Q2-? (unknown )
FORMULA: ( ARC OR MID POINT FORMULA )
Q2-Q1
Ed =(Q2+Q1) / 2 = % Q
P2-P1 % P
(P2+P1) /2

SOLUTION:

So, to conclude, the elasticity of demand mostly appears a negative; its absolute value was taken.
However, with the elasticity is given which is 0.9 that is constant let us assume that it is negative.
And let us assume and use x as our Q2.

Therefore,Since Neil probably can’t buy a fractions of hotdogs or in decimal.We conclude that
Neil will buy 6 hotdogs when the price drop like in this problem in $ 1.00 he will buy 5
6 hotdogs.
CHECKING:

And, to simplify the answer we got in Point Formula is 5.2 while in the Arc or Mid-Point Formula
is 5.76 so therefore the difference is 0.56.

Problem 3:: Which of the following goods are likely to have elastic demand, and which are likely
to have inelastic demand? Explain and justify your answer.
ELASTIC INELASTIC
Pepsi Home Heating Oil

Chocolate Water

Oriental Drugs Heart Medication

Home heating oil- Oil price is quite unique from other products because it cannot be easily
substitute. Home heating oil prices can increase at times, especially during cold weather and
winter storms. A significant cold weather system can have an impact on supply, demand, and
prices. People often consume more fuel when winter storms disrupt delivery systems.
Therefore, the demand will be less elastic because many consumers will buy oil regardless
of how much it costs. For this situation, the oil price is called as a price inelastic of demand.

Pepsi-- Pepsi is an elastic good. If there is a slight increase in the price of the product, there
is a tremendous change in demand of the product because of the number of other substitutes
available in the market. Pepsi, a normal good is a good the demand for which increases as
income increases. The income effect is positive, and the substitution effect is positive.
Therefore, as price increases, demand falls and vice versa. Normal goods have a positive
income elasticity of demand.

Chocolate- For example, let’s assume that the price of a chocolate bar increased by one-third,
from $1.50 to $2.00 1,000 people bought the candy bar when it was $1.50, but now only 250
people buy it. A 33% increase in price resulted in a 75% drop in quantity demanded,
resulting in an elasticity of 2.27. Generally, any elasticity measurement greater than the
absolute value of one means that the product is elastic, and thus price greatly impacts
demand. Also, because Chocolate had a lot of brands and substitutes that can costumer
choice that is why it is elastic due of the large impact and react in the market.

Water- Since water is a necessity so quantity demanded for it does not respond to a change
in its price and to be more precise, its demand is inelastic. Even if water increases in price,
we will still purchase it and buy because water is one of the necessities we need to survive
as a human. For example, the mineral water now has a price of 35 pesos each jar and we can
purchase 5 gallons then after how many months had pass it increase by 5 pesos so it will be
40 pesos each gallon as a consumer even it will increase in price, we will still buy it because
there is no substitute for that. So, in 40 pesos each gallon we can purchase still 5 gallons, so
we are inelastic we are not totally affected in change, or it is happening when a change in
price causes a smaller percentage change in demand.

Heart medication- Necessities and medical treatments tend to be relatively inelastic because
they are needed for survival, whereas luxury goods, such as cruises and sports cars, tend to
be relatively elastic. And also, medication is inelastic because even the price of heart
medication will rise we will still buy specially if that is what our Doctor recommended for
our illness. Even if its price will high, we will still stick on that and we will not find a
substitutes specially that every medicine had different side effect and effectiveness to every
human.
Oriental drugs-- For example the quantity price of the oriental drugs increase the drug
demanded will decrease, On the other hand, if the demand for the drug is elastic an
increase in the price of the drug will cause a large decrease in the use of that drugs.

Problem 4 : Katherine advertises to sell cookies for $4 a dozen. She sells 50 dozen and decides
that she can charge more. She raises the price to $6 a dozen and sells 40 dozen. What is the
elasticity of demand? Assuming that the elasticity of demand is constant, how many would she
sell if the price were $10 a box?

In finding the elasticity of demand, we need to divide the percent change in quantity by the
percentage of Price.

FORMULA: (POINT FORMULA)

Q2-Q1
Ed = Q1 =% Q
P2-P1 % P
P1
GIVEN:
Q2- 40 dozen
Q1-50 dozen
P2-$ 6.00
P1-$ 4.00

SOLUTION:
40-50
Ed = 50 = -0.2 = 20% =0.4
6.00-4.00 0.5 50%
4.00
The elasticity of demand is 0.4

While when finding the quantity when the price is $10 a box it will be;
Elasticity=0.4= (% Change in Quantity)/(% Change in Price)
% Change in price=(10.00- 4.00)/(4.00)=1.5=150 %

Take note before taking he absolute value, elasticity is 0.4 so in calculating the change in quantity
or you will end up with a big increase in consumption instead of decrease.
-0.4= (% Change in Quantity)/(150%)
(% Change in Quantity) = -60% =-0.6
-0.6=(X-50)/50
X=20
So therefore, the new demand at $10 a dozen will be 20 dozen cookies.
 But let us also look for the answer using the Arc or Mid-Point Formula.

a. Katherine’s cookies elasticity of demand will be 0.55. Using the Arc or Mid- Point Formula
let us compute for it.

GIVEN:
Q2- 40 dozen
Q1-50 dozen
P2-$ 6.00
P1-$ 4.00

Ed -?

FORMULA: ( ARC OR MID- POINT FORMULA)

Q2-Q1
Ed =(Q2+Q1) / 2 = % Q
P2-P1 % P
(P2+P1) /2

SOLUTION:

b. So, with the constant elasticity of demand of Katherine which is 0.55.Katherine will have
an estimate of 31 dozens to sell in price of $10 a box.
GIVEN:
Q2- 40 dozen
Q1-50 dozen
P2-$ 6.00
P1-$ 4.00

Ed -0.55

FORMULA: ( ARC OR MID- POINT FORMULA)

Q2-Q1
Ed =(Q2+Q1) / 2 = % Q
P2-P1 % P
(P2+P1) /2

SOLUTION:
CHEKING:

Therefore, the difference we got between the two solution that we do and the formula we use in
which in Point Formula we got 20 while in Arc or Mid-Point Formula is 30.97 or 31 so the
difference, we got is 11. In which it has a big impact if we will look at it.

Problem 5: Anna is making cupcakes as a sideline to somehow have extra money. She charges
P10 per cupcake. You, the economist, have calculated the elasticity of demand for cupcakes in
their barangay is 2.5. If she wants to increase her total revenue, what advice will you give her and
why? Be able to explain your answer. You can show the answer graphically or numerically?

Anna's price should be decreased. Her price elasticity of demand for cupcakes is elastic or
greater than one, therefore lowering her pricing will result in her selling more cupcakes since
more purchasers are cheaper and more convenient. Her lower pricing will be offset by the higher
quantity sold, resulting in increased total revenue. To put it another way, she's selling at a
cheaper price but making up for it with quantity.
Problem 6: Assume that the price of Jolly spaghetti decreases by 5%, and as a result, the quantity
demanded of McSpaghetti decreases by 8%. What is the cross-price elasticity for your product?
What type of goods are they?
They are example or belong to the substitute goods because we all know that Jollibee and
Mcdo are competitors what Jollibee had Mcdo have also. Like in Spaghetti Jolly spaghetti and
McSpaghetti are just similar but different in taste and price. So, if the price of Jolly Spaghetti
decreased by 5% the customers of course will grab it or will go for it because it is lower the price.
So, the demand for Mc Spaghetti will decrease also because people will go for Jollibee because of
the lower price. So therefore, Goods A and B are substitutes because when the price of good B
fell, the demand for good A also fell. This shows that people shifted from good A to B as it was
available at a lower price. This happens mostly when the goods are substitutes for one another.

Cross Price Elasticity is identified as a concept that is used to explain the relationship between
the price and demand of two goods. This means that how the demand for one goods reacts to the
change in the price for another good. It also measures the responsiveness of demand for good A
following change in the price of good B in which it is the related good.

FORMULA:

Cross Price Elasticity = % Change in quantity demand of a product A

% Change in price of a product B

GIVEN :
8%-(% Change in quantity demand)
5%-(% Change in price)
Cross Price Elasticity-?
SOLUTION:
Cross Price Elasticity = % Change in quantity demand of a product A
% Change in price of a product B
Cross Price Elasticity = -8
-5
=1.6

Problem 7
: The National bookstore or NBS ..com,.ph launched its online bookseller channel and they want
to increase its total revenue, after their 1 million opening day sale One strategy is to offer a 10%
discount on every book it sells. NBS .com knows that its customers can be divided into two distinct
groups according to their likely responses to the discount. The accompanying table shows how the
two groups respond to the discount.

Group A (sales per week ) Group B(sales per week)

Volume of sales before the 1.55 million 1.50 million

10% discount

Volume of sales after the 10% 1.65 million 1.70 million

discount

a. Using the midpoint method, calculate the price elasticities of demand for group A and groupB
b. Explain how the discount will affect total revenue from each group
c. Suppose NBS .com .com knows which group each customer belongs to when he logs on and
can choose whether or not to offer the 10% discount. If NBS. com wants to increase its total
revenue, should discounts be offered to group A or to group B, to neither group, or to both groups?

ANSWERS:

a.
b. The 10% discount strategy of the National Bookstore after their 1 million opening day sale can
help them increase their total revenue from each group.

c. After computing the price elasticity of demand of both Group A and Group B and if I were to
choose which group I would offer the 10% discount, I would give it to Group B because their
demand curve is elastic and their response to the 10% discount is much higher than the response
of Group A who’s demand curve is inelastic.

Problem 8 and 9
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
for example, why is the cross-price elasticity of McDonald’s burgers and Burger King burgers less
than the cross-price elasticity of butter and margarine?
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 gasoline affects
the quantity of SUVs demanded.

Good Cross price elasticities demand

Air-conditioning units and kilowatts of -0.34

electricity -

Coke and pepsi +0.63

 high-fuel-consuming sport-utility vehicles -0.28
SUV and gasoline

Mcdonald’s burger and burger king +0.82

Butter and margarine +1.54

ANSWERS:
a. The negative sign of cross-price elasticity of demand implies that the two goods are gross
complements wherein it is a product or service that adds value to another. Thus, in the table, air-
conditioning units and kilowatts of electricity, and high-fuel-consuming sport-utility vehicles and
gasoline are gross complements and has a negative sign of cross-price elasticity demand. On the
other hand, a positive cross-price elasticity of demand implies that the two goods are gross
substitutes wherein the good is a product or service that is used in place of another. So, Coke and
Pepsi, Mcdonald’s burger and burger king, butter and margarine are gross substitutes and has a
positive sign of cross-price elasticity demand.

b. In the positive sign, the larger the cross-price elasticity of demand, the closer that the two goods
are to being gross substitutes. As the cross-price elasticity of butter and margarine is larger than
McDonald's burger and Burger King cross-price elasticity, then, butter and margarine are closer
gross substitutes than McDonald's burger and Burger King. Likewise, in the negative sign, the
greater the cross-price elasticity of demand is, the stronger that the two goods are gross
complements.

c. A cross-price elasticity of 0.63 in the Coke and Pepsi implies that a 1% increase in the price of
Pepsi affects the quantity of coke demanded, wherein it would increase the quantity of Coke
demanded by 0.63%. As we know, when a price of one substitute good goes up, then the demand
for the other substitute also goes up, and Pepsi and Coke are gross substitute. Then, a 5% increase
in the price of Pepsi would affect the quantity of Coke demanded to increase by five times, wherein
5 × 0.63% = 3.15%. Thus, there would be an increase of 3.15% in the quantity of coke demanded
when the price of Pepsi would increase to 5%.

d. A cross-price elasticity of −0.28 implies that a 1% fall in the price of gasoline affects the quantity
of SUVs demanded, wherein it would increase the quantity of SUVs demanded by 0.28%. As we
know, in the complementary goods, when the price goes down on one, the demand goes up for the
other good, and gasoline and SUV are gross complements. Therefore, a 10% fall in the price of
gasoline would affect the quantity of SUVs demanded to increase by ten times, wherein 10 ×
0.28% = 2.8%. Thus, there would be an increase of 2.8% in the quantity of SUVs demanded when
the price of gasoline would fall by 10%.
Problem 10
Question: In the Philippines, the average coffee grower has increased the amount of acreage under
cultivation over the past few years. The result has been that the average coffee plantation produces
significantly more coffee than it did 10 to 20 years ago. Unfortunately for the growers, however,
this has also been a period in which their total revenues have plunged. In terms of elasticity, what
must be true for these events to have occurred? Illustrate these events with a diagram, indicating
the quantity effect and the price effect that gave rise to these events.
ANSWER:

The scenario above shows that the number of acreages for the cultivation of coffee have
increased which implies that the supply for the coffee will also increase. This happened because
there is a rightward shift to the curve of supply to the coffee. As a result, the price of the coffee in
The Philippines will decrease and the quantity demanded for the same have also increased. This
demonstrates how the law of demand intervenes. However, the revenue for the sales of the coffee
have dropped, which only conveys that the price effect has surpassed over the quantity demanded
for the product. For this reason, the price elasticity of demand will be inelastic which means that
the consumers are not that responsive towards to the change in price. More so, the diagram below
portrays that the price effect which resulted in a decrease in the total revenue is equal to the size
of area A, whereas the quantity effect which increases the total revenue is equal to the size of b.
This portrays, however, that the price effect overlaps the quantity effect causing a fall to the total
revenue.