CHAPTER 3

ELASTICITY AND ITS APPLICATION

QUESTION 1

Complete the table:

Price elasticity of Cross elasticity of Income elasticity Price elasticity of

demand demand of demand supply

Definition

Ed = Ec = Ei = Es =

Formula

Degree: Relationship: Types of good: Degree:

Degree/
(Ed > 1) = Ec (+) = Ei (+ > 1) = (Es > 1) =
responses
(Ed < 1) = Ec (-) = Ei (+ < 1) = (Es < 1) =
Relationship/
Types of Good (Ed = 1) = Ec (0) = Ei (-) = (Es = 1) =

(Ed = 0) = Ei (0) = (Es = 0) =

QUESTION 2
Based on the table below, answer the following question:

Price of Good A Quantity Demanded Quantity Demanded Income

(RM) for Good A (Unit) for Good B (Unit) (RM)
8.50 450 300 1000
7.00 475 370 1100
6.50 502 480 1200
6.00 548 620 1300

a) If income is constant, calculate prices elasticity of demand for good A if its price rises from
RM6.50 to RM8.50.

b) Is the demand of good A elastic or inelastic?

c) Calculate the income elasticity of demand for good B if the consumer’s income decreases
from RM1,300 to RM1,100.

d) What type of good is good B? Why?

e) List three (3) factor that influence elasticity of demand of good A.

i. _________________
ii. _________________
iii. _________________
QUESTION 3

Given the following information:

Quantity Demanded (units) Consumers’

Price of Good
Income per
A (RM per unit) Good A Good B Good C
month (RM)
10 100 1 000 10 800
20 50 500 20 700
30 25 250 40 600
40 20 200 80 500
50 18 180 180 400

Suppose the price of good A increases from RM20 per unit to RM50 per unit, calculate:

a) Price elasticity of demand for Good A. State whether demand is elastic or inelastic.

b) Cross elasticity of demand for Good B with respect to Good A and determine the
relationship between these two goods.

c) Cross elasticity of demand for Good C with respect to Good A and determine the
relationship between these two goods.

d) Calculate Income elasticity of demand for good A and C when the consumers’ income
increases from RM500 to RM700.

QUESTION 4
The following table shows the amount of Hand Z demanded by the citizens of a particular country
at different prices and consumer income levels.

Price of good Quantity Quantity Quantity Income of

H demanded Supplied Demanded Consumers
(RM per unit) for good H (unit) for good H (unit) for Good Z (unit) (RM)
60,000 100,000 20,000 20,000 4,500
65,000 90,000 30,000 30,000 3,500
70,000 70,000 40,000 50,000 2,500
75,000 40,000 50,000 70,000 1,500
80,000 10,000 60,000 85,000 500

a) Calculate the price elasticity of demand for good H when the price of good H decreases
from RM75,000 to RM60,000. Is the demand elastic or inelastic?

b) Calculate the cross elasticity of demand for good Z when the price of good H increases
from RM70,000 to RM80,000. What is the relationship between the 2 goods?

c) If the consumer’s income level decreases from RM4,500 to RM500, determine the
income elasticity of demand and type of good for
(i) Good H

(ii) Good Z

d) Calculate the price elasticity of supply for good H when the price of good H increases
from RM65,000 to RM80,000. Is the supply elastic or inelastic?

e) State two (2) factors that influence the price elasticity of supply for a good.
i. ___________________
ii. _________________________
QUESTION 5

a) Calculate the income elasticity of demand for houses when income increases from RM120,000 to
RM150,000 per year, quantity demanded for houses increases from 1,300 units to 2,200 units.
State what type of goods the demand for the houses is?

b) Given the coefficient of income elasticity of demand for House is positive but less than one, then
house must be a/an ________________ good.

c) When price of Terrace House increases by 20%, the quantity demanded for Apartment increases
by 35%. Calculate the cross elasticity for Apartment.

d) Use the information in the table to identify the type of cross relationship between products P and
product Q in each of the following cases.

Cases Percentage change in Percentage change in Cross elasticity

price of P quantity demanded of Q type

I 15 10

II 10 -5

i) Give example of product P and product Q for each case.

e) Suppose the coefficient elasticity of demand for the shop lots and kiosks in Bandar Seri Iskandar
are estimated to be 2.3 and 0.8 respectively. State whether the demand for the shop lots and
kiosks are elastic or inelastic.
QUESTION 6

Define price elasticity of supply. Explain four (4) determinants of price elasticity of supply.

Definition:
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Determinants:

i. ________________________________________
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ii. ________________________________________
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iii. ________________________________________
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iv. ________________________________________
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__________________________________________________________________________
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QUESTION 7

Define price elasticity of demand. Explain four (4) determinants of price elasticity of demand.

Definition:
________________________________________________________________________________
____________________________________________________________________________

Determinants:

i. ________________________________________
________________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
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ii. ________________________________________
________________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
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iii. ________________________________________
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iv. ________________________________________
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