Name______________________________________

Principles of Microeconomics
Instructor: Sandhya Patlolla
Assignment 3
1. Suppose you are given the following data on demand for a product.

    
a) Calculate the value of price elasticity of demand at the price equal to $8?

b) Is the demand elastic or inelastic at the price equal to $8? ANSWER: ____________________

c) Interpret the value of price elasticity of demand calculated in part (a)?

d) Suppose of price of the good increases in the market, the revenue received by the producer will
________________________ (increase, decrease or no change)

2. When the price of candy bars increased from $.40 to $.50 the quantity demanded changed from 21,000
per day to 19,000 per day.
(a) Calculate the value of price elasticity of demand for candy bars?

(b) Is the demand elastic or inelastic? ANSWER: ____________________

(c) Interpret the value of price elasticity of demand calculated in part (a)?

3. Assume that the price of product X rises by 5 percent and the quantity supplied of X increases by 15
percent. The coefficient of price elasticity of supply for good X is: 
A. negative and therefore X is an inferior good.
B. positive and therefore X is a normal good.
C. less than 1 and therefore supply is inelastic.
D. more than 1 and therefore supply is elastic.
4.
a) In the above graph calculate the value of price elasticity of demand at the equilibrium?

(i) Is it elastic or inelastic? ANSWER: _______________________ ___

(ii) Interpret the value of price elasticity of demand calculated in part (a)?

(iii) Suppose prices of resources decreases. As a consequence:

What happens to the equilibrium price? _________________________

What happens to the equilibrium quantity? ______________________

What happens to the total revenue of the producers based on the elasticity?

b) In the above graph calculate the value of price elasticity of supply at the equilibrium?

(i) Is it elastic or inelastic? ANSWER: _______________________ ___

(ii) Interpret the value of price elasticity of supply calculated in part (b)?
5. Total revenue falls as the price of a good increases if price elasticity of demand is: 
A. Elastic B. Inelastic
C. Unitary elastic D. Perfectly elastic

6. Suppose the income of an individual has decreased from $500 to $300 a week. His consumption of
coffee has decreased from 6 cups to 4 cups a week.

(a) Calculate income elasticity of demand. ________________

(b) Based on income elasticity of demand classify the type of good coffee is.
_______________________

(c) Interpret the value of income elasticity of demand.

7. Suppose 15% increase in the price of good X led to 25% decrease in good Y sales.

(a) Calculate cross-price elasticity of demand. ________________

(b) Based on cross-price elasticity of demand, classify the relationship between good X and good Y.
_______________________

(c) Interpret the value of cross-price elasticity of demand.