ECON 101- Elasticity

Solve the following questions:

1. If a 10 percent increase in the price of Kellogg’s cereal causes a 25 percent reduction in the number
of boxes of cereal demanded, what is the price elasticity of demand for Kellogg’s cereal? Is demand
for Kellogg’s cereal elastic, inelastic or unit elastic?
Ped= -25/10= -2.5, demand is elastic
2. State whether the following are: elastic, inelastic, unit elastic, perfectly inelastic or perfectly elastic.
Also state what the price elasticity of demand is for each case.

a- perfectly inelastic, Ped= 0

b- Perfectly elastic, Ped= infinity
c- Unit elastic, PEd= 1
d- elastic, Ped>1
e- inelastic, Ped<1
3. Rain spoils the strawberry crop, the price rises from $4 to $6 a box, and the quantity demanded
decreases from 1,000 to 600 boxes a week.
a. Calculate the price elasticity of demand over this price range. Ped= -40/50=-0.8
b. Describe the demand for strawberries. inelastic

4. In 2003, when music downloading first took off, Universal Music slashed the average price of a CD
from $21 to $15. The company expected the price cut to boost the quantity of CDs sold by 30
percent, other things remaining the same.
a. What was Universal Music’s estimate of the price elasticity of demand for CDs?
Ped=30/-28.6= -1.05, elastic
b. What effect do you think this will have on total revenue? price decrease, elastic, TR will increase
5. Apple Inc. wants to increase its total revenue. One strategy is to offer an 8% discount on every product
it sells. Amazon.com knows that its customers can be divided into 2 distinct groups according to their
likely responses to the discount. The table below shows how the groups respond to the discount.

Group A Group B
(sales per week) (sales per week)
Volume of Sales before the 8% discount 1.65 million 1.60 million
Volume of Sales after the 8% discount 1.75 million 1.80 million

a. Using the midpoint method, calculate the price Elasticities of demand for Group A and Group B.
Ped Group A: 5.9/8= 0.7, inelastic; Ped Group B: 11.8/8= 1.5 elastic
b. Explain how the discount will affect Total Revenue from each group.
Group A is inelastic, therefore the drop in prices will decrease TR. Group B’s TR will increase
due to a drop in the prices as demand is elastic.
c. If Apple Inc. wants to increase its total revenue, should discounts be offered to Group A or Group
B, to neither group or to both groups? Group B only

6. When Judy’s income increased from $130 to $170 a week, she increased her demand for concert tickets
by 15 percent and decreased her demand for bus rides by 10 percent. Calculate Judy’s income elasticity of
demand for (a) concert tickets and (b) bus rides.
a- Yed for concert tickets= 15/30.8= 0.49, normal good because elasticity is positive
b- Yed for bus rides= -10/30.8= -0.32, inferior good because elasticity is negative

7. If a 5 percent rise in the price of sushi decreases the quantity of soy sauce demanded by 2 percent and
decreases the quantity of sushi demanded by 1 percent, calculate the
a. Price elasticity of demand for sushi. Ped= 1/5= 0.2, inelastic
b. Cross elasticity of demand for soy sauce with respect to the price of sushi. Xed= -2/5= -0.4,
complements