PRACTICE QUESTIONS ON ELASTICITY

a) would you compare the price elasticity of demand of i) Pharmaceutical drugs and ii)
game tablet computers? Suppose that improvement in production technology doubles the
supply of both products, clearly illustrate what happens to the equilibrium price and
quantity in each market .
b) A company sells q  ribbon winders per year at $   p  per ribbon winder. The demand
function for ribbon winders is given by p=300−0.02q. Find the elasticity of demand when
the price is $70 apiece. Will an increase in price lead to an increase in revenue?
c) A company finds the demand q , in thousands, for their kites to be q=400− p2  at a price
of  p dollars. Using the concept of elasticity, advice the company of its strategy in price
changes for revenue purposes when the price is $5 and when the price is $15.

d) If the demand for apples increased by 3% when the price of bananas increased by 6% -
what is the implied cross price elasticity of demand?Are these goods complements or
substitutes?  Explain.  

e) If income increased by 30% and demand for bread increased by 5%, what is the implied
income elasticity of demand? Is bread a normal or inferior good?  

f) The weekly demand function for butter in the province of Quebec is Qd = 20000 - 500Px
+ 25M + 250Py, where Qd is quantity in kilograms purchased per week, P is price per kg
in dollars, M is the average annual income of a Quebec consumer in thousands of dollar,
and Py is the price of a kg of margarine. Assume that M = 20, Py = $2, and the
weekly equilibrium price of one kilogram of butter is $14.

i) Calculate the cross-price elasticity of the demand for butter (i.e. in response to

changes in the price of margarine) at the equilibrium. What does this number
mean? Is the sign important?
ii) Calculate the income elasticity of demand for butter at the equilibrium.
iii) Calculate the price elasticity of demand for butter at the equilibrium. What can we
say about the demand for butter at this price-point? What significance does this
fact hold for suppliers of butter?