KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY

(INSTITUTE OF DISTANCE LEARNING)

CEMBA 2020/2021 (1ST SEMESTER)

CMBA559: MANAGERIAL ECONOMICS

ASSIGNMENT

FRANCIS OSEI POKU

(PG4878620)

SUBMITTED TO: Dr. BUABENG

DATE: SATURDAY, 6/03/2021
 Assignment 3: Elasticity of demand

• What is elasticity of demand? What are the various types of elasticity of demand?
Answer:
Elasticity of demand refers to the degree in the change in demand when there is a change in
another economic factor, such as price or income.
• Identify the determinants of price elasticity of demand.
Answer:
The determinants of price elasticity of demand includes
(i) Availability or number of closeness of substitute goods.
(ii) If the good is a luxury or a necessity,
(iii) The proportion of income spent on the good, and
(iv) How much time has elapsed since the time the price changed?

• In 2020, Amazon reduced the annual subscription fee for its Prime membership service,
which provides free two-day shipping on many goods and other benefits, from $119 to $99.
Zoppa Consulting, an investment firm, estimated that before the price reduction, Prime had
62 million subscribers globally. The Zoppa speculated that the number of members would
increase to about 77 million. If so, what is the arc elasticity of demand for a Prime
membership of Amazon?
Answer:
Arc Elasticity of demand
Given that: P1 = $119, P2 = $99, P3 = 62, P4 = 77
Arc Elasticity of demand = ΔQ/Q̅
ΔP/P̅

ΔQ = Q2 – Q1

ΔP = P2 – P1

Q̅ = Q1 – Q2
2

P̅ = P1 – P2
2

ΔQ = 77 – 62 = 15

ΔP = 99-119 = -20

Q̅ = 77 + 62
 2
= 69.5

P̅ = 99 + 119
2
= 109

Arc elasticity = 15/69.5

-20/109

= 0.216
-0.183

= -1.180

4. Calculate the price and cross-price elasticities of demand for coconut oil. The coconut oil
demand function (Buschena and Perloff, 1991) is Q = 1,200 - 9.5P + 16.2Pp + 0.2Y, where Q is
the quantity of coconut oil demanded in thousands of metric tons per year, P is the price of
coconut oil in cents per pound, Pp is the price of palm oil in cents per pound, and Y is the income
of consumers. Assume that P is initially 45¢ per pound, Pp is 31¢ per pound, and Q is 1,275
thousand metric tons per year.
Answer:

Calculate the Price Elasticity

Ep = ΔQ X P
ΔP Q

Considering the function; Q= 1,200 -905p + 16.2Pp + 0.2y

Given ΔQ = -9.5, P = 45 and Q = 1,275

ΔP
Ep = -9.5 X (45/1,275)

Ep = -9.5 X 0.0353

Ep = -0.34

Calculate Cross Price Elasticity of demand

E = ΔQ X Pp
ΔPp Q

Pp = 31, Q = 1,275

E = 16.2 X Pp
Q