Practice Problems, Chapter 5

ECONOMICS 2306 PRACTICE PROBLEMS, CHAPTER 5

Name ______Class day & time ______PRICE ELASTICITY OF DEMAND

ED#1. Peggy Sue sells whatchacallits. She recently lowered the price of her whatchacallits from $30 each to $25 each, and as a result the quantity demanded rose from 4,000 per month to 5,000 per month. What is the price elasticity of demand for Peggy Sue’s whatchacallits? (Round your answer to two decimal places.)

ED#2. The price of Bubba Gump shrimp rose from $8.00 per pound to $9.25 per pound, and customers responded by decreasing their quantity demanded from 20,000 pounds per month to 18,000 pounds per month. What is the price elasticity of demand for Bubba Gump shrimp? (Round your answer to two decimal places.)

ED#3. The price elasticity of demand for Powerpuff Girls keychains is –2.8. What does this mean? (Your answer should begin something like this: “For every 1% increase in the price of the keychains, . . .”)

ED#4. The price elasticity of demand for “Shrek’s Scratch and Stink Storybook” (yes, this is a real product!) is –0.35. What will happen to the quantity demanded of these books if the price goes down by 10%?

ED#5. See question #1 above. Based on your calculation of the price elasticity of demand for Peggy Sue’s whatchacallits, and assuming this elasticity continues, what can be expected to happen to the quantity demanded of whatchacallits if sometime in the future Peggy Sue raises the price by 5%? ED#6. Your friend knows you are an economics student and asks your advice. She is concerned about how her customers will react if she raises the price of her product by $10 per unit. She believes, based on past experience, that the quantity demanded of her product will fall by 20 units per week. Based on this information, what can you tell your friend about the price elasticity of demand for her product? Justify your answer.

PRICE ELASTICITY OF SUPPLY

ES#1. Billy Joe sells this-n-thats. The price of this-n-thats recently rose from $11 to $13 each. Billy Joe responds to this price increase by increasing his quantity supplied from 250 per week to 350 per week. What is the price elasticity of supply for Billy Joe’s this-n-thats? (Round your answer to two decimal places.)

ES#2. The price elasticity of supply for Prada purses is 0.7. What does this mean? (Your answer should begin something like this: “For every 1% increase in the price of the purses, . . .”)

ES#3. The price elasticity of supply for Pokemon lunchboxes is 1.6. What will happen to the quantity supplied of these lunchboxes if the price goes down by 10%?

ES#4. See question #1 above. Based on your calculation of the price elasticity of supply for Billy Joe’s this-n-thats, and assuming this elasticity continues, what can be expected to happen to his quantity supplied of this-n-thats if sometime in the future the price goes down by 15%? INCOME ELASTICITY OF DEMAND

IED#1.Suppose the income elasticity of demand for Beerok tennis shoes is –1.4. What does this mean? What will happen to the demand for Beeroks if consumer income goes up by 5%? What two facts can you discern about Beeroks and the demand for Beeroks from the information provided? (For example, is this product a normal or an inferior good? Is the demand for the good elastic, inelastic, or something else?)

IED#2.Suppose the income elasticity of demand for Itsibitsi automobiles is 0.8. What does this mean? What will happen to the demand for Itsibitsis if consumer income goes up by 5%? What two facts can you discern about Itsibitsis and the demand for Itsibitsis from the information provided?

CROSS PRICE ELASTICITY OF DEMAND

CPED#1. The price of peanut butter goes down from $2.50 a jar to $2.25 a jar. For the many people who like peanut butter and pickle sandwiches, the peanut butter price decrease causes the demand for pickles to rise from 250 jars per month to 290 jars per month. What is the cross price elasticity of demand for these two goods? What does this tell you about the relationship between these two goods?

CPED#2. The price of Kaffeine King soda goes up from $0.50 to $0.60 per can. This leads to an increase in the demand for Popular Pop, another soda brand, from 400 cans per day to 450 cans per day. What is the cross price elasticity of demand for these goods? What does this tell you about the relationship between these two goods?