Elascity problem set
a)Netflix is a normal good.
In 2015, Netflix increased its monthly price for new subscribers by $1. In response, one individual tweeted the following: "So tired of being a college student. Can't wait until I have a stable job and won't have to give up Netflix cause they raised their price by $1". What does this statement indicate about the income elasticity of demand for Netflix? a)Netflix is a normal good. b)Netflix is an inferior good. c)Netflix is a perfectly inelastic good. d)Netflix violates the law of demand.
a) sub/positive b)comp/negative If the price of a good falls and this causes the quantity demanded of another good to fall, then the goods are substitutes. The cross-price elasticity is positive, because the price and quantity demanded both move in the same direction. If the price of a good falls and this causes the quantity demanded of another good to rise, then the goods are complements. The cross-price elasticity is negative, because the price and quantity demanded move in opposite directions.
a) If the price of a good falls and this causes the quantity demanded of another good to fall, then the items are considered to be (substitutes/complements) and the cross-price elasticity is (negative/positive) b)If the price of a good falls and this causes the quantity demanded of another good to increase, then the items are considered to be (substitutes/complements) and the cross-price elasticity is (positive/negative) . .
(d) Understanding the price elasticity of demand will help guide the decision about whether to increase or decrease the toll. If the price elasticity of demand is inelastic, or less than 1, an increase in the toll will increase the total revenue the toll generates. However, if price elasticity of demand is elastic, or greater than 1, a decrease in the toll will be the way to increase total revenue. While the other factors might be interesting or slightly helpful, they would not provide the complete picture. Knowing the number of vehicles using the tollway per day would be helpful, as it would help us calculate the price elasticity of demand, but we would still need more information. Income elasticity would tell us about the likelihood of the drivers using the toll road if incomes increased, but not necessarily how they would respond to a price change for the toll. The price elasticity of supply would give insight about how the supply (roads) would vary based on the price, but total revenue depends on demand.
An article in Forbes noted that the Intercounty Connector toll road that connects two counties in Maryland was not generating as much toll revenue as predicted. At that time, the toll rate was $8 for a passenger car making a round trip from end to end on the tollway during rush hour. What additional information would you need to know in order to determine if the toll should be increased or decreased? a)The price elasticity of supply b)The income elasticity of drivers using the tollway c) The number of vehicles using the tollway per day d)The price elasticity of demand
elastic/lower/price matching Consumers shopping at places such as Best Buy and Barnes and Noble have internet access through their smartphones. Smartphones allow consumers to quickly check competitor prices online at Amazon, Ebay, Walmart, and any number of other retailers. Internet access makes the cost of gathering price information lower. This results in consumers being more sensitive to price changes because it is easier to find cheaper substitutes. The access to quick and rich information means that the goods and services at brick and mortar stores are more price elastic. One leading strategy for companies to combat this change is to offer price matching. For example, if you go into Best Buy and find a laptop that is $200 cheaper on Amazon, you can show the Amazon page to the cashier. They will manually adjust the price to match Amazon. This ensures that Best Buy still retains the sale and does not just become a show room for Amazon.
Consumers now have easy access to internet shopping because of smartphones. Technology has caused demand to become more (elastic/inelastic) for goods you can purchase at stores like Barnes and Noble and Best Buy. This is because the cost of getting price information from other retailers is now (lower/higher) . To stay competitive, Best Buy uses a strategy called (price matching/price setting) where they offer to sell items at competitor prices.
less/lower If the European‑made alternatives were available in the U.S. market, the price elasticity of the EpiPen would become less inelastic, or more elastic, due to the increase in substitutes. Mylan would likely charge a lower price due to the competitive pressure of the substitutes.
Europe has eight different companies selling devices similar to the EpiPen. If these devices were available for use in the U.S. market, you would expect price elasticity of demand to become (more inelastic/ less inelastic) . This would also lead Mylan to charge a (higher/lower) price.
14% 1) Start by substituting in the known information from the question. Next, solve for percentage change in price. (% change in quantity% )/(change in price)=price elasticity of demand 21/%change in price=-1.5 2) To solve for percentage change in price, cross multiply the fractions, then rearrange 21=% change in price×1.5 %change in price=21/1.5=14%
In 2017, Hurricane Irma had a significant, negative impact on the orange harvest in the state of Florida. The U.S. Department of Agriculture predicted that the quantity of oranges produced would be 21% lower than the previous year. If the price elasticity of demand for oranges is -1.5, what impact would Hurricane Irma have on the price of oranges? change in price of oranges:
a) 0.122 b)inelastic 3) elastic/flatter 1) use midpoint formula The daily price elasticity of supply is 0.12 which is relatively inelastic because a 40% price increase only results in a 5% increase in quantity supplied. Subway's daily supply curve is relatively steep. Subway is likely better able to respond to price changes over the course of a year rather than over the course of a day. For example, they can add more capacity by building more stores, expanding operations at existing store, and hiring more workers. Therefore, at a longer time horizon, the price elasticity of supply is likely to be more elastic and their supply curve is likely to be flatter.
Suppose the accompanying table contains data on how many Veggie Delite sandwiches Subway is willing to sell each day at two different prices. Calculate the daily price elasticity of supply when the price increases from $5.00 to $7.50. Please round to the nearest hundredth. $5=200,000 sandwiches $7.50=210,000 sandwiches a) Daily price elasticity of supply for Veggie Delite sandwiches = b)The daily price elasticity of supply for Veggie Delite sandwiches is relatively (inelastic/elastic) Now consider how responsive Subway's supply of Veggie Delite sandwiches is to changes in price on an annual basis instead of a daily basis. c)Compared to the daily value, the annual price elasticity of supply for Veggie Delite sandwiches is likely to be more (elastic/inelastic and the annual supply curve is likely to be (steeper/flatter) than the daily supply curve.
a) 2.57 b) sub Cross-price elasticity of demand=Percent change in quantity demandedPercent change in price of another good=−36%−14%≈2.6 The cross-price elasticity of demand can be interpreted as the following: when gas prices decreased by approximately 14% in 2015, people bought approximately 36% fewer hybrid electric vehicles. Because the sign of the cross-price elasticity of demand is positive, gasoline and HEVs are substitutes. Thus, lower gas prices resulted in some consumers choosing to forgo the purchase of an HEV.
According to the U.S. Department of Energy, the average price of gasoline in the U.S. fell by 14% in 2015. The number of hybrid electric vehicles (HEV) sold in the U.S. fell by 36% in the same year. Calculate the cross-price elasticity of demand for HEVs and gasoline. a)Cross-price elasticity= b) Based on your answer in part a, gasoline and HEVs are (comp/sub)
(D) Almonds have a more inelastic supply in the short run because of the inflexibility in the supply. It is not easy to adjust the supply of almonds when it takes at least five years to increase the amount of production. Both crops many have an inelastic supply, as do most agricultural commodities. However, barley will be more elastic because the shorter growing season allows for more flexibility in its production. A steeper slope represents a more inelastic supply. In the graph, the supply curve with the steeper slope is the most likely supply curve for almonds. The supply curve with the relatively flatter slope is the most likely supply curve for barley. Flexibility is the underlying determinant of price elasticity of supply. The more flexible you are, the greater your price elasticity of supply will be. Each of the factors listed in part c helps determine price elasticity of supply. The five determinants of price elasticity of supply are the ability to store inventory, the availability of inputs, the availability of extra capacity, the ease of entry to or exit from the market, and the length of time to adjust supply.
Almonds are a crop that grows on trees. Farmers do not need to replant trees every year to produce a crop of almonds. It takes at least five years after planting for trees to bear fruit. Several factors such as weather, disease, and long term projections about price impact the supply of almonds available. Barley is a grass that must be planted each year to produce a crop. The growing season is short, about three to four months. Several factors influence farmers' decisions to plant barley each year, including price, weather, and disease. based on this information: a)barley has a more inelastic supply in the short run because barley is more dependent on price in the short run. b)it is impossible to infer anything about the price elasticity of supply for these two crops. c)the crops have the same price elasticity of supply because they are both agricultural commodities. d)almonds have a more inelastic supply in the short run because little can be done to change production in the short run.
decrease/less than The EpiPen is likely price inelastic because it can mean the difference between life and death for people with severe allergies. If the producer of EpiPens increases price by 25%, the quantity demanded of EpiPens is likely to decrease by much less than 25%.
The EpiPen is a lifesaving device used by individuals with severe allergies. The U.S. manufacturer of the EpiPen raised its price by nearly 25% per year for nearly a decade. For each 25% increase in the price, quantity demanded would (increase/decrease) by (more than/less than/exactly) 25%. **draw graph*****
(d) A change in price leads to a change in the quantity demanded in the opposite direction. The impact on total revenue will depend on the relative magnitudes of the two changes. In this example, the price elasticity of demand for the drug is 1.5, which implies that demand is elastic. If your customers are very responsive to price changes—that is, if their demand is elastic—then a modest price drop will lead to a larger increase in quantity. For example, with a price elasticity of 1.5, a 10% decrease in price will lead to a 15% increase in sales. When demand is elastic, a lower price yields more total revenue
You are a pricing manager at a generic pharmaceutical distributor. The CEO of the company calls a meeting of all the managers and states that it is critical to increase revenue soon or you may have to start laying off employees. You know that the price elasticity of demand for your leading generic drug is 1.5 and you sell it for three times what it costs. As the pricing manager you should: a) suggest increasing the price on the leading generic drug to increase revenue. b) suggest laying off employees because elasticity of the leading generic drug is unit elastic, so there is no way to increase revenue by changing price. c)argue that the numbers must be off because the company is charging three times the cost of the leading generic drug and therefore must be making a profit. d) suggest decreasing the price on the leading generic drug to increase revenue
sub/large For different brands of the same item, the cross‑price elasticities are likely positive and large in magnitude. Different brands of the same item are very close substitutes for each other due to the ease of price comparisons and similarities of the goods.
You may have observed that items such as different brands of aspirin, tomato sauce, or gasoline are typically priced the same as each other. This is particularly true when consumers can find these goods in close proximity to each other. For example, prices are often the same at gas stations that are on opposite sides of the street. Prices are also generally the same for products next to each other on the same grocery store shelf. These goods are (sub/complements). The value of the cross price elasticity is (large/small/ignisificant) bc the opportunity cost of getting information on price is low.
