Week Two Homework: Price Elasticity of Demand

Chapter 6

1. Refer to the section on “Calculating the Price Elasticity of Demand”. Review the formula for calculating price elasticity of demand and work out the following problem:

A number of retail stores in San Diego form a “District”. In that district, a popular brand of lady’s handbag was selling at $400.00 per bag. In one week, the combined sale in the district was 200. The District Manager then declared a sale of 25% on the handbags. As a result, sale of the handbags increased to 550 in the following week.

1. Calculate price elasticity of demand. (Use the following formula: Elasticity =(Change in quantity demanded/Average quantity)/(Change in price/Average price)
2. What does the coefficient of elasticity indicate? Explain your answer.

• A recent study determined the following elasticities for Volkswagen Beetles:

Price elasticity of demand = 2

Income elasticity of demand = 1.5

Based on this information, answer the following questions:

1. What will happen if the price of Volkswagen Beetles is reduced by 10%?
2. What will happen to the price and quantity of Beetles if consumer income increases?

Chapter 9

Define the following with appropriate examples. You will not receive any point if you do not provide example of each of the definitions.

1. Constant marginal cost
2. Implicit cost
3. Risk aversion
4. Sunk cost
5. Optimal quantity

Chapter 10

Fill in the gap:

(a). If good X is cheaper than good Y, and a consumer decides to consume more of good X and less of good Y, the effect is known as —- effect.

(b). If the price of a good goes down and, a consumer decides to consume more of that good, the effect is known as ——– effect.

(c). If a consumer’s income goes up and the consumer consumes less of good M, good M is known as —— good.

(d). A consumer’s budget line assumes that the consumer spends —– of their income.

Chapter 11

Complete the following Table:

Quantity Q	Fixed Cost FC	Variable Cost VC	Total Cost TC = FC +VC	Marginal Cost MC= ∆TC/∆Q
0	$108	0
1		12
2		48
3		108
4		192
5		300
6		432
7		588
8		768
9		972
10		1200