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SOLUTIONS Practice Sheet 2 - Elasticity |
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SOLUTIONS Practice Sheet 2 - Elasticity |
1. Falana runs a body-piercing business out of her kitchen in order to pay her college tuition fees. She initially charges $15 per piercing (including the standard gold electro-plated, barbed-stud (regardless of body part) and averages 12 customers per week. She later raises the price to $20 and her sales fall to 10 per week .
a. What is the initial-point price elasticity of demand for her piercings?b.What is the mid-point (or arc) price elasticity of demand for her piercings?
c. Calculate Falana's total revenue when she charges $20 per piercing.
d. Calculate her total revenue when she charges $15 per piercing.
e. Is the demand for Falana's piercings elastic or inelastic?
c. TR = P x Q
= $20 x 10 = $200d. TR = $12 x 15 = $180
e. Demand for Falana's piercings is price-inelastic. We can see this two ways. First, the elasticities calculated in a & b are less than 1. Second, Falana's total revenue rises when she raises her prices, so sales dropped at a lower rate than her prices rose.
2. Match the following elasticities with their correct example.
a. price elasticity of Demand
b. price elasticity of Supply
c. cross (price) elasticity of Demand
d. income elasticity of Demand
A 3% growth in the economy results in an increase in the sales of new houses.
ANSWER: _d_The price of Reebok shoes falls 10% causing sales of Nike shoes to fal1 2%
ANSWER: _c_The price of Reebok shoes rises 10% causing sales of Reebok shoes to fall 5%
ANSWER: _a_The minimum wage is raised 20% causing the entry level jobs to decrease 5%
ANSWER: _a_The minimum wage is raised 20% causing the labor force to increase 2%
ANSWER: _b_
3. ANSWER: C. Price elastic. The Administration fears a small (5.5%) rise in tuition will result in a greater (than 5.5%) drop in enrollment?
4. ANSWER: If the company's prices are at the low end of the Demand line, then it is operating in the inelastic region. So consumer demand is inelastic. Thus, a drop in prices will result in less of an increase in sales, so this option loses money. On the other hand, a rise in prices will result in fewer sales being lost. Thus, total revenue will rise if prices are raised. The company should raise prices in order to make more money.