THE UNIVERSITY OF THE WEST INDIES

Faculty of Social Sciences DEPARTMENT OF ECONOMICS

ECON 1001 INTRODUCTION TO MICROECONOMICS Semester I 2013/2014 TUTORIAL ASSIGNMENT #3 (Unit 6)
1) i) Define the terms: Elasticity and Elasticity of Demand ii) Define the following: a) Price Elasticity of Demand; b) Income Elasticity of Demand; c) Cross-Price Elasticity of Demand. 2) a) On a supply and demand diagram, show equilibrium price, equilibrium quantity, and the total revenue received by producers. b) If price elasticity of demand is inelastic, how will an increase in price change revenue? c) If price elasticity of demand is elastic, how will an increase in price change revenue? 3) For each of the following pairs of goods, which good would you expect to have more elastic demand and why? a) Levi brand blue jeans or clothing? b) Cigarettes over the next week or cigarettes over the next five years? c) Insulin or Advil? d) Business travel or vacation travel? 4) Explain why the price elasticity of demand for foreign holidays is likely to be elastic. 5) i) A price change causes the quantity demanded of a good to decrease by 25%, while the total revenue of that good decreases by 10%. Is the demand curve elastic or inelastic? Explain.

ii) If the value of PED is -1.4 for a commodity and the price of the commodity decreases

such that the Percentage change in price is -10.00 a) What happens to total revenue. b) Using economic theory explain the change in the total revenue. c) Explain why the outcome would be different if the PED was -0.5.

6) Consider the following information about good X and good Y: Income elasticity of demand for good X is -3; Cross-Price elasticity of demand for good X with respect to good Y is 2. Tutorial Sheet #3 ECON 1001, Semester I 2013/2014

Would an increase in income and a decrease in the price of good Y decidedly decrease the demand for good X? Why or Why not? 7) Consider public policy aimed at smoking. a) Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes currently cost $20 and the Government wants to reduce smoking by 20 percent, by how much should it increase the price? b) What will be the impact of an increase in price on the revenues of WITCO? c) If the Government permanently increases the price of cigarettes, will the policy have a larger effect on smoking one year from now or five years from now? d) Studies also find that teenagers have higher price elasticity than do adults. Why might this be true?

7) Using the concepts of elasticity define the following: a) an inferior good and a normal good b) a substitute and a complement. 8) A firm sells two products: X and Y. Product X has an income elasticity of demand of +1.3 and product Y has an income elasticity of -1.4. a) Explain what type of good can good X be considered based on its income elasticity of demand. b) Explain what type of good can good Y be considered based on its income elasticity of demand. c) Advise this firm on how sales may be affected in the coming year if real consumer incomes are set to increase by 12%.

Department of Economics September 2013.

Tutorial Sheet #3 ECON 1001, Semester I 2013/2014