1.

(a) The price elasticity of demand measures the responsiveness of

the quantity demanded / price to a change in the quantity demanded / the quantity supplied / price.

[Delete wrong words.]

(b) Give the (conceptual) formula for price elasticity of demand.

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2. In the mid 1990s, the government in the UK announced that for every 10 per cent rise in the price of
cigarettes, the demand is likely to fall by 6 per cent. If this information is correct, what is the value of
the price elasticity of demand for cigarettes?
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3. In each of the following pairs, tick which of the two items is likely to have the more elastic demand.
Give reasons for your answer.
(a) Petrol (all brands) Esso petrol
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(b) Holidays abroad Bread

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(c) Salt Clothing

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4. Using the example from the lecture (Q = 50-5P), calculate the price elasticity of demand
a) Between £8 and £9
b) At a price of £6
c) At a price of £5
d) At a price of £2
e) At a price of £1
f) Using your answers to the previous questions explain what happens to the price elasticity of demand
as you move upwards along a demand curve. Sketch the demand curve to help illustrate your answer.

5. A local bus company fearfully raised its prices two years ago by 10 per cent in an attempt to cover
increased costs. It was pleased to see its revenues rise by 5%. This year it confidently raised its prices
again and was surprised and dismayed to find that its revenue fell by 2%. The manager was reported
in the local press as saying “It is hard to do business when our customers are so erratic” Having
studied elasticity do you believe that the customers behaved erratically? Explain your answer. (Hint
look at your answers to question 4).

6. An executive of a professional association introduced a motion at the annual general meeting “to
increase dues by 10% so as to increase our revenue by 10 per cent”. Using the concept of elasticity do
you think his views were over optimistic? Explain your answer.

7. Suppose demand and supply are given by the following equations:

Qd = 110 - 5P
Qs = 6P
Where Qd = Quantity demanded
Qs = Quantity supplied
P = the price
a) Using algebra, determine the market equilibrium price and quantity.
b) Find the inverse demand and supply functions making P the dependent variable.
c) Sketch the inverse demand and supply curves, clearly labelling the slope, the intercept and the
equilibrium price and quantity.
d) Calculate elasticity of demand at the equilibrium price
8.

(a) What is the formula for income elasticity of demand?

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(b) Which of the following would you expect to have a demand which is elastic with respect to income?

(There are more than one.)

(i) Flour ....................................................................................................... Yes / No / Possibly

(ii) Ready-prepared meals for the microwave ............................................ Yes / No / Possibly

(iii) Champagne ............................................................................................ Yes / No / Possibly

(iv) Socks ..................................................................................................... Yes / No / Possibly

(v) Designer jeans........................................................................................ Yes / No / Possibly

(vi) Electricity ............................................................................................... Yes / No / Possibly

(vii) Bus journeys........................................................................................... Yes / No / Possibly

(viii) Insurance ................................................................................................ Yes / No / Possibly