Answer Tutorial 4 AFT1033 PDF

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TUTORIAL 4 CHAPTER: ELASTICITY 1.

Use the table below to answer the questions. Price (RM)

of 10 20 30 40

(a)

A Quantity of A (unit) 100 80 60 40

Quantity of B (unit) 140 110 80 50

Income (RM) 2000 1800 1600 1400

Calculate price elasticity of demand for goods A, when price increases from RM20 to RM30 and indicate whether the demand is elastic or inelastic?

Answer: USING POINT FORMULA P1 = 20 P2 = 30 Q1 =80

Q2 =60

60−80 80 − ΔQ = 30−20 ΔP 20 −

−20 80 ¿− 10 20 ¿−

−0.25 0.5

¿−0.5 ¿ INELASTIC DEMAND

(b)

Answer:

Calculate the cross-price elasticity of demand for goods B when the price of goods A increases from RM10 to RM20. Are goods A and goods B substitutes or complement?

USING POINT FORMULA

110 −140 ΔQ 140 = ΔP 20−10 10 −30 140 ¿ 10 10 −0.214 1 ¿−0.214 ¿ COMPLEMENT GOODS ¿

(c)

Calculate the income elasticity of demand for goods A and goods B when the income increases from RM1,600 to RM2,000. What type of goods A and goods B?

Answer: USING POINT FORMULA Goods A

100 −60 ΔQ 60 = ΔY 2000 −1600 1600 40 60 ¿ 400 1600 ¿

0.6667 0.25 ¿ 2.6668 ¿ luxury goods

Goods B

140 −80 ΔQ 80 = ΔY 2000 −1600 1600 60 80 ¿ 400 1600 0.75 0.25 ¿ 3=luxury goods ¿

2.

Use the table below to answer the questions.

Price of A (RM) 24 20 16 12 8 4

(a)

Quantity demanded (Income = RM5000) Goods A Goods B 4 2 8 4 12 6 16 8 18 9 20 12

Quantity demanded (Income = RM7500) Goods A Goods B 6 3 9 6 12 9 15 11 18 15 21 18

Quantity demanded (Income = RM10000) Goods A Goods B 8 4 12 8 16 12 20 16 24 18 28 20

Calculate price elasticity of demand for goods A, when price increases from RM12 to RM20 at income RM7,500 and indicate whether the demand is elastic or inelastic? Answer: USING POINT FORMULA P1 = 12 P2 = 20

Q1A = 15 Q2A = 9

∆Q ∆P

Ed =

19−15 15 = 20 −12 12

−0.4 =0.6 0.6667

=

Ed is less than 1 : Thus is inelastic

(b)

Calculate cross price elasticity of demand when price of goods A decreases from RM24 to RM8 at income RM10,000 and indicate type of goods A? Answer: USING POINT FORMULA P1 = 24 P2 = 8 Ed =

Q1B= 4 Q2B= 18

∆Q ∆P

18− 4 4 = 8−24 24

=

3.5 =−5.25 −0.6667

Ed is greater than 1 : Thus is Elastic (c)

i.

Calculate income elasticity for goods A at price RM16 if income increase from RM5,000 to RM10,000 and indicate type of goods A? Answer: USING POINT FORMULA Y 1 = 5000 Y2 = 10,000

Ey =

∆Q ∆y

Q1A= 12 Q1A = 16

16 −12 12 = 10000−5000 5000

=

0.3333 =0.3333 1

Ey less than 1 : Goods A is normal goods ii.

Calculate income elasticity for goods B at price RM8 if income decrease from RM7,500 to RM5,000 and indicate type of goods B? Answer: USING POINT FORMULA Y1 = 7500 Q1B =18 Y2 = 5000 Q2B = 9

Ey =

∆Q ∆Y

9−18 18 = 5000−7500 5000

=

−0.5 =1.5 −0.3333

Ey less greater than 1 : Goods A is luxury goods

(d)

Explain briefly factors would affect the elasticity of demand and elasticity of supply. Answer: Determinants of Price Elasticity of Demand ED (elasticity of demand) is greater:  The greater the availability of substitutes, and the more similar the substitutes  The more important the good as a share of the consumer’s budget  The longer the period of adjustment (time) The Determinants of Supply Elasticity  Ability of sellers to change the amount of the good they produce. The more easily sellers can change the quantity they produce, the greater the price elasticity of supply.

 Time period For many goods, price elasticity of supply is greater in the long run than in the short run, because firms can build new factories, or newfirm may be able to enter the market.

3.

Use the table below to answer the questions. Consumer Income Quantity Price of A Quantity (RM) Demanded for (RM) Demanded for A (kg) B (kg) 6.00 100 20 2000 6.50 90 30 1800 7.00 70 50 1600 7.50 40 70 1400 8.00 10 85 1200 (a)

Calculate price elasticity of demand for goods A, when price increases from RM7 to RM8 and indicate whether the demand is elastic or inelastic? Answer: USING POINT FORMULA

P1 = 7 P2 = 8

Ed =

Qd1 = 70 Qd2= 10

∆Q ∆P

10− 70 70 = 8− 7 7

=

−0.8571 =5.99 ≈ 6 0.1429

Ed is greater than 1 : Thus is Elastic

(b)

Calculate the cross-price elasticity of demand for goods B when the price of goods A decreases from RM7.5 to RM6.5. Indicate type of product. Answer: USING POINT FORMULA P1 = 7.5 QB1 = 70 P2 = 6.5 QB2= 30 EAB =

30−70 ∆Q 70 = 6 . 5−7 . 5 ∆P 7 .5

=

−0 .5714 =4 .3 −0 .1333

EAB is positive and goods B is substitutes goods for goods A.

(c)

Calculate the income elasticity of demand for goods A and goods B when the income increases from RM1,400 to RM1,800. What type of goods A and goods B? Answer: USING POINT FORMULA Goods A Y 1 = 1400 Q1A= 40 Y2 = 1800 Q1A = 90

Ey =

∆Q ∆y

90− 40 40 = 1800−1400 1400

=

1.25 =4.3752 0.2857

EY greater than 1 : Goods A is luxury goods/superiors goods Goods B Y 1 = 1400 Y2 = 1800

Q1A= 70 Q1A = 30

Ey =

∆Q ∆y

30−70 70 = 1800−1400 1400

=

−0.5714 =−2 0.2857

Ey is negative : Goods A is inferior goods...