1
Chapter 5: Measurement and Interpretation of Elasticities
ANSWERS TO TESTING YOUR ECONOMIC QUOTIENT EXERCISES
Exercises appearing on pages 82-84:
1.
Demand curve shifts to the right as a result of successful advertising. Other
determinants include (1) the price of Big Macs, (2) the price of substitutes and
complements such as Burger King hamburgers and french fries, and (3) income.
2.
a. Complements
b.
Ppancakes
Psyrup
B
A
Qpancakes
Qsyrup
c. The cross-price elasticity is negative.
3.
Between A and B, the own price elasticity is elastic (-1.38). Between B and C, the own
price elasticity if inelastic (-0.46). Between A and B, recommend a price decrease.
Between B and C, recommend price increase to raise total revenue.
4.
The elasticity is –1.3. The new price of $4.20 represents a 20 percent increase from the
initial price of $3.50. Therefore, the percent change in quantity must be –26. If you are
currently selling 1,500 burger platters, a 20 percent increase in price is associated with
1,110 platters.
5.
The income elasticity between points A and B is 1.80. The income elasticity between
points B and C is –1.57. Therefore the good is a normal good (actually a luxury item
since its income elasticity exceeds one) between A and B, and the good is an inferior
good between B and C.
6.
Hamburger consumption will fall by 3 percent. They are complements since the crossprice elasticity of demand is negative.
7.
Sales of Pepsi will rise by 3.5 percent. Thus, this retailer will sell 1,035 six packs of
Pepsi per day as a result of the price of Coca-Cola increasing by 5 percent, assuming all
other factors are invariant. Pepsi and Coca-Cola are substitutes because of the positive
cross-price elasticity of demand.
2
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
-2/3=-0.667
Alfred Marshall
b
d
b
c
b
b
-0.4
(a) substitutes; (b) necessity (also a normal good)