Daria's income decreases from £80,000 to £54,000 per year. As a result, she increased her demand for take-away food by 30 percent and decreased her demand for new clothes by 20 percent. a) Calculate Daria's income elasticity of demand for (i) take-away food and (ii) new clothes. b) Comment on the nature of both items. In a newspaper article you read that the price for shirts increased by 23% and the demand for pullovers rose by 9%. c) State the type of elasticity you can calculate. Calculate the elasticity and discuss the economic intuition of your result. d) The newspaper looked at historical data and noticed that the elasticity calculated in part (c) increases. What does this imply for the relationship between shirts and pullovers?

Daria's income decreases from £80,000 to £54,000 per year. As a result, she increased her demand for take-away food by 30 percent and decreased her demand for new clothes by 20 percent. a) Calculate Daria's income elasticity of demand for (i) take-away food and (ii) new clothes. b) Comment on the nature of both items. In a newspaper article you read that the price for shirts increased by 23% and the demand for pullovers rose by 9%. c) State the type of elasticity you can calculate. Calculate the elasticity and discuss the economic intuition of your result. d) The newspaper looked at historical data and noticed that the elasticity calculated in part (c) increases. What does this imply for the relationship between shirts and pullovers?

ECON MICRO

5th Edition

ISBN:9781337000536

Author:William A. McEachern

Publisher:William A. McEachern

Chapter5: Elasticity Of Demand And Supply

Section: Chapter Questions

Problem 4.9P: (Other Elasticity Measures) Complete each of the following sentences: a. The income elasticity of...

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(Other Elasticity Measures) Complete each of the following sentences: a. The income elasticity of demand measures, for a given price, the __________ in quantity demanded divided by the __________ income from which it resulted. b. If a decrease in the price of one good causes a decrease in demand for another good, the two goods are __________. c. If the value of the cross-price elasticity of demand between two goods is approximately zero, they are considered __________.
Economists define normal goods as having a positive income elasticity. We can divide normal goods into two types: Those whose income elasticity is less than one and those whose income elasticity is greater than one. Think about products that would fall into each category. Can you come up with a name for each category?
Income Effects depend on the income elasticity of demand for each good limit you buy. If one of the goods you buy has a negative income elasticity, that is, it is an inferior good, what must be true of the income elasticity of the other good you buy?
What is the formula for the income elasticity of demand?
Maria has decided always to spend one third of her income on clothing. a. What is her income elasticity of clothing demand? b. What is her price elasticity of clothing demand? c. It Marias tastes change and she decides to spend only one fourth of her income on clothing, how does her demand curve change? What is her income elasticity and price elasticity now?
The equation for a demand curve is P=483Q. What is the elasticity in moving from quantity of 5 to a quantity of 6?
The Stopdecay Company sells an electric toothbrush for $25. Its sales have averaged 8,000 units per month over the past year. Recently, its closest competitor, Decayfigh ter, reduced the price of its electric toothbrush from $35 to $30. As a result, Stopde cays sales declined by 1,500 units per month. What is the arc cross elasticity of demand between Stopdecays toothbrush and Decayfighters toothbrush? What does this indicate about the relationship between the two products? If Stopdecay knows that the arc price elasticity of demand for its toothbrush is 1.5, what price would Stopdecay have to charge to sell the same number of units as it did before the Decayfighter price cut? Assume that Decayfighter holds the price of its toothbrush constant at $30. What is Stopdecays average monthly total revenue from the sale of electric toothbrushes before and after the price change determined in part (b)? Is the result in part (c) necessarily desirable? What other factors would have to be taken into consideration?