Question

Calculate the elasticity for the following questions (USING THE MIDPOINT (AVERAGE) FORMULA) and indicate if the goods are:

1. Inferior,
2. Normal,
3. Complements, or
4. Substitutes

(Please Include The Negative signs in your answers where appropriate and calculate to 2 decimals)

A. The price of gasoline increases from 14 per barrel to 38 per barrel and as a result, the demand per month for new cars changes from 650 to 100.

Part 1: The elasticity is



Part 2: These goods are (answer using numbers, 1-4) ?

B. As a result of a change in income from 1,925 to 3,125 per month, the consumption of good X changes from 180 to 200 units.


Part 3: The elasticity is ?



Part 4: Good X is a(an) (answer using numbers, 1-4) ?


C. As a result of a decrease in the price of good Y from 38 to 15 the demand for good X changes from 200 to 450 units.


Part 5: The elasticity is ?



Part 6: These goods are(answer using numbers, 1-4) ?


D. As a result of an economic boom in Calgary, the average income increases from 2,200 to 6,100 per month and as a result the demand for new houses increases from 110 to 210 units.


Part 7: The elasticity is ?



Part 8: New houses are a(an) (answer using numbers, 1-4) ?

Answer 1

A) E = [100-650/(100+650/2)] / [38-14/(38+14/2)]

= [-550/375]/[24/26]

= -1.47/0.92

= -1.60

These goods are complements

B) E = [200-180/(200+180/2)]/[3125-1925/(3125+1925/2)]

= [20/190]/[1200/2525]

= 0.1053/0.4752

= 0.22

These goods are Normal

C) E = [450-200/(450+200/2)]/[15-38/(15+38/2)]

= [250/325]/[-23/26.5]

= 0.7692/-0.8679

= -0.90

These goods are complements

D) E = [210-100/(210+110/2)]/[6100-2200/(6100+2200/2)]

= [110/160]/[3900/4150]

= 0.6875/0.9398

= 0.73

These goods are normal