Question

Use the graphi Demand for Running Shoes 500 700 1. New Balance is currently selling their running shoes for $100. They are considering dropping the price to $80. What is the price elasticity of demand between these two points? 2. What type of elasticity is this? 3. Based on the answer to 2, what would happen to New Balance's revenue if they dropped their price? 4. Suppose the average income increases by 15% and as a result the quantity demanded of Ramen decreases by 10%. What is the income elasticity of demand for ramen? 5. What type of good is ramen? 6. Suppose the price of hot dog buns increases by 20% and as a result the quantity demanded of hot dogs decreases by 25%. What is the cross-price elasticity of hot dog buns and hot dogs? 7. What type of goods are hot dog buns and hot dogs?

Answer 1

1)Price elasticity is :

percentage change in quantity/ percentage change in price

= ( Dq/dp ) × ( p/q )

Here, dq = 200 dp= -20 p=100 q= 500

This gives the elasticity as : ( 200/(-20 )) × ( 100/500 ) =- 2

2) Since absolute elasticity is greater than 1 , therefore demand is elastic.

3) Since the demand is elastic, here, percentage change in quantity > percentage change in price , hence the decrease in price is smaller than increase in quantity which means total expenditure increases.

4) Income elasticity of demand =

Percentage change In quantity / Percentage change in Income = (-10)/15 = - 0.67

5)Since the quantity demanded decreases with an increase in income , therefore it is an inferior good.

6) Cross price elasticity =

Percentage change in quantity of hot dogs/ percentage change in orice of hot dog buns

= (-25)/20 = -1.25

7) Since the cross price elasticity is lesser than 0 this means that quantity of hot dogs demanded decreases with increase in price of hot dog buns, hence the goods are complements.