Question

2) Answer the following:

a) When the price of sand increased by 10% this winter, stores starting stocking and selling 3% more sand. Calculate and interpret this elasticity. How price sensitive are these stores and why?

b) When Windy’s increased the price of their ice cream by 2%, sales of fries decreased by 4%. Calculate the appropriate elasticity and explain the relationship between ice cream and fries at Windy’s.

Answer 1

2. a. Price of sand increased by 10%.

Sale of sand increased by 2%

Price elasticity of demand for sand =(Percentage change in quantity demanded) /(Percentage change in Price)

=( 3%) / (10%) = 0.3

So price elasticity is 0.3. It is less than 1.Quantity demanded changes by a smaller percentage ,that is,less than 1, than the change in price.The demand for sand is said to be relatively inelastic.

Because sand is not much demanded in winter.

Q.b.Price of ice cream increased by 2%.

Demand for fries decreased by 4%

Elasticity of demand =(Percentage change in quantity demanded of Fries) /( Percentage Change in price of Ice cream)

(4%) /(2%) = 2.

Elasticity is more than 1.

Here it is cross elasticity as there is percentage change in quantity demanded of fries with respect to change in the price of its related commodity ice cream.

Here the cross elasticity is negative because increase in price of one good (ice cream) leads to a fall in the demand of another good (Fries).Such goods are Complementary goods.