Question

Question 1 (a) Right before Christmas, the price of Christmas trees went up by 30%, while the quantity of Christmas trees sold increased by 80%. Do these figures imply an upward sloping demand curve for Christmas trees? Explain with a diagram. (10 marks) (b) The Kowloon Motor Bus (KMB) Company Limited has done a research on the price elasticity of demand for bus service. The following table shows that the price elasticity of demand varies in different timeslots of a day. Timeslots | 7:00 a.m. – 10:00 a.m. 10:00 a.m. - 5:00 p.m. 5:00 p.m. - 8:00 p.m. 8:00 p.m. – 12:00 mid-night Price elasticity of demand 0.5 | 1.5 0.7 2.0 Explain the meaning of those numbers of price elasticity of demand, and why the demand for bus service has different levels of price elasticity of demand during different timeslots? (10 marks) (C) Suppose the Hong Kong government imposes a price ceiling above the equilibrium price of flour. How does this price ceiling affect the price and the quantity sold of flour? Explain. (5 marks)

Answer 1

Answer:

Yes, the below figure shows upward sloping demand curve. When the price of Christmas tree increases 30% still the quantity demanded rises to 80%. Which shows positive relationship between price and quantity demanded of Christmas tree which is not according to the law of demand, which normally shows downward slopping demand curve. Here due to the festival reason people will increase the demand for the Christmas tree though there is a rise in the price of Christmas tree. This can be seen from the below diagram. When price increases from p1 to p2 the quantity demanded for the Christmas tree rises from Q1 to Q2.

(b)

Timeslots	Price elasticity of demand	meaning of price elasticity of demand
7:00 a.m. – 10:00 a.m.	0.5	This represents price elasticity of demand is less than one. This means that a 30% increase in price leads to 15% decrease in quantity demanded. It means that the elasticity of demand is relatively inelastic. Here customers are less sensitive towards the price change.
10:00 a.m. – 5:00 p.m.	1.5	This represents price elasticity of demand is greater than one. This means that slighter change in price leads to a bigger change in quantity demanded. It means that the elasticity of demand is relatively elastic. Here customers are more sensitive towards the price change.
5:00 p.m. – 8:00 p.m.	0.7	This represents price elasticity of demand is less than one. This means that bigger change in price leads to a smaller change in quantity demanded. It means that the elasticity of demand is relatively inelastic. Here customers are less sensitive towards the price change.
8:00 p.m. – 12:00 mid-night	2.0	This represents price elasticity of demand is greater than one. This means that slighter change in price leads to a bigger change in quantity demanded. It means that the elasticity of demand is relatively elastic. Here customers are more sensitive towards the price change.

Why the demand for bus service has different levels of price elasticity of demand during different timeslots:

elasticity of transport demand can be defined as “the responsiveness of demand for transport mode to a change in one of its determinants.”

There are many factors affect on the price elasticity of demand for the bus services during different slots which are the price of bus fare, the availability of substitutes for the product, etc. During different time slots these factors keeps on changing so as the elasticities.

(c)

When price is fixed above the equilibrium level the price increases as a result quantity sold of flour in the market increases because according to the law of supply there is a positive relationship between the price and quantity supplied in the market. So, this price ceiling affects the price and the quantity sold of flour positively.