Question

1. A care manager decides to lower the price of the featured collee drink from $3 to $2 and finds that sales during the week increase from 240 cups to 480 cups. a. Calculate the price elasticity of demand of the featured coffee drink. b. Is demand for the featured coffee drink elastic? c. What is the effect on total revenue for the cafe? 2. Characterize the demand for each of the following goods or services as relatively price elastic in demand or relatively price inelastic with respect to demand and explain why: a. A lifesaving medicine b. Photocopies at a copy shop when there are other copy shops near by c. The water you buy from the local utility company d. Flights to Cancun 3. Do customers who visit convenience stores at 3 am have a price elasticity of demand that is more elastic or less elastic that those who visit at 3 pm? Why or why not? 4. Consider a public policy aimed at reducing smoking. Studies indicate that the price elasticity of demand for cigarettes is about 0.8. a. If a pack of cigarettes currently costs $5 and the government wants to reduce smoking by 20%, how much should it increase the price of a pack of cigarettes by? b. If the price increase is permanent, will the effect on smoking be greater in 3 months or 3 years? Why? 5. What factor(s) determine the price elasticity of supply? Give an example of a good that might have very low price elasticity of supply, and graph what the supply curve might look like. 6. Consider the market for milk tea, depicted in the graph below a. Graph the effect of an increase in the cost of milk, an input in milk tea. What is the effect on equilibrium price and quantity? b. Given the new equilibrium, what is the effect on total revenue? How does the price elasticity of demand and the slope of the demand curve determine this outcome?

Answer 1

1)

a) E = [Q2-Q1/(Q2+Q1/2)]/[P2-P1/(P2+P1/2)]

= [480-240/(480+240/2)]/[2-3/(2+3/2)]

= [240/360]/[-1/2.5]

= 0.6666/-0.4

= -1.67

b) Yes, the demand is price elastic as the value is greater than one

c) Total revenue will increase since the demand is price elastic.

As per HOMEWORKLIB RULES, the first question is answered