Question

1. One week, the quantity of pizza consumed is 35 slices per day at a price of $2.00 per slice. The next week, the price of pizza rises to $2.50 per slice, but the quantity consumed falls to 5 slices per day. Calculate the price elasticity of demand. Is demand for pizza elastic or inelastic?

2. A car company hires economists to calculate the price elasticity of demand for their most popular brand. They find that the PED is .01. If the company wants to increase revenue, should they raise or lower their prices?

3. When my income is $50 per week, I consume 2 pounds of rice per week. If my income rises to $70 per week, I consume 3.4 pound of rice per week. Calculate my income elasticity of demand for rice. Is rice a luxury, or a necessity?

4. When the price of hamburger rolls is $.25 per roll, 25 hamburgers are consumed per week. If the price rises to $.50 per roll, however, 40 hamburgers are consumed per week. Calculate the cross elasticity of demand. Based solely on the CED, are hamburgers and rolls substitutes or complements?

Answer 1

1) Elasticity = percentage change in quantity/percentage change in price

= [5-35/(5+35/2)] / [2.50-2/(2.50+2/2)]

= [-30/20] / [0.5/2.25]

= -1.5/0.2222

= -6.75

2) E = 0.1

Since the price elasticity of demand is inelastic, so an increase in price will increase total revenue so, the company should increase their prices.

As per Chegg guidelines, more than one question is answered.