Question

1. Explain the elasticities of demand for the following products based on the determinants of elasticity we discussed in class last 2 weeks.

Housing                                0.12

Cable TV (Basic Rural)     0.69

Cable TV ( Basic Urban)   1.51

Restaurant Meals.           2,27

Kitchen & Household appliances               0.63

F a tax imposed on the

Answer 1

An elasticity of demand for Housing at 0.12 would mean that there is least or insignificant effect of change in price of housing on demand for housing. Those who demand houses will not care much about the prices. A one percent change in price of housing will lead to 0.12 percent change in demand for housing. Simply put a 1 percent increase in price of housing would only reduce the demand for housing by 0.12 percent.

An elasticity of demand for cable TV at 0.69 would mean that there is less percentage effect of change in price of cable TV in rural areas on demand for cable TV. A one percent change in price of Cable TV in rural areas will lead to 0.69 (that is less than 1 percent) percent change in demand for cable TV (basic rural). Simply put a 1 percent increase in price of cable tv in rural areas would only reduce the demand for cable TV by 0.69 percent. The case is similar with the elasticity of demand for Kitchen and Household appliances. A 1 percent increase in price of Kitchen and Household appliances will lead to less than 1 percent, that is, 0.63 percent fall in demand for these appliances. In both the above cases we say that the demand is less than unitary elastic or inelastic and a change in price will have less percentage change effect on demand for these goods.

An elasticity of demand for Cable TV at 1.51 would mean that there is more percentage effect of change in price of cable TV in urban areas on demand for cable TV. A one percent change in price of Cable TV in urban areas will lead to 1.51 percent (that is less than 1 percent) change in demand for cable TV (basic urban). Simply put a 1 percent increase in price of cable TV in urban areas would only reduce the demand for cable tv by 1.51 percent. The case is similar with the elasticity of demand for Restaurant Meals. A 1 percent increase in price of Kitchen and Household appliances will lead to more than 1 percent, that is, 2.27 percent fall in demand for these appliances. In both the above cases we say that the demand is highly elastic or elastic and a change in price will have more percentage change effect on demand for these goods.