Question

Question 7 [20] 7.1. Suppose the average monthly income of households in Kagiso increases from R3 000 to R3 500. As a result, the quantity of white bread demanded increases from 1 200 to 1300 loaves per day, while the quantity of brown bread decreases from 2 100 to 2 000 loaves per day. The quantity of KFC pieces demanded also increases from 350 to 550 pieces per day. 7.1.1. Use the arc (midpoint) formula to calculate the income elasticity of demand for white bread 7.1.2. Classify each of these three products as normal or inferior and briefly explain why this is so in each case. 7.1.3. Classify each of these three products as a necessity or a luxury and briefly explain why this is so in each case. (3) (3) 7.2. Graphically illustrate the following elasticities. Show the percentage changes in price and quantity on the graph in each case as an explanation and indicate the price elasticity (ep) value. 7.2.1. Elastic demand 7.2.2. Unit elastic demand 7.2.3. Inelastic demand 7.2.4. If the percentage change in price is greater than the percentage change in quantity supplied of a good, what type of elasticity will be applicable? 7.2.5. If the price of a product rises and suppliers still produce the same quantity of that product, what will the value of price elasticity of supply be? (1) 7.3. Draw a basic linear demand curve diagram. Label the graph and clearly indicate on which part of the curve the following price elasticity (ep) values will be found: ep = 1; 0> ep<1; ep > 1; ep = 0; ep = 0 (3)

Answer 1

To =3000 Oo - 1200 1 = 3500 0 I= 1300 Ascifrcome alesticity - so x Pang po ang = levy 3250 low see 3250 1250 = 0.52 Income Elasticity = 0.52 7.1.2) while bread is normal good & KFF piecies is also a normel good ble demand increases as Income increases Becown bread is an inferior goodble as income increases demand for the Brown bread decreases 7.1.3) Kre peces are luxury good ble Rucome Elasticity is high whereas as ا هده الممط لناد م که Income inelastic