Managerial Economic Problems on Elasticity

Eon340 problems on Elasticities

1. The price elasticity of demand for chicken is estimated to be – 0.65. If the price of chicken increased by 6 percent, what will be the expected percentage decrease in the quantity of chicken sold?

2. The average price for personal computers has recently decreased from BD300 to BD250. As a result, the quantity of personal computers bought has increased by 20 percent. What would be the price elasticity of demand for personal computers?

3. The demand for Penn's Oil motor oil can be characterized by the following point elasticities: price elasticity = -2.5, cross-price elasticity with Value Lean motor oil = 1.5, and income elasticity = 0.75.

Indicate whether each of the following statements is true or false, and explain your answer.

(a) A price increase for Penn's Oil will decrease both the number of units demanded and the total revenue of sellers.

(b) The cross-price elasticity indicates that a 2% increase in the price of Value Lean will cause a 3% increase in Penn's Oil demand.

(c) Demand for Penn's Oil is price inelastic and the motor oil is a superior good.

(d) Falling Value Lean prices will definitely increase revenues received by manufacturers of both brands of oil.

(e) A 0.9% price reduction for Penn's Oil would be necessary to overcome the effects of a 3% decline in income.

4. Given the demand for bicycles in Holland Q = 2000 + 15Y – 5.5P, where Y is income in thousands of Guilders, Q is quantity demanded in units, and P is price (Guilders per unit). When P is 150 Guilders and Y is 15,000 Guilders, determine the following:

(a) Price elasticity of demand. (b) income elasticity of demand

5. The manager of a supermarket the accidentally miss-marked the price of 10-killo bag of rice at BD4.38 instead of the regular price of BD5.18. At the end of a week, the store's inventory of 200 bags of rice was completely sold out. The store normally sells an average of 150 bags per week.

(a) What is...