Submitted by: Submitted by POHJOO
Views: 390
Words: 569
Pages: 3
Category: Business and Industry
Date Submitted: 12/03/2011 06:44 PM
TOPIC: ELASTICITY OF DEMAND AND SUPPLY
TABLE OF CONTENT
PAGE
I PROBLEM
II RELEVANT THEORIES
III SOLUTION
i. QUESTION 1
ii. QUESTION 2
iii. QUESTION 3
IV APPENDIX
II RELEVANT THEORIES
1. The Income elasticity of demand ( QUESTION 1):
* Measure the responsiveness of a change in quantity demanded of some commodity to a change in income.
2. Arc Income elasticity (QUESTION 1):
Income elasticity between 2 income levels
3. Income elasticity (εy) (QUESTION 1):
* εy > 0 (positive), refers to normal goods
0< εy < 1 necessity good
εy > 1 (luxury good)
* εy < 0 (negative), refers to inferior goods
III SOLUTION
i. Question 1
Calculate the income elasticity of demand and explain.
Solution:
Given:
Q0= 10,500 potted plants, Y0 = $34,200
Q1= 7,500 potted plants, Y1= $30,600
By using Arc Income Elasticity formula:
Interpretation:
The income elasticity is 3.0. This means that a 10% increase in income will lead to 30% increase in the quantity demanded. As the value for income elasticity is greater than 1 (Ey>1), this implies that potted plants sell in Interior’s landscape is a luxury good.
ii.
Question 2
Given the projected fall in income, the sales manager believes that current volume of 10,500 plants could only be maintained with a price cut of $5 per unit. On this basis, calculate the price elasticity of demand and explain
Solution:
i) The market in Equilibrium
P
Q
D
$25
10500
S
ii) When income dropped, the demand curve shift to leftward
P
Q
D
$25
10500
D
7500
iii) As Sales manager wish to maintain the sales at 10,500 plants, he reduced the price to $20
P
Q
$25
10500
D
7500
$20
Given:
Q0= 7,500 potted plants, P0 = $25
Q1= 10,500 potted plants, P1= $20
Interpretation:
The income elasticity is -1.53 which is a negative value. This means that when price of greenery DECREASE by 10%, the...