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1.(a)The price elasticity of demand measures the responsiveness of the quantity demanded to a change in price.

(b)Give the formula for price elasticity of demand.See formula in question 4 below.

2.(a)As -0.2 = %∆Q / %∆P, therefore ∆Q = -0.2 *10% = - 2.0 %;

(b)As -1.6 = %∆Q / %∆P, therefore ∆Q = -1.6 *10% = - 16.0 %;

3.In each of the following pairs, tick which of the two items is likely to have the more elastic demand. Give reasons for your answer.

(a)Petrol (all brands) BP petrol

There is no close substitute for petrol. If the price of petrol went up, the quantity demanded would fall only slightly, as people would still need fuel for their cars. If the price of Esso petrol went up, however (assuming that the prices of other brands had not changed), people could easily switch to other brands.

(b)Holidays abroadBread

People could easily substitute cheaper holidays, at home or abroad, if the price of foreign holidays rose. The substitutes for bread are less close, and people spend a relatively small proportion of their income on bread. A rise in the price of bread, therefore, is likely to result in only a small fall in the quantity demanded.

(c)SaltClothing

People spend such a small proportion of their income on salt that they could easily afford to pay a higher price – and would probably not even be aware that the price had risen. Do you know the price of a drum of salt?

4.The formula for price elasticity of demand is as follows:

Proportionate (or percentage) change in quantity demanded

Proportionate (or percentage) change in price

This can be summarised as:
(Qd / mid Qd ( (P / mid P

The following table shows the quantity of a product demanded at two different prices:

|P ($) |Qd |
|16 |25 |
|14 |35 |

(a)Calculate the proportionate change in quantity demanded when price falls from $16 to $14.
(Use the first part of the formula, i.e. (Qd / mid Qd , to do your calculation.)

(Qd / mid Qd = 10/30 = 0.33

(b)Calculate the proportionate change in price when price falls from $16 to $14.
(Use the second part of the formula, i.e. (P / mid P, to do your calculation.)

(P / mid P = –2/15 = –0.13

(c)What is the price elasticity of demand between $16 and $14?

(Qd / mid Qd ( (P / mid P = 0.33/–0.13 = –2.5

5.The following diagram shows two demand curves that cross at a price of P0.

[pic]

Which of the following statements are true?

(a)Curve D1 is inelastic and curve D2 elastic.False

The price elasticity of demand decreases as you move down a straight-line demand ’curve’, so you can only compare elasticity at particular points on the two curves or over particular segments.

(b)Demand is more elastic between P0 and P1 along curve D2 than along curve D1True

There is a bigger change in quantity demanded for the given change in price along curve D2.

(c)The price elasticity of demand between P0 and P1 in the case of curve D2 is equal to:

Q2 ( Q0 P0 ( P1
( True
mid Q mid P

(d)For any given change in price there will be a larger proportionate change in quantity along curve D1 than along curve D2. False

The opposite is true.

6.Fill in the rest of the following table:

(For the final column use the formula: (Qd / mid Qd ( (P / mid P)

|Quantity demanded (000s) |Price |Total consumer |Elastic or inelastic | | | |($) |expenditure |demand |Price elasticity of | | | | |...
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