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IB1 ECONOMICS: ELASTICITY ASSIGNMENT

ANSWER IN THE SPACE PROVIDED

1. Calculate the price elasticity of demand (PED) for CD’s if an increase in the price of CD’s from 15 euro to 18 euro causes the quantity demand to fall from 1000 to 900 units.

2. According to your calculation above, do CD’s have elastic, inelastic or unit elastic demand? Explain your answer.

3. Explain the significance of the co-efficient of the PED calculated in question 1. What exactly does it tell you?

4. If a 7% decrease in the price of peanut butter causes total revenue to increase, what do you know about the demand for peanut butter?

5. Which of the following two goods would you expect to have more ELASTIC demand: A Philips television OR the DVD of The Matrix? Explain your answer.

6. A decrease in membership fees to join a fitness center will result in a decrease in the fitness center’s total revenue if the PED for memberships is: a. less than 0
b. greater than 0 but less than 1
c. equal to 1
d. greater than 1
Circle the correct answer above and then explain your choice.

7. If the price elasticity of demand for milk is - ⅔ and the price of milk falls by 20%, will the quantity demanded increase or decrease? By how much?

8. Calculate the income elasticity of demand (YED) for going to the movies given that an increase in income from 1875 euro to 2000 euro a month causes demand for going to the movies to increase from 4 movies a month to 6 movies a month.

9. Would going to the movies be considered a normal good or an inferior good? Would it be considered a necessity or a luxury? Briefly explain both answers.

10. If an 8% increase in income causes a 4% decrease in the consumption of chocolate bars,...
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