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Week 4_Tutorial Questions -High School For The Gifted ECON 1000

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ECO10004: ECONOMIC PRINCIPLES WEEK 4_TUTORIAL QUESTIONS Key concepts: Elasticity, Price Elasticity of Demand, Elastic, Inelastic, Cross-price Elasticity of Demand, Income Elasticity of Demand. Sh ... ort-answer Questions Question 1) If a 10 percent increase in the price of Kellogg’s cereal causes a 25 percent reduction in the number of boxes of cereal demanded, what is the price elasticity of demand for Kellogg’s cereal? Is the demand for Kellogg’s cereal elastic or inelastic? Elasticity ( E ) = % change∈Q % change∈P = −25% 10% =−2.5 The relationship between price and quantity is negative Elasticity take an absolute value so 2.5 >1 so it’s elastic demand Question 2) Suppose you own a bookstore. You believe that you can sell 40 copies per day of the latest J.K.Rowling novel (a sequel to the Harry Potter series) when the price is $35. You consider lowering the price to $25 and believe this will increase the quantity sold to 50 books per day a. Using the mid-point formula and based on the data above, calculate the price elasticity of demand for the latest J.K.Rowling novel in your bookstore b. Is the demand for the novel elastic or inelastic? c. Would you go ahead and reduce the selling price? How will that decision affect your total revenue? a) Mid-point formula elasticity = 50−40 ( 50+40 2 ) 25−35 ( 25+35 2 ) = 10 45 −10 30 = 30 −45 = −2 3 =−0.6666667 b) Elasticity = -0,6667 < 1 so it’s inelastic. c) When elasticity is lower than 1, the decrease in price does not increase demand. SO the total revenue falls if price is reduced [Show More]

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