Please write your answers for each of the following question

Please write your answers for each of the following questions. 0 1. Five brief scenarios are presented below. Apply the correct elasticity term to each scenario and explain your answer. (a) John must have an appendectomy. Upon arriving at the hospital he is told that for this week only they are doing abdominal operations at half price. Even in the face of a 50 percent price cut, John insists that he wants only one operation. (b) The Dell Corporation announces that it is willing to sell as many model 3000 computers as are ordered at a fixed price of $500 per unit. (c) Northwest Airlines increased all its fares by 25 percent. As a result the number of passengers declined by 25 percent and the total revenue of Northwest Airlines remained the same. (d) Newsweek magazine raised its price to annual subscribers by 50 percent. As a result annual subscriptions fell by 30 percent. Although it lost some readership, Newsweek significantly increased its revenues. (e) The price of soybeans went up by 60 percent. In response farmers planted more soybeans and output increase by 70 percent. 2. What is the income elasticity of demand? How can it be used to determine whether a good is a normal good or an inferior good? What is the cross-price elasticity of demand? How can it be used to determine whether two goods are substitutes or compliments?

Solution

1) a) perfectly inelastic demand. Even when price for operation falls by 50% his demand for operation dies not change.

b) perfectly elastic supply, Dell is ready to supply as many model 3000 computers when Price is fixed at 500, when price falls out will not sell any computer.

c) unit elastic demand. When price increases by 25% demand for airlines reduces by 25%, rate is same.

d) inelastic demand. Decrease in demand for annual subscriptions is lower than increase in price. Demand does not respond much to change in price.

e) elastic supply. Increase in supply is higher than increase in price. Supply respond at a higher rate to changes in prices.