QUIZ 112 OCTOBER 2017 BFT101 BUSINESS ECONOMICS ELASTICITY O

QUIZ #1-12 OCTOBER 2017 BFT101 BUSINESS ECONOMICS (ELASTICITY OF DEMAND AND SUPPLY) ANSWER ALL QUESTIONS 1. Anna owns the Sweet Alps Chocolate store. She charges RM10 per 100 grams for her hand made chocolate. You, the economist, have calculated the elasticity of demand for chocolate in her town to be 2.5. f she wants to increase her total revenue, what advice will you give her and why? Be able to explain your answer 2. If the cross elasticity of demand between peanut butter and milk is -1.11, then are peanut butter and milk substitutes or complements? Be able to explain your answer. 3. A 10 percent increase in income brings seout a 15 percent decrease in the demand for a good. What is the income elasticity of demand and is the good a normal good or an inferior good? Be able so explain your answer 4 If the price of a product increases by 8% and the quantity demanded decreases by 12%, what is the price elasticity of demand? Ist elastic, inelastic or unitary elastic? 5. Discount stores sell relatively elastic goods. Ceteris paribus, explain why selling at a relatively low price is profitable for them? Soluhon

Solution

Question 1

There exists a relationship between elasticity of demand and total revenue.

If demand for a good is inelastic then an increase in price leads to increase in total revenue while a decrease in price leads to decrease in total revenue.

If demand for a good is elastic then an increase in price leads to decrease in total revenue while a decrease in price leads to increase in total revenue.

If demand for a good is unit elastic then either increase in price or decrease in price will have no impact on total revenue. In other words, total revenue will remain unchanged.

The elasticity of demand for chocolate in Anna\'s town is 2.5.

Since, the value of elasticity of demand is greater than one, demand for chocolate is elastic.

In case of elastic demand, decrease in price leads to increase in total revenue.

So, we will advice Anna to decrease the price she charges for her chocolate if she wants to increase her total revenue.