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ECON 2001.01 Lecture Notes - Lecture 14: Tax Incidence, Price Elasticity Of Demand, Normal Good

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reddolphin448
16 Oct 2018
School
Ohio State University
Department
Economics
Course
ECON 2001.01
Professor
Jeffrey Buser

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13

ECON 2001.01 Lecture 13: Elasticity

14

ECON 2001.01 Lecture Notes - Lecture 14: Tax Incidence, Price Elasticity Of Demand, Normal Good

15

ECON 2001.01 Lecture Notes - Lecture 15: Demand Curve, Utility Maximization Problem, Normal Good

Document Summary

In addition to the effect of the product"s own price on sales, income and the prices of related goods also have an effect that a seller should anticipate. The income elasticity of demand measures how sensitive consumers are to changes in income. Income elasticity of demand is the percentage change in the quantity demanded at a specific price divided by the percentage change in income that produced the demand change, other things being equal. Income elasticity allows us to identify three categories of goods. A positive income elasticity denotes the product is a normal good. When income increases, the demand for a normal good increases. When income decreases, the demand for a normal good decreases. A negative income elasticity denotes the product is an inferior good. When income increases, the demand for an inferior good decreases. When income decreases, the demand for an inferior good increases.

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Related Questions

Data collected from the economy of Cardtown reveals that a 16% increase in income leads to the following changes:

• A 6% increase in the quantity of chips demanded
• A 14% decrease in the quantity of clubs demanded
• A 29% increase in the quantity of diamonds demanded

Compute the income elasticity of demand for each good and use the dropdown menus to complete the first column in the following table. Then, based on its income elasticity, indicate whether each good is a normal good or an inferior good. (Hint: Be careful to keep track of the direction of change. The sign of the income elasticity of demand can be positive or negative, and the sign confers important information.)

Good Income Elasticity of Demand Normal or Inferior Good
Chips choose one: -2.67, -0.37, 0.38, 2.67
Clubs choose one: -1.14, -0.88, 0.88, 1.14
Diamonds choose one: -1.81, -0.55, 0.55, 1.81

Which of the following three goods is most likely to be classified as a luxury good ?

Chips

Diamonds

Clubs

1. When demand is inelastic, a decrease in price will cause
 
a. an increase in total revenue.
b. a decrease in total revenue.
c. no change in total revenue but an increase in quantity demanded.
d.no change in total revenue but a decrease in quantity demanded.
 
2. For which of the following types of goods would the income elasticity of demand be positive and relatively large?
 
a. all inferior goods
b. all normal goods
c. goods for which there are many complements
d. luxuries
 
3. Which of the following should be held constant when calculating the income elasticity of demand?
 
a. the quantity of the good demanded
b. the price of the good
c. income
d. All of the above should be held constant.
 
4. Suppose goods A and B are substitutes for each other. We would expect the cross-price elasticity between these two goods to be
 
a. positive.
b. negative.
c. either positive or negative. It depends on whether A and B are normal goods or inferior goods.
d. either positive or negative. It depends on whether the current price level is on the elastic or inelastic portion of the demand curve.
 
5. As the price elasticity of supply increases, the supply curve
 
a. becomes flatter
b. becomes steeper
c. becomes downward sloping.
d. shifts to the right.

 

6) 1This set of questions focus on elasticity.

a. John’s demand for bananas increases from 4 bananas to 6 bananas when his hourly wage rises from $18 to $30. What is his income elasticity of demand for bananas? Use the standard formula of percentage change to calculate this income elasticity. Are bananas normal or inferior goods for John?

b. John’s demand for bananas dropped from 10 bananas to 6 bananas when the price of apples decreased from $6 per apple to $5 per apple. What is his cross-price elasticity of bananas for apples? Use the arc elasticity formula for the percentage change to calculate this cross-price elasticity. Based upon your value for the cross-price elasticity of demand of bananas for apples, are these two goods substitutes or complements? Explain your answer.

c. Suppose at $4 per banana, Ben can supply an infinite quantity of bananas, but he will supply none at a price below $4. What do you know about his supply when price rises above $4? What is Ben’s price elasticity of supply?