Tutorial Questions

1) Briefly explain whether the demand for each of the following products is likely to be price elastic or price inelastic.

a. Milk

b. Frozen pizza

c. Cars

d. Prescription medicine

2) Research has indicated that the demand for soft drinks is relatively price inelastic, while the demand for Coca-Cola is relatively price elastic. Coca-Cola is a type of soft drink so why isn't its price elasticity of demand the same as the price elasticity for soft drinks as a whole?

3)The news article says that farmers' revenue shrank as the price of coffee fell. Explain why this fact tells us the demand for coffee is inelastic.

4)Joe and Bruce sit outside a bar on budget night. Joe eyes his pack of cigarettes with dismay. "Those darn politicians announced another tax on us poor smokers today", he says. Bruce nods with empathy, fingers his smokes and then whines, "They try to tell us that they do it to reduce the number of cigarettes sold in the market. It's just another way for the government to levy more taxes! They should tax the cigarette companies and leave us poor smokers alone".

(a) Do you suppose that the demand for cigarettes is price elastic or price inelastic?

(b) If your guess about price elasticities is right, then discuss and illustrate, will the burden of

the new sales tax be borne by suppliers or more by consumers?

(c)Discuss, is the outcome efficient?

True/False

Please answer the following true/false questions and explain your answer.

1.	Price elasticity of demand measures the responsiveness of quantity demanded to changes in price.
2.	If an elasticity coefficient is equal to -3.5 then we can conclude that a 1% change in the independent variable is associated with a 3.5% change in the dependent variable in the opposite direction.
3.	Your local corner store tells you that it has decreased the price of "Old Grandma's Pies" because it knows that demand for them is price elastic and that this implies that its revenues will increase.
4.	Price elasticity of demand rises when the number of substitutes increases or as the purchase of the good uses up more and more of the consumer's budget.
5.	If the demand for a good is relatively more elastic compared to supply, the consumer will pay a higher burden of sales tax.

Multiple choice

1.The price elasticity of demand coefficient indicates: A.buyer responsiveness to price changes. B.the extent to which a demand curve shifts when incomes change. C.the slope of the demand curve. D.how far business executives can stretch their fixed costs.

2.The price of product X is reduced from $100 to $90 and, as a result, the quantity demanded increases from 50 to 60 units. From this we can conclude that the demand for X in this price range: A.has declined. B.is of unit elasticity. C.is inelastic. D.is elastic.

3.In which of the following instances will total revenue decline? A.Price rises and supply is elastic. B.Price falls and demand is elastic. C.Price rises and supply is inelastic. D.Price rises and demand is elastic.

4.Price elasticity of demand is generally: A.greater in the long run than in the short run. B.greater in the short run than in the long run. C.the same in both the short run and the long run. D.greater for 'necessities' than it is for 'luxuries'.