Question

Cross Price Elasticity: At movie theater, when the price of a Coke falls from $1.49 to $1.29, the sale of M&M’s increases from 60 packs to 80 packs. What is the cross-price elasticity? What does it say about the relationship between Coke and M&M’s, are they complements or substitutes?

Income Elasticity of Demand: A college student eats ramen noodles twice a week and earns $300 a week working part time. After graduating, the student earns $1000 a week and eats ramen noodles once every other week (0.5 times week). What is the income elasticity? Are Ramen Noodles inferior or normal goods?

Price elasticity of supply: The price of a barrel of oil increases from $50 to $100. New output is 2 million barrels a day and the previous output was 1.8 million barrels a day. What is the price elasticity of supply?

Answer 1

The negative cross-price elasticity of -2.48 indicates that Coke and M&M's are complementary goods. The negative income elasticity of demand for ramen noodles at -0.32 suggests they are an inferior good. The price elasticity of supply for oil is 0.11, indicating a relatively inelastic supply response to the price change.

Step-by-step explanation:

To calculate the cross-price elasticity of demand you need to use the formula:

Cross-price elasticity of demand = (Percentage change in quantity demanded of good A) / (Percentage change in price of good B)

When the price of a Coke falls from $1.49 to $1.29, the percentage change in price is -13.42%. The quantity of M&M's sold increases from 60 to 80 packs, which is a 33.33% increase. Plugging in the values we get:

Cross-price elasticity of demand = 33.33% / -13.42% = -2.48

A negative cross-price elasticity indicates that Coke and M&M's are complementary goods. As the price of Coke decreases, the sale of M&M's increases

The income elasticity of demand measures how the quantity demanded changes as consumer income changes. It can be calculated as the percentage change in quantity demanded divided by the percentage change in income. Using the given data:

Income elasticity of demand = (Percentage change in quantity demanded) / (Percentage change in income)

The quantity demanded decreases from 2 times a week to 0.5 times a week, which is a -75% change. The income increases from $300 to $1000, a 233.33% change. Thus we get:

Income elasticity of demand = -75% / 233.33% = -0.32

A negative income elasticity indicates that ramen noodles are an inferior good; as income increases, the quantity demanded for ramen noodles decreases.

The price elasticity of supply demonstrates how much the quantity supplied of a good responds to a change in price. The formula is:

Price elasticity of supply = (Percentage change in quantity supplied) / (Percentage change in price)

For oil, the price increase from $50 to $100 is an increase of 100%. The quantity supplied increases from 1.8 million barrels a day to 2 million barrels a day, which is an 11.11% increase. Thus:

Price elasticity of supply = 11.11% / 100% = 0.11

A price elasticity of supply of 0.11 indicates that the supply of oil is relatively inelastic; when the price doubles, the quantity supplied does not increase proportionately.