Demand and Supply

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Question Four

Mayonnaise exhibits a relatively inelastic relative price elasticity. A change in price does not trigger a significant shift in quantity demanded. The inelasticity can be explained by the fact that mayonnaise is a necessity, consumed regularly, and accounts for a small portion of the total budget of a family or an individual. A specific brand of Mayonnaise, on the other hand, has a relatively elastic demand. A slight change in price result into a larger change in quantity demanded as consumers opt to buy other cheaper brands (Chauhan, 2009).

In the case of Chevrolet automobiles, the price elasticity of demand is relatively elastic since there are numerous substitutes in the market. Also, automobiles are capital items that account for a significant portion of the total budget for an individual. (Chauhan, 2009).

Jaguar automobile is a Veblen good whose relative price elasticity is relatively elastic and positive. The behavior of Veblen goods defies the law of demand such that demand increases as price increase (Dwivedi, 2003). Jaguar not only meets the underlying fundamental need but also for snob appeal. Brand loyalty reduces the number of substitutes in the market limiting shifting to other brands. Therefore, substitution is dependent on whether the consumer considers other brands as substitutes or not (Chauhan, 2009).

Washing machines is a durable good with low relative price elasticity. The more durable a washing machine is, the lower the price elasticity of demand. The item constitutes a significant portion of a person’s budget, and consumers will opt to prolong the machine’s useful life, through repair and replacement of key components and parts, in place of purchasing a new one when prices escalate (Chauhan, 2009).

The relative price elasticity for air travel for air is relatively elastic. Pricing of the service is dependent on season and purpose. Many airlines reduce flight ticket prices significantly during off-peak to spur sales and raise ticket prices during peak seasons. Travel for leisure may be affected by price increase while business trips may not. Travelers may choose other means like train and road trips for domestic travel or plan for vacations during off-peak seasons to avoid higher prices. (Khanna, 2009-10).

Beer is a habit forming commodity with relatively inelastic relative price elasticity. Consumers of beer seem insensitive to price changes stabilizing demand even when prices increase. On the other hand, diamond rings have relatively elastic relative price elasticity due to a large number of substitutes in the market the fact that diamond rings account for a significant portion of the total budget for a person (Chauhan, 2009)


Question six

Cross-elasticity coefficient for personal computers and software is negative. The two items are complementary goods. The decrease in demand for one product results in a reduction in the other product’s demand. In the case of electricity and natural gas, the coefficient is positive, since a substitute relationship exists between both products.

Apples and oranges are substitutes with a positive Cross-elasticity coefficient. To consume more of either, a consumer will choose to give up more of one to gain extra units of the other.

Bread and DVRs are unrelated products with zero Cross-elasticity coefficients. Increase or decrease in the price of one product does not impact the other product’s demand directly. However, if they are competing for dollars in a budget, the products may be regarded as substitutes (Khanna, 2009-10).


Question Eleven

Cigarettes and alcohol are habit-forming goods. The demand curves for both are usually relatively inelastic to changes in prices. Any increase in price as a result of additional taxes would have a relatively little effect on the quantity demanded. Therefore, governments will collect higher taxes in the case of cigarettes and alcohol as opposed to a situation where the government would impose taxes on products with an elastic demand resulting in a great decline in the quantity demanded (Khanna, 2009-10).

Question Thirteen

The firm operates in a perfectly competitive market characterized by intense competition In such a market; there are many close substitutes. A slight increase in price by the firm results in loss of a considerable amount of business to competitors who are offering the same product or a close substitute at a lower price. A horizontal demand curve depicts the fact that quantity demanded is highly sensitive to slight changes in price (Chauhan, 2009).

Question eleven

I would expect cross-price elasticity to be negative for Television sets and DVRs since both products are compliments. On the other hand, Rye bread and whole wheat are substitutes with positive cross-price elasticity. The cross-price elasticity is negative for the construction of new residential housing and furniture since both are complimentary goods. No correlation exists between breakfast cereal and men’s shirts as both are unrelated products, thus zero cross-price elasticity except if they are competing for dollars in a budget when they would be regarded as substitutes (Khanna, 2009-10)




Question twelve

  1. Arc price elasticity (pizza)

Percentage Quantity change in pizza demanded ÷ percentage change in price of pizza

= ((130-70)/ ((130+70)/2)) ÷ (($2.50 – $3.50)/ (($2.50+$3.50)/2))

= 60% ÷ -33.33%

= -1.80

  1. Arc cross-price elasticity (soft drinks and pizza) = %change in soft drinks quantity demanded                                                         ÷ % change in price of pizza

= ((90-40)/((90+40)/2)) ÷ (($2.50 –                                                                                                      $3.50)/(($2.50+$3.50)/2))

= 76.92% ÷ -33.33%

= -2.31












Chauhan, S. P. (2009). Microeconomics: An Advanced Treatise. Delhi: PHI Learning Private     Ltd.

Dwivedi, D. N. (2003). Microeconomics Theory and Application. Delhi: Dorling Kindersley      (India) Pvt. Ltd..

Khanna, T. R. (2009-10). Business Economics (First ed.). Delhi: KK Publications Education      Publishers.





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