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# Suppose you are given the following data on the market demand and supply for record albums in a small record store.

INSTRUCTIONS TO CANDIDATES

1. Suppose you are given the following data on the market demand and supply for record albums in a small record store.

Price QD Ed Price Qs Es TR

\$30 18 \$30 56

25 26 25 45

20 34 20 34

15 42 15 23

10 50 10 12

5 58 5 1

a. Calculate the price elasticity of demand and place it in the table above. (Round answers to 2 decimal places.)

b. Calculate the price elasticity of supply and place it in the table above. (Round answers to 2 decimal places.)

c. Using the values for quantity demanded for this product at each price, calculate the total revenue (TR) which would be earned at each price level. Place it in the table above.

a. At higher prices, would the elasticity of demand have a higher or lower value?

b. Total revenue is at the lowest value where the price elasticity is elastic, inelastic or unitary?

c. As you move down a demand curve, the price elasticity of demand becomes more elastic or more inelastic?

d. If demand is in an area where it is elastic and prices decrease, what would happen to total revenue? Would it increase, decrease, or not change?

3. Suppose the price of chicken has recently fallen by 10%.  As a result, more cheese is being sold in the store. The quantity of cheese sales is up 20%.

What is the cross price elasticity for cheese and chicken?

Are these two goods complements or substitutes?

4. Based on the information provided alone, characterize the following goods as being more price elastic or more price inelastic.

a. A \$1 box of salt that you buy once a year (inexpensive item)

b. An expensive HD television (a luxury item)

c. A specific drug that you must take to remain alive (a necessity)

d. A Golden Delicious variety of apple (an item with good substitutes)

e. An airline ticket that you are purchasing to travel somewhere during the next year (the long run)

5. Suppose we have the following information for a family:

Income per Month Quantity of product demanded per month Income Elasticity

\$100 40

\$200 100

\$300 170

\$400 220

\$500 240

\$600 230

a. Calculate the income elasticity of the product and place it in the table above. (Round answers to 2 decimal places.)

b. At what income level does this product become an inferior good?

c. How could you tell?

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