PED and YED Practice Questions
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Nomvuma GubesaPED and YED Practice Questions
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Nomvuma GubesaCommon questions
Powered by AIUsing the midpoint formula for income elasticity of demand: (-50% change in quantity) / (150% change in income) = -0.33. Since the income elasticity is negative, canned tuna is an inferior good in this context, meaning consumption decreases as income increases .
Using the midpoint formula: ((Q2 - Q1) / ((Q2 + Q1)/2)) / ((P2 - P1) / ((P2 + P1)/2)), and given that the percentage change in quantity is 0.05, we get PED = 0.05 / ((35 - 30) / ((35 + 30)/2)) = 0.05 / (5/32.5) = 0.32. Therefore, the price elasticity of demand is 0.32, indicating inelastic demand .
The midpoint formula indicates the PED for cream soda is 1.5, suggesting elastic demand. With elastic demand, an increase in price leads to a more than proportionate decrease in quantity demanded, hence total revenue decreases: initial revenue = R8 * 100 = R800, new revenue = R12 * 50 = R600. Therefore, revenue declines by R200 .
The cross-price elasticity of Doritos relative to Pringles is 5.0, indicating substitutes as the quantity of Doritos increases by 50%. Coca Cola's cross-price elasticity is -2.5, suggesting complements as the quantity demanded decreases. Aero Chocolates have elasticity of 0, showing no relationship. These elasticities suggest consumer choices rely heavily on perceived substitution and complementarity between these goods when prices change .
Income elasticity of demand (YED) measures how the quantity demanded of a good responds to changes in consumer income. It is calculated as % change in quantity demanded / % change in income. A positive YED indicates a normal good (demand increases with income), while negative indicates an inferior good (demand decreases with higher income). This concept aids in predicting consumer behavior and guiding production based on economic trends .
Price elasticity of demand (PED) measures the responsiveness of the quantity demanded of a good to a change in its price, while the slope of the demand curve measures the change in price over the change in quantity. The equation for PED is % change in quantity demanded / % change in price, whereas the slope is derived directly from the demand function, such as dP/dQ from the demand curve equation. Unlike the slope, PED is usually a dimensionless measure, and it varies along the curve. A PED less than 1 indicates inelastic demand, equal to 1 indicates unitary elasticity, and greater than 1 indicates elastic demand .
A positive cross-price elasticity indicates that Doritos and Pringles are substitute goods. A 50% increase in Doritos consumption as Pringles prices rise by 10% implies that consumers consider these products interchangeable to some extent. This could lead to competitive pricing strategies among similar snack brands .
Using the midpoint formula, PED is ((50 - 100) / (75)) / ((12 - 8) / (10)) = -1.5. A PED of -1.5 indicates that demand is elastic; quantity demanded is highly responsive to price changes. When firms increase prices, a significant decrease in sales follows, suggesting that consumers readily substitute cream soda with alternative products .
The midpoint formula gives the elasticity of supply as ((2000 - 1000) / ((2000 + 1000)/2)) / ((150 - 100) / ((150 + 100)/2)) = 1.2, indicating elastic supply. This suggests that the quantity supplied is responsive to price changes, typically due to flexible production processes during the World Cup period .
Using the demand function P = -25Qd + 100, we first solve for Q when P = 20 to find Q = 3.2. The point elasticity formula is (dQ/dP) * (P/Q). The derivative dQ/dP from P = -25Qd + 100 is -1/25. Substituting into the formula gives (-1/25) * (20/3.2), which equals -0.25. Thus, the price elasticity of demand at P=20 is -0.25, indicating inelastic demand .