Calculating and Interpreting Elasticity
This analysis assessment has three parts. While responding to each part, make sure that you show the formula prior to your complete calculation. Listing only the final answer will not earn credit.
Part I. Using the midpoint method, calculate and interpret the price elasticity of demand for the following situation:
a. When the price of oranges increases from $1.00 per pound to $1.50 per pound, quantity demanded falls from 500 pounds to 400 pounds. Calculate the price elasticity of demand.
400+500 = 450
2
$1.00 + $1.50 = $1.25
2
500-400 x 100 = 22.2%
450
$1.00 – $1.50 x 100 = 40%
$1.25
22.2%= .55
40%
b. Is the demand for oranges price elastic, inelastic, or unit elastic? Explain
Because the elasticity is less than 1 the price is inelastic
c. Calculate total revenue before and after the price change. How does that relate to the elasticity interpretation?
Part II. Given the following information, calculate the income elasticity of demand using the midpoint formula.
a. Nancy's income increases from $20,000 to $30,000 and her consumption of spaghetti changes from 10 pounds per month to 2 pounds per month. Calculate the income elasticity of demand.
b. Interpret the result.
Part III. Given the following information, calculate the cross-price elasticity of demand.
a. The quantity of Pepsi purchased rises by 15% when the price of Coca-Cola rises by 30%. Calculate the cross-price elasticity.
b. Interpret the result.
Submission Requirements:
Formulas and calculations must be shown along with the final correct answer.
Attach a Word document that contains all answers.
Format: Double line space, Times New Roman, 12-point font