Review Questions – Chapter 7. ECON 500 – Spring 2004. Chapter #7 (“Market Demand and Elasticity”): Questions for Review: 2, 3, 4, 5, 7, and 9. Problems and Applications: 1, 2, 4, 5, 8, and 10. Additional Questions: 1) Consider a product with demand given by the inverse function qqPD51200)(−= . a. Determine total consumer expenditure on this commodity as a function of quantity. How much expenditure is generated when zero units are sold? How much expenditure is generated when 1,000 units are sold? b. Graphically illustrate total expenditure as a function of quantity. c. Determine an expression for price elasticity of demand as a function of quantity. d. Determine all quantities for which: demand is elastic, demand is inelastic, and demand is unit elastic. What quantity maximizes total expenditure on this commodity? 2) Farid, Jean-Jacques, and Quang have estimated the following elasticities for Coca-Cola and Pepsi at the current market prices: Elasticity Coca-Cola Pepsi Price Elasticity of Demand 1.47 1.55 Cross-Price Elasticity of Demand .52 .64 Income Elasticity of Demand .58 1.38 Based upon these estimates, answer the following questions. a. At the current market price, is the demand for Coca-Cola elastic, inelastic, or unit elastic? Is the demand for Pepsi elastic, inelastic, or unit elastic? Would an increase in the price of Coca-Cola increase or decrease total expenditure on Coca-Cola? Would an increase in the price of Pepsi increase or decrease total expenditure on Pepsi? Explain. b. Are Coca-Cola and Pepsi substitutes for or complements to each other? Would a decrease in the price of Coca-Cola lead to an increase or a decrease in the demand for Pepsi? Would a decrease in the price of Pepsi lead to an increase or a decrease in the demand for Coca-Cola? Explain. c. Is Coca-Cola a normal good or an inferior good? Is Pepsi a normal good or an inferior good? Would an increase in consumer income lead to an increase or a decrease in the demand for Coca-Cola? Would an increase in consumer income lead to an increase or a decrease in the demand for Pepsi? Explain.3) Consider the demand function 2500)(ppD = . a. State an expression for price elasticity of demand. b. For what range of prices is demand elastic, inelastic, and unit elastic? Explain. c. How does total expenditure behave as price is decreased? Exaplain. d. Redo parts (a), (b), and (c) if instead 2000,5)(ppD = . Redo parts (a), (b), and (c) if instead 5.500500)(pppD ==
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