Monday, March 06, 2006

Elasticity stuff...

You guys are doing very well on the questions from earlier postings! I can't help but notice, though, that some questions are very sad because they're being ignored. ;) Also, two of them may be easier to answer now that you have more info. Any takers?

1. Other thing equal, an increase in the number of buyers for a product or service will increase demand. Baby diapers and retirement villages are two products designed for different population groups. The US Census Bureau website, http://www.census.gov/ipc/www/idbpyr.html , provides population pyramids (graphs that show the distribution of population by age and sex) for countries for the current year, 2025, and 2050. View the population pyramids for Mexico, Japan, and the US. Which country will have the greatest percentage increase in demand for baby diapers in the year 2050? For retirement villages? Which country do you think will have the greatest absolute increase in demand for baby diapers? For retirement villages?


2. Taxicab fares in most cities are regulated. Several years ago, cab drivers in Boston obtained permission to raise their fares 10%, and they anticipated that revenues would increase by about 10% as a result. They were disappointed, however. When the commissioner granted the 10% increase, revenues increased by only about 5%. What can you infer about the elasticity of demand for taxicab drivers? What were cab drivers assuming about the elasticity of demand? (You may not be able to answer this one without looking up other ways to determine elasticity in your book) :)


3. Studies have fixed the short-run price elasticity of demand for gasoline at the pump at -.20. Suppose that international hostilities lead to a sudden cut off of crude oil supplies. As a result, US supplies of refined gasoline drop 10%. If gasoline was selling for $1.40 per gallon before the cutoff, how much of a price increase would you expect to see in the coming months?

11 comments:

The Amazing O-clam said...

2. The cab drivers had assumed that cabs were an inelastic good (service), but when the price raised, the demand fell, and as a result they got more money per cab fare, but they got less fares overall

Bethany said...

1. For baby diapers, the U.S. is the only country out of the 3 that is expected to have an increase in babies from 2000 to 2050. The roughly 46% increase will most surely provide a greater demand for baby diapers.
The U.S. is expecting roughly a 142% increase in elderly people from 2000 to 2050. It also wins in the race for greatest percent increase of retirement homes.
As far as absolute increases, the U.S. wins for both baby diapers and retirement homes, but that is because the U.S. has a much larger population than Mexico or Japan. Since population is exponential, it is not surprising that the expected percentage increase for both age groups is so much greater in the U.S. than the other two countries.

Bethany said...

3. For gasoline prices, you should expect a 50% increase ($.70), bringing the price from $1.40 to $2.10.

forsnic said...

the u.s. was the only country that had an increase in the youngest age group so therefore more DIAPERS needed. it has the absolute advantage. japan had the largest older population so they will need more retirement homes/demand will increase. however, mexico probably had the greatest absolute increase. i dont really understand the whole percentage increase thing. i'm not sure if i agree with bethany's comment on how the U.S. has a greater population than Japan or Mexico.

forsnic said...

i dont understand num 3 at all. can someone help explain it to me?

NicolleM said...

10%/x%=what...i don't get it...I wanted to explain it to Nicki, but now I don't understand. BETHANY!! HELP!

KM said...

Nicki & Nicolle -

This is just using the elasticity coefficient, but backwards. Instead of finding the elasticity, you are given that and must find the price.

gorman said...

1. I would have to agree with bethany about question 1...Usa is expecting teh most babies in 2050 and will also have the most absolute increase in diapers and retirement homes because of the large population...As far as retirement home demand i think it could be mexico because there are so many young people right now, so in 50 years all of them will be older... that is the only part i disagree with bethany on

helen said...

2 the taxi drivers assumed that the demand was more inelastic than it really was; the actual demand for taxis is pretty elastic

KM said...

You guys are right on the cab drivers, and even on the growth/population pyramids.

Can anyone explain the gas prices one?

KM said...

The percentage increase one is the harder one, Nicki. It would mean you'd have to be looking at the percentage change over time - which would involve a comparison over years.

Absolute increase would look at just the numbers. Percentage increase allows for a better comparison, but you have to figure more out.

You got the absolute, though! :)