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?

3 comments:

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.

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! :)