question archive You have hired a student intern to calculate some elasticity measures so that you can present the findings at a prestigious economics conference
You have hired a student intern to calculate some elasticity measures so that you can present the findings at a prestigious economics conference
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You have hired a student intern to calculate some elasticity measures so that you can present the findings at a prestigious economics conference. For the measures below, provide a quick interpretation, and then determine whether you should trust the intern's work or not. After all, it will be you in front of that critical audience of professionals, not the intern.
a. "The income elasticity of demand for movie theatre tickets is 1.5."
b. "The price elasticity of demand for milk is 0.4 in the short run and 0.9 in the long run."
c. "The cross-price elasticity of demand for Cheerios cereal with respect to the price of Wheaties cereal is 2."
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a)The income elasticity of demand for movie theatre tickets is 1.5. It means if income increase by 10 percent, demand for movie theatre tickets would fall 15 percent. There is a negative relationship between income and demand, which concludes movie tickets are an inferior good. But in general, they are not inferior goods. So, it might be possible that there is a mistake that has to be investigated.
b)The price elasticity of demand for milk is 0.4 in the short run and 0.9 in the long run. It explains that if the price of milk increase by 10%, the quantity demanded will fall by 4% in the short run and fall by 9% in the long run. The conclusion may be true because goods are more elastic in the long-run.
c)The cross-price elasticity of demand for Cheerios cereal concerning the price of Wheaties cereal is 2. Suppose the price of wheat increases by 10%, the demand for cereal will fall by 20%. These two brands of cereals are compliments, which means when the price of wheat increases, the demand for Cheerios cereal will decrease by this measure of elasticity. But actually, these two goods are substitutes as they both are breakfast cereals, so that this elasticity calculation might be wrong.
Elasticity of demand
Elasticity of demand is a concept which explains the demand patterns of different individuals. The elasticity of demand depends upon the nature of product. And it is measured with the help of different degrees.
