Microeconomics Assignment 1 – Elasticity Questions & Case Study
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| University | Singapore Management University (SMU) |
| Subject | Microeconomics |
Microeconomics Assignment 1 Questions
Q.1 How would the following changes in price affect total revenue? That is, would total revenue increase, decline, or remain unchanged?
i. Price falls and demand is inelastic.
ii. Price rises and demand is elastic.
iii. Price rises and supply is elastic.
iv. Price rises and supply is inelastic.
v. Price rises and demand is inelastic.
vi. Price falls and demand is elastic.
vii. Price falls and demand is of unit elasticity
Q.2 What is the formula for measuring the price elasticity of supply? Suppose the price of apples goes up from $20 to $22 a box. In direct response, Goldsboro Farms supplies 1200 boxes of apples instead of 1000 boxes. Compute the coefficient of price elasticity (midpoints approach) for Goldsboro’s supply. Is its supply elastic, or is it inelastic?
Q.3. Suppose the cross elasticity of demand for products A and B is 3.6 and for products C and D is -5.4. What can you conclude about how products A and B are related? Products C and D?
Q.4. The income elasticities of demand for movies, dental services, and clothing have been estimated to be 3.4, 1, and .5, respectively. Interpret these coefficients. What does it mean if an income elasticity coefficient is negative?
Q.6 Suppose a movie theater raises the price of popcorn 10 percent, but customers do not buy any less popcorn. What does this tell you about the price elasticity of demand? What will happen to total revenue as a result of the price increase?
Q.7 Charles loves Mello Yello and will spend $10 per week on the product no matter what the price. What is his price elasticity of demand for Mello Yello?
Q.8. Which of the following pairs of goods has the higher price elasticity of demand?
i. Oranges or Sunkist oranges
ii. Cars or salt
iii. Foreign travel in the short run or foreign travel in the long run
Q.9 Suppose the income elasticity of demand for furniture is 3.0 and the income elasticity of demand for physician services is 0.3. Compare the impact on furniture and physician services of a recession that reduces consumers’ incomes by 10 percent.
Q.10 In Lahore, Pakistan, the ride-hailing industry has grown rapidly in recent years. Companies like Uber and Careem compete with traditional transport modes such as rickshaws . As fuel prices and consumer incomes fluctuate, both ride-hailing apps and traditional operators face challenges in adjusting prices to maintain demand. The Department of Economics at COMSATS University conducted a survey of 1,000 commuters in Lahore to understand their travel preferences. The findings are summarized below.
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Survey Results
1. Average Price & Demand Data for Uber Rides (short distance trips):
| Price per ride (PKR) | Quantity Demanded (trips/day) |
| 300 | 1,000 |
| 250 | 1,200 |
| 200 | 1,500 |
| 150 | 2,000 |
2. Income Levels & Demand for Uber Rides (at fixed price PKR 200):
| Monthly Income (PKR) | Average Trips per Month |
| 40,000 | 6 |
| 60,000 | 12 |
| 80,000 | 20 |
3. Cross-price Effect (Price of Rickshaw vs. Demand for Uber at PKR 200):
| Average Rickshaw Fare (PKR) | Uber Trips per Day |
| 150 | 1,000 |
| 200 | 1,400 |
| 250 | 1,800 |
(A) Price Elasticity of Demand (PED)
a. Using the midpoint method, calculate the price elasticity of demand when Uber reduces fare from PKR 250 to PKR 200.
b. Interpret whether demand is elastic, inelastic, or unit elastic.
c. Discuss what this implies for Uber’s pricing strategy.
(B) Income Elasticity of Demand (YED)
a. Calculate the income elasticity of demand when monthly income rises from PKR 40,000 to PKR 60,000.
b. Classify Uber rides as normal good or luxury good.
c. Discuss how changes in Pakistan’s middle-class income might affect ride-hailing demand.
(C) Cross Elasticity of Demand (XED)
a. Calculate the cross elasticity of demand when the rickshaw fare rises from PKR 150 to PKR 200.
b. Interpret whether Uber and rickshaws are substitutes or complements.
c. Suggest strategies Uber could adopt based on changes in public transport fares.
Discussion Questions
a. How can Uber use elasticity analysis for dynamic pricing strategies (peak vs. off-peak hours)?
b. If fuel prices rise, how might this affect both supply costs and consumer demand elasticities?
c. What policy implications could be drawn for government regulation of urban transport pricing?
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