Assignment 2 Econ

College of Business Assignment 2 (Fall-2023-24) Term A WARNING Possession of smart phones or other electronic devices containing course-related materials during the exam is a violation of the Academic Integrity Policy and subjects the student to dismissal from ADU . Signature of Students : ___________________________________ Student Name and ID Number Name : ID # Course Code and Title ECO 482-PC, Introduction to Economics Course Section Section 02, Term A Course Instructor Dr Ilham Haouas Date and Duration of the Exam 20/09/2023 Exam Type (open/ closed book ( Closed book M ARKING S CHEME : Question s Score CLO Questio n Scor e CLO Question CLO 3 Total Score → 1 ــــــــــ ـ

Assignment 2 You are assigned to answer the following question: You have to submit your answer in a hard copy. Do not forget to mention your name and your id in your answer sheet. The due date (deadline) for the assignment is Wednesday, September 20 th 2023. In case you have any questions do not hesitate to contact me. Question 1 Suppose the price of orange increases from $0.80 to $1.00 a pound, and the quantity demanded decreases from 100 pounds to 95 pounds. a- What is the price elasticity of demand? -(2 marks) To calculate the price elasticity of demand (PED), you can use the following formula: PED % change ∈ quantity demanded % change ∈ price Here, you have the initial price (P1) as $0.80 per pound, the final price (P2) as $1.00 per pound, the initial quantity demanded (Q1) as 100 pounds, and the final quantity demanded (Q2) as 95 pounds. % change in price = P 2 − P 1 P 1 ∗ 100 % change in price = 1.0 − 0.8 0.8 ∗ 100 = 25% % change in demand = Q 2 − Q 1 Q 1 ∗ 100 % change in demand 95 − 100 100 ∗ 100 =− 5% PED= − 5 % 25 % PED =- 0.2 b- Is the demand elastic, inelastic, or unit elastic?-(2marks) The negative sign in the PED value indicates that the demand for oranges is inelastic. In this case, a 25% increase in the price of oranges led to a 5% decrease in the quantity demanded. The absolute value of PED (0.2) is less than 1, which confirms the inelastic nature of the demand. This means that consumers are not very responsive to changes in the price of oranges, and the total revenue may increase when the price is raised. 2

Question 2 Consider two goods: peanut butter and jelly. If the price of jelly increases from $2 a jar to $3 per jar, the quantity demanded of peanut butter decreases from 50 to 45 jars. a- What is the cross elasticity of demand between peanut butter and jelly?-(2.5 marks) To calculate the cross elasticity of demand (XED) between peanut butter and jelly, you can use the following formula: XED= % change ∈ quantity demanded of peanut butter % change ∈ the priceof jelly Here, you have the initial price of jelly (P Jelly ,1) as $2 per jar, the final price of jelly (PJelly,2) as $3 per jar, the initial quantity demanded of peanut butter (Q Peanut Butter 1) as 50 jars, and the final quantity demanded of peanut butter ( Q Peanut Butter ,2) as 45 jars. Let's calculate the percentage change in the price of jelly and the percentage change in the quantity demanded of peanut butter: Percentage Change in the Price of Jelly: % change in price of jelly= PJelly 1 ¿ PJelly 1 ¿ ¿ PJelly 2 − ¿ ¿ ¿ % change in the price of jelly= 3 − 2 ¿ ¿ ¿ =50% Percentage Change in the Quantity Demanded of Peanut Butter: %Change in quantity demanded of peanut butter = Q peanut Butter, 2 − Q PeamutButter , 1 Q Peanut Butter, 1 *100 %Change in quantity demanded of peanut butter = 45 − 50 50 ∗ 100 =− 10% Now, plug these values into the XED formula: XED=-10%/50% =-0.20 b- Is the good a substitute good or an complement good?-(2.5 marks) 4

The negative sign in the XED value indicates that peanut butter and jelly are complementary goods. When the price of jelly increased by 50%, the quantity demanded of peanut butter decreased by 10%. This negative relationship suggests that these two goods are typically consumed together, and when the price of one increases, the demand for the other decreases. 5