Answer to Question #123546 in Microeconomics for Lebohang1 Mtuze

Question

Question 2

You are told that the price elasticity of demand for biltong is estimated to be 1.89.

Use this information to answer the questions that follow.

Marks will be awarded for your ability to integrate theory with the scenario provided.

Q.2.1  Identify any six factors that can impact the price elasticity of demand for

biltong; and

 Explain how each one can be applied to achieve this elasticity coefficient.

(12)

Q.2.2 Based on an elasticity coefficient of 1,89, explain how biltong producers can increase total revenue from the sale of biltong.

(4)

Q.2.3 Fitness enthusiasts consider biltong to be an excellent source of protein and a good alternative to drinking a protein shake.

Based on this information, would you expect the cross elasticity of demand for biltong to be positive or negative if the price of protein shakes increases? Explain your answer.

Answer 1

Q 2.1,a) i.The availability of close substitutes.

ii.The proportion of the income spend on the good.

iii. The durability of the good.

iv. The time period of switching between products

v. The number of uses of the commodity.

vi. The frequency of using the goods

Q 2.1,b)Having a price elasticity of demand of more than 1, this implies that the demand for biltong products is elastic, therefore, the quantity demanded changes by a greater percentage than the price.

i.The availability of close substitutes.

when there many close substitutes, as biltong increases their prices, consumers can easily use other alternative products. Therefore,demand becomes elastic since consumers will find it easy to switch from biltong products to the available substitutes.

ii.The proportion of the income spend on the good.

The higher the proportion of income spent on biltong products, the greater the elasticity. Since when the prices increases, consumers can easily minimize their consumption patterns thus purchasing less of biltong products.

iii.The durability of the good.

For goods that can be kept longer, should the price go up, consumers are more sensitive to the changes, consumers will still be willing to purchase. Thus for biltong products, is is more elastic if the prices go up yet they are durable.

iv. The time period of switching between products

When prices rise, consumers may take time to adjust their consumption patterns and find alternatives. For elastic products of biltong, when the adjust time is longer consumers get enough time to find alternative products and switch.

v. The number of uses of the commodity.

For a commodity is cheap and has various purposes, when price falls, its demand increases thus more elastic.

vi. The frequency of using the goods

When consumers are habitual to using biltong products, they will be more responsive to price increase thus elastic.

Q 2.2)To increase the total revenue, biltong needs to reduce the prices. If the demand is elastic at a certain price level, it implies that a fall in price will increase the demand at a grater percentage thus increasing the sales revenue.

Q 2.3)i. Positive cross elasticity.

ii. For substitute goods, as the price of one good increases the demand for the substitute good increases. Therefore,increasing the price of protein shakes, consumers will switch to biltong thus resulting to an increase in its demand.

References

Dr. Dewett, K. K., & Navalur,M. H,. (2006). Modern Economic Theory. S chand: Reprint Edn