Answer to Question #140243 in Microeconomics for Thelma

Question

is a producer of commodity Xwho has experienced an increase in the cost of producing the commodity. As a result, he responds by increasing the price of commodity X from ZMW5 to ZMW10 and continues to produce 250 units of commodity X. Consumers of commodity X respond by reducing the quantity demanded. As such, Alfred's sales reduce from 250 units to 200 units of commodity X. REQUIRED: i. ii. iii. iv. V Define a necessity good in terms of elasticity. Find the price elasticity of supply. Is supply elastic, inelastic or unit elastic? Justify. Find the price elasticity of demand. Is demand elastic, inelastic or unit elastic? Justify. Calculate the loss in consumer surplus to the buyers of commodity X. Calculate the dead-weight loss to the society. Draw a well labelled diagram showing (v) and (vi). State four ways in which you can display the law of demand

Answer 1

Normal goods whose income elasticity of demand is between zero and one are typically referred to as necessity goods, which are products and services that consumers will buy regardless of changes in their income levels.

The price elasticity of supply is zero, because there was no change in quantity supplied. So, the supply is very inelastic.

The price elasticity of demand is:

$Ed = \frac{200 - 250} {10 - 5} × \frac{10 + 5} {200 + 250} = -1/3.$

So, the demand is inelastic.

The loss in consumer surplus to the buyers of commodity X is:

$\Delta CS = 0.5×(250 - 200)×(10 - 5) = ZMW125.$

The dead-weight loss to the society is:

DWL = (250 - 200)×10 = ZMW500.

The four ways in which you can display the law of demand are: demand schedule, demand function, demand curve and elasticity of demand.