S1W6

Zeenat the Witch spends all her income on spell books and broomsticks. Her demand curve for

broomsticks is elastic. True or false: If the price of broomsticks rises, she consumes more spell

books. Explain.

• A -True

• B -False

Answer explanation

True. The demand for broomsticks is elastic. When their price goes up, the total expenditure

on broomsticks goes down. Thus, the share of income available for spell books increases. Since

the price of spell books is constant she consumes more blood.

Suppose you’re planning for Halloween and your entire budget is spent on two things: broom sticks for decoration and Lidl’s own brand Halloween sweets for trick-or-treaters. If broom sticks are an inferior good ( meaning you buy more when your income decrease), can Lidl's Halloween sweets also be an inferior good? Why or why not?

• Yes

• No

Answer explanation

No. If broom sticks are an inferior good, then as income increases, quantity demanded of broom sticks decreases. If Halloween sweets were an inferior good also, then likewise, quantity demanded of Halloween sweets would decline as income grows. However spending on both goods cannot decline, because there would be no way of spending the additional income. Thus, not all good can be inferior. Of course, most people consume many goods, and in that case there can be more than one inferior good- the point here is that all goods cannot be inferior at once, even in theory.

5. Chucky’s overalls

In 2021 the Edinburgh Bargain store sold the chucky mask and the chucky overalls separately.

In 2021 the mask cost €15 and sold 300 units. The overalls cost €10 and sold 200 units. In

2022, they increased the price of the overalls to €15 and sold 100 units instead. The price of

the mask stayed at €15 but instead only sold 200 units. Calculate the cross-price elasticity of

demand for the mask with respect to the overalls in 2021, and determine whether the goods are

substitutes or complementary.

6. The Price of Pumpkins

Is the quantity of pumpkins demanded during Halloween responsive or unresponsive to a change

in price? What about the responsiveness to the price of a specific firm?

• A. Responsive, Unresponsive

• B. Unresponsive, Unresponsive

• C. Unresponsive, Responsive

• D. Responsive, Responsive

Answer explanation

During Halloween, the demand for pumpkins increases so much, that for many it becomes a

“necessity”, meaning it has high inelastic demand, and the income effects are small due to pumpkins’ low price. Therefore, the quantity demanded is unlikely to be responsive to a change in price. When it comes to a firm’s pumpkins, they are likely to be very responsive. This is because there are many firms selling pumpkins, and so consumers will switch where they buy their pumpkins.

On Halloween night, Jack and his friends went trick or treating. At one house, a very generous

homeowner gave Jack £100. Jack was thrilled and decided to use this money to buy a vampire costume from Shein for next Halloween. On November 1st, the price of the costume Jack

wanted dropped by one-third.

Statement: Given the costume is a giffen good, the price reduction and his additional income, Jack will always buy more

than one costume.

True, False, or Uncertain?

• True

• False

• Uncertain

As Halloween approaches, Dracula is trying to gain a better understanding of the elasticity of

demand. He feels that a better grasp of this concept will help him understand why he prefers

to purchase blood at certain prices but not at others. Which of the following formulas correctly

represents how Dracula could calculate the price elasticity of demand?

• ε = ∆Q/∆P × P/Q

• ε = 1/slope × P/Q

• ε = %∆Q/%∆P

Suppose the demand curve for halloween sweets is given by P = 100 − 1/3 Q. Find the elasticity of demand when P = 30.

Answer explanation

Which of these are examples of inferior goods:

• Hotel Chocolat Halloween Chocolates.

• Toffee apples on reduced to clear, because the packaging is damaged.

• A second-hand halloween costume in the charity shop.

• Tesco Finest Cobweb Cheesecake.

Answer explanation

Inferior goods are goods that when income rises, the quantity demanded falls. As income in-

creases, you want to buy more Hotel Chocolat Halloween Chocolates and Tesco Finest Cobweb

Cheesecake as these are very high quality, luxury goods. Hence, these are not inferior goods. For the toffee apples in the reduced section, when income rises you will want to buy less of these as you can now afford the ones that aren’t damaged. For the second hand halloween costume, when income increases, you will want to buy less of these as you will be able to afford a brand new halloween costume.

Due to the shortage of pumpkins during Halloween, the government is considering to impose tax

on the Pumpkin Spice Latte since the tax on it will only lead to a relatively small change in the

quantity it’s sold. Given these information, please predict the Elasticity of demand and supply

of Pumpkin Spice Latte.

• Inelastic Demand, Elastic Supply

• Inelastic Demand, Inelastic Supply

• Elastic Demand, Elastic Supply

• Elastic Demand, Inelastic Supply

Answer explanation

When either a supply or a demand curve is inelastic, though the tax lead to change in price, the quantity would not be very responsive to price change. So, when both curves are inelastic, there will only be a relatively small change in quantity when tax is imposed.

Ms Zombie knocking your door, you’ve prepared candy apple or jellybean for her. If one extra candy apple raises her utility by 6 units, and one extra jellybean will increase it by 4 units. She would satisfied by 2 candy apple or 3 jellybean. If the price of one jellybean is $6, how much is one candy apple that would make you indifferent between giving her either of the sweet?

Answer explanation