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Prepare short written responses (no more than 250 words) to the following five (5) questions.
Question 1 (5 marks)
What is the midpoint method for calculating price elasticity of demand? How else can the price elasticity of demand be calculated? What is the advantage of the midpoint formula?
Question 2 (5 marks)
What are the key determinants of the price elasticity of demand for a product? What determinant is the most important?
Question 3 (5 marks)
In 2003, when music downloading first took off, Universal Music slashed the average price of a CD from $21 to $15. The company expected the price cut to boost the quantity of CDs sold by 30 per cent, other things remaining the same. What was Universal Music’s estimate of the price elasticity of demand for CDs? If you were making the pricing decision at Universal Music, what would be your pricing decision? Explain your decision.
Question 4 (5 marks)
In May 2009, iTunes raised the price of 33 songs from 99¢ per download to $1.29 per download. In the week following the price rise, the quantity of downloads of these 33 songs fell 35 per cent. Taking this into account calculate the price elasticity of demand for these 33 songs.
Question 5 (5 marks)
A 5 per cent fall in the price of chocolate sauce increases the quantity of chocolate sauce demanded by 10 per cent; and with no change in the price of ice cream, the quantity of ice cream demanded increases by 15 per cent. Calculate the price elasticity of demand for chocolate sauce. Calculate the cross elasticity of demand for ice cream with respect to the price of chocolate sauce. Are ice cream and chocolate sauce substitutes or complements? Why?