Problems And Applications

1. Fur each of the following pairs of goods, which good would you expect to have more elastic demand and why?

a. required textbooks or mystery novels b. Beethoven recxudings or classical music recordings in general c. subway rides during the next 6 months or subway rides during the next 5 years d. toot beer or water

2. Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston:

Ouonlity DwiMndu Quantity D»m«nd«d

Price Ibutrwi traveled (vocot oners)

200 2.CC0 m

2S0 1.9CO 403

a. As the price of tickets rises from \$200 to \$250, what is the price elasticity of demand for

(i) business travelers and (ii) vacationers? (Use the midpoint method in your calculations.)

b, Why might vacationers have a different elas-ticily from business travelers?

3. Suppose the price elasticity of demand for heating oil is 0.2 in the short run and 0.7 in the long run.

a. If the price of healing oil rises from \$1JW to {¿JO per gallon, what happens to the quantity of heating oil demanded in the short run? In the long run? (Use the midpoint method in your calculations.)

b. Why might this elasticity depend on the time horizon?

4. A price change causes the quantity demanded of a good to decrease by 30 percent, while the total revenue of that good increases by 15 percent. Is the demand curve elastic or inelastic? Explain.

5. The equilibrium price of coffee mugs rose sharply last month, but the equilibrium quantity was the same as ever. Three people tried to explain the situation. Which explanations could be right? Explain your logic.

Billy: Demand Increased, but supply was totally inelastic. Marian: Supply increased, but so did demand. Valerie: Supply decreased, but demand was totally inelastic.

6. Suppose that your demand schedule for compact discs is as follows:

Quantity Oemar>d*d Quantity Derrwded Prko llncomo SIO.CCOj Unconv® \$12,000)

10 32 AS

la 16 20

16 8 12

a. Use the midpoint method to calculate your price elasticity of demand as the price of compact discs increases from to S10 if (i) your income is \$10,000and (ii) your income is \$12.000.

b. Calculate your income elasticity of demand as your income increases from £10,000 to \$12,000 if (il the price is \$12 and (ii) the price is \$16.

7. You have the folkiwing information about good X and good Y:

• Income elasticity of denvand for good X: -3

• Cross-price elasticity of demand for good X with respect to the price of good Y: 2

Would an increase in income and a decrease in the price of gixxl Y unambiguously decrease the demand for good X? Why or why not?

8. Maria has deckled always to spend one-third of her income on clothing.

a. What is her income elasticity of clothing demand?

b. What is her price elasticity of clothing demand?

c- If Maria's tastes change and she decides to spend only one-fourth of her income on dolhing, how does her demand curve change? What is lx.*r income elasticity and price elasticity now?

9. The Nov YM Tim« reported (Feb. 17,1996, p. 25) that subway rtdership declined after a fare increase: "There were nearly four million fewer riders in December 1995, the first full month after the price of a token increased 25 cents to \$1.50, than in the previous December, a 4 J percent decline."

a. Use these data to estimate the price elasticity of demand for subway rides.

b. According to your estimate, what happens to the Transit Authority's revenue when the fare rises?

c. Why might your estimate of the elasticity be unreliable?

10. Two drivers—Tom and Jerry—each drive up to a gas station. Before looking at the price, each places an order. Tom says, "I'd like 10 gallons of gas." Jerry says. "I'd like \$10 worth of gas." What is each driver's pricc elasticity of demand?

11. Consider public policy aimed at smoking.

a. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes currently costs \$2 and the government wants to reduce smoking by 20 percent, by how much should it increase the price?

b. If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking 1 year from now or 5 years from now?

c. Studies also find that teenagers have a higher price elasticity than do adults. Why might this be true?

12. You are the curator of a museum. The museum is running short of funds, so you decide to increase revenue. Should you increase or decrease the price of admission? Explain.

13. Pharmaceutical drugs have an inelastic demand, and computers have an elastic demand. Suppose that technological advance doubles the supply of both pmducts (that is, the quantity supplied at each price is twice what it was).

a. What happens to the equilibrium price and quantity in each market?

b. Which product experiences a larger cltange in price?

c. Which product experiences a larger change in quantity?

d. What happens to total consumer spending on each product?

14. Beachfront resorts have an inelastic supply, and automobiles have an elastic supply. Suppose that a rise in population doubles the demand for both products (that is, the quantity demanded at each price is twice what it was).

a. What happens to the equilibrium price and quantity in each market? b Which product experiences a larger change in price?

c. Which product experiences a larger change in quantity?

d. What happens to total consumer spending on each product?

15. Several years ago, flooding along the Missouri and the Mississippi rivers destroyed thousands of acres of wheat.

a. Farmers whose crops were destroyed by the floods were much worse off, but farmers whose crops were not destroyed benefited from the floods. Why?

b. What information would you need about the market for wheat to assess whether farmers as a group were hurt or helped by the floods?

16. Explain why the following might be true: A drought around the world raises the total revenue that farmers receive from the sale of grain, but a drought only in Kansas reduces the total revenue that Kansas farmers receive.

17. Suppose the demand curve for a pmduct is Q — 60/P. Compute the quantity demanded at prices of \$1,S3,54, S5, and Sh.Craph the demand curve. Use the midpoint method to calculate the price elasticity of demand between \$1 and \$2 and between io and S6. How does this demand curve compare to the linear demand curve?

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Responses

• nelma kankkunen
Why might vacationers have a different elasticity from business travelers?
8 years ago
• david
Which one is elastic subway rides during the next 6 months or subway rides during the next 6 years?
7 years ago
• hugh
Which is more elastic required textbooks or mystery novels?
7 years ago
• ralph
Which good would you expect to have more elastic demand?
7 years ago
• heike
Which good would you expect to have more elastic deman and why?
7 years ago