CHAPTER 6
Elasticity
A. Short-Answer, Essays, and Problems
1. What is the main difference between the law of demand and the price elasticity of demand?
2. The following data shows the relationship between price and quantity demanded at four different prices for
a product:
P = $11, Qd = 16
3. Why do economists use percentages rather than absolute amounts in measuring the responsiveness of
consumers to changes in price?
4. How do you interpret the coefficient of the price elasticity of demand? Explain when Ed is 1.5, 0.7, and
1.0.
5. What is the meaning of perfectly inelastic demand and perfectly elastic demand? How would each be
6. (Consider This) Use an Ace bandage and a rubber tie-down to make an analogy for explaining the price
7. (Consider This) How can a rubber band be used to explain elasticity and inelasticity of demand?
8. The president of a toy company asks you for advice about whether the company should cut the price of its
best-selling doll this year based on the following information: last year the company cut the price of its
9. The owner of a health club asks you for advice about whether the company should raise the price of its
membership this year based on the following information: last year the club raised the price of its
10. The Metropolitan Transit System recently announced a 50% increase in the price of a transit ticket. The
administrators said that they needed an increase in revenue to cover their rising costs. Explain the
11. Ford Motor Company announced a major rebate program for its cars and trucks. The rebate program
amounts to a simple reduction in price. The company executives hope to increase revenue as a result of
12. A gasoline station very near a professional football stadium parks cars on its lot to make money on game
days. Last year it charged $4.00 per car and parked 1000 cars. This year it raised the parking price to
$5.00 and parked 850 cars. Did the station owner make a good economic decision in raising the parking
prices from one year to the next? Explain.
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13. The president of the Micro Brewing Corporation asks you, as the company economist, to forecast changes
in consumer beer purchases associated with a proposed price change. You conduct a survey and find that if
the price of a six-pack increases from $5.50 to $7.50, the quantity demanded will decrease from 2200 units
to 1800 units a month. Should the Micro Brewing Corporation raise its price? Explain the economic basis
14. The owner of a restaurant is considering lowering menu prices to draw in more customers. He is debating
between lowering the price for the steak entrée or the salmon entrée. When he lowered prices last year, a
15. A marketing firm has done a study of market demand for DVDs of three different movies. Calculate the
total revenue for each movie in columns 3, 5, and 7.
(1)
Price
(2)
QA
(3)
(4)
QB
(5)
(6)
QC
(7)
$10
100
$_____
100
$_____
100
$_____
9
111
_____
130
_____
110
_____
8
125
_____
170
_____
120
_____
7
143
_____
220
_____
130
_____
6
167
_____
280
_____
140
_____
5
200
_____
350
_____
150
_____
Without calculating the price elasticity of demand, indicate whether demand for each movie is elastic,
inelastic or unit-elastic. For which movie would a reduction in price produce the greatest increase in
revenue?
16. On the below demand curve, indicate the character of the price elasticity of demand across all prices.
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17. The following is a straight-line demand curve that confronts a single firm.
Price
Quantity
demanded
(4)
$6
1
_____
5
2
_____
4
3
_____
3
4
_____
2
5
_____
1
6
(a) In column 3, compute total revenue. In column 4, compute the coefficient for the price elasticity of
demand at each price using the midpoints formula.
(b) Describe the character of elasticity across the prices based on the total revenue test and the elasticity
coefficient.
(c) Does a straight-line demand curve have constant elasticity?
(d) Of what practical significance is your answer to (c)?
18. Using the demand data given, complete the following table by computing total revenue at each of the
prices. Indicate whether demand is elastic, inelastic, or unitary between each set of prices.
Price
Quantity
demanded
Total
revenue
Character of
demand
$1000
300
$_____
__________
900
400
_____
__________
800
500
_____
__________
700
600
_____
__________
600
700
_____
__________
500
800
_____
__________
400
900
_____
__________
300
1000
_____
__________
200
1100
_____
__________
100
1200
_____
19. Use the data from the table in the previous question and the two graphs below for this problem. On the first
graph: (a) plot the demand curve; and (b) indicate the elastic, unitary, and inelastic portions of the demand
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curve. On the second graph: (a) plot the total revenue on the vertical axis and the quantity demanded on
20. Based on the determinants of elasticity as discussed in the text, explain what the price elasticity of demand
21. Based on the determinants of elasticity as discussed in the text, compare the price elasticity for each set of
22. Explain how each of four different factors can affect the price elasticity of demand. Give an example for
23. Explain why the following situations would occur in terms of the factors that affect elasticity.
24. Which of the pair of goods would be considered to have more elastic demand? Why?
25. Federal and state governments often seek to raise tax revenue by levying excise or sales taxes on specific
products. What economic factors should be considered in determining the products that will raise the most
26. Paper newspapers have an elasticity of demand of .10. Interpret this number and offer an explanation to
27. Explain the perspective that tougher enforcement of drug laws for cocaine or other drug laws may actually
28. Discuss the pros and cons of legalizing drugs such as heroin or cocaine from an economic perspective using
29. What is the price elasticity of supply? How is it measured?
30. What is the main determinant of the price elasticity of supply? Explain.
31. Why is there no total revenue test for elasticity of supply?
32. (Consider This) Describe the elasticity of supply for college education. What effect does this have on price
and quantity as demand for college increases?
33. Describe and give reasons for the characteristics of the elasticity of supply of a farm product that is sold at
a farmer’s market on a particular day.
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34. Explain the difference between the immediate market period, the short run, and the long run as they relate
35. Draw three supply and demand graphs below that illustrate the effect of time on the elasticity of supply.
36. For each of the situations below use supply elasticity to explain the how the equilibrium price and quantity
change.
37. Using the supply data in the schedule shown below, complete the table by computing the price elasticity of
supply coefficients between each set of prices. Indicate whether supply is elastic, inelastic or unitary at
each set of prices.
Price
Quantity
supplied
Elasticity
coefficient
Character of
supply
$11
130
_____
_____
9
110
_____
_____
7
90
_____
_____
5
70
_____
_____
3
50
38. Explain how the price elasticity of supply is related to the prices of antiques and gold.
39. Why would it be valuable for a business to know the cross elasticity of demand for the two products it
produces: peanuts and popcorn?
40. A computer company is considering lowering the price of its laptop computer to promote sales. However,
it worries that this will reduce desktop computer sales. It finds the cross product of demand to be 1.5. Are
its concerns legitimate? Explain.
41. Use the information in the table below to identify the type of cross elasticity relationship between products
X and Y in each of the following five cases, A to E.
Cases
Percent change
in price of Y
Percent change in
quantity demanded of X
Cross elasticity
type
A
5
7
__________
B
9
6
__________
C
5
−5
__________
D
3
0
__________
E
−2
10
__________
42. For the following three cases, use a midpoints formula to calculate the coefficient for the cross elasticity of
demand and identify the type of relationship between the two products.
(a) The quantity demanded for product A increases from 30 to 40 as the price of product B increases from
$0.10 to $0.20.
Coefficient: ______ Relationship: ________________
(b) The quantity demanded for product A decreases from 3000 to 1500 as the price of good B increases
from $5 to $10.
Coefficient: ______ Relationship: ________________
(c) The quantity demanded for product A remains 400 units as the price of product B increases from $25
to $30.
Coefficient: ______ Relationship: ________________
43. Would you expect the cross price elasticity to be positive or negative for the following set of goods?
44. Use the information in the table below to identify the income elasticity type of each of the following
products, A to E.
Product
Percent change
in income
Percent change in
quantity demanded
Income elasticity
type
A
9
12
__________
B
−6
6
__________
C
3
3
__________
D
6
−3
__________
E
2
1
__________
45. You would think that if people’s income increased over time, then all industries in the economy should
benefit equally, but this is not the case. Explain why and give examples.
46. What is the practical significance of income elasticity coefficients? Explain the significance using as
47. (Last Word) Give three examples of how businesses or nonprofit institutions use elasticity of demand to
charge consumers different prices.
B. Answers to Short-Answer, Essays, and Problems
1. What is the main difference between the law of demand and the price elasticity of demand?
2. The following data shows the relationship between price and quantity demanded at four different prices for
a product:
P = $11, Qd = 16
3. Why do economists use percentages rather than absolute amounts in measuring the responsiveness of
consumers to changes in price?
4. How do you interpret the coefficient of the price elasticity of demand? Explain when Ed is 1.5, 0.7, and
1.0.
5. What is the meaning of perfectly inelastic demand and perfectly elastic demand? How would each be
graphed?
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6. (Consider This) Use an Ace bandage and a rubber tie-down to make an analogy for explaining the price
elasticity of demand.
7. (Consider This) How can a rubber band be used to explain elasticity and inelasticity of demand?
Elasticity of demand is depicted by the stretchiness of the rubber band. If the rubber band stretches
substantially when pulled, the rubber band is elastic. This represents elastic demand because a moderate
8. The president of a toy company asks you for advice about whether the company should cut the price of its
best-selling doll this year based on the following information: last year the company cut the price of its
9. The owner of a health club asks you for advice about whether the company should raise or lower the price
of its membership this year based on the following information: last year the club raised the price of its
10. The Metropolitan Transit System recently announced a 50% increase in the price of a transit ticket. The
administrators said that they needed an increase in revenue to cover their rising costs. Explain the
11. Ford Motor Company announced a major rebate program for its cars and trucks. The rebate program
amounts to a simple reduction in price. The company executives hope to increase revenue as a result of
this rebate program. What economic explanation would justify this decision?
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12. A gasoline station very near a professional football stadium parks cars on its lot to make money on game
days. Last year it charged $4.00 per car and parked 1000 cars. This year it raised the parking price to
$5.00 and parked 850 cars. Did the station owner make a good economic decision in raising the parking
prices from one year to the next? Explain.
13. The president of the Micro Brewing Corporation asks you, as the company economist, to forecast changes
in consumer beer purchases associated with a proposed price change. You conduct a survey and find that if
the price of a six-pack increases from $5.50 to $7.50, the quantity demanded will decrease from 2200 units
to 1800 units a month. Should the Micro Brewing Corporation raise its price? Explain the economic basis
for this recommendation to the president.
Yes, the corporation should increase the price of a six-pack. Over the price range considered, the price
14. The owner of a restaurant is considering lowering menu prices to draw in more customers. He is debating
between lowering the price for the steak entrée or the salmon entrée. When he lowered prices last year, a
$2.00 decrease in price for the $15 steak resulted in a growth in steak sales from 75 per week to 100 per
week. A $2.50 decrease in the price of the $17 salmon entrée increased sales from 40 to 75 meals per
week. Which entrée should he choose to put on sale?
With a $2.00 decrease in price for the steak entrée and a 25-unit increase in demand, according to the
midpoint formula, the price elasticity of demand for the steak is 2.43. With a $2.50 decrease in price for
the salmon entrée and a 35-unit increase in demand, the price elasticity of demand according to the
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15. A marketing firm has done a study of market demand for DVDs of three different movies. Calculate the
total revenue for each movie in columns 3, 5, and 7.
(1)
Price
(2)
QA
(3)
(4)
QB
(5)
(6)
QC
(7)
$10
100
$_____
100
$_____
100
$_____
9
111
_____
130
_____
110
_____
8
125
_____
170
_____
120
_____
7
143
_____
220
_____
130
_____
6
167
_____
280
_____
140
_____
5
200
_____
350
_____
150
_____
Without calculating the price elasticity of demand, indicate whether demand for each movie is elastic,
inelastic or unit-elastic. For which movie would a reduction in price produce the greatest increase in
revenue?
(1)
Price
(2)
QA
(3)
(4)
QB
(5)
(6)
QC
(7)
$10
100
$1000
100
$1000
100
$1000
9
111
999
130
1170
110
990
8
125
1000
170
1360
120
960
7
143
1001
220
1540
130
910
6
167
1002
280
1680
140
840
5
200
1000
350
1750
150
750
Applying the total revenue test, we see that total revenues remain approximately constant for movie A,
meaning that demand is unit-elastic. Total revenues for movie B are increasing as price decreases, meaning
that demand for movie B is elastic. Total revenues for movie C are decreasing as price decreases, meaning
the demand for movie C is inelastic.
16. On the below demand curve, indicate the character of the price elasticity of demand across all prices.
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17. The following is a straight-line demand curve that confronts a single firm.
Price
Quantity
demanded
(4)
$6
1
_____
5
2
_____
4
3
_____
3
4
_____
2
5
_____
1
6
(a) In column 3, compute total revenue. In column 4, compute the coefficient for the price elasticity of
demand at each price using the midpoints formula.
(b) Describe the character of elasticity across the prices based on the total revenue test and the elasticity
coefficient.
(c) Does a straight-line demand curve have constant elasticity?
(d) Of what practical significance is your answer to (c)?
Price
Quantity
demanded
(4)
$6
1
3.7
5
2
1.8
4
3
1.0
3
4
0.6
2
5
0.3
1
6