11) Which of the following is true?
I. The easier it is to find substitutes for a good, the more price elastic the demand for the good is.
II. The demand for a good is more price elastic the smaller the proportion of income spent on it.
III. If demand is price elastic, lowering the price leads to a decrease in total revenue.
A) Only I
B) Only II
C) Only III
D) I and II
E) I and III
5.6 Essay: The Price Elasticity of Demand
1) “The price elasticity of demand is a measure of how sensitive demanders are to changes in the
price of a product.” Is this statement true or false?
2) What is the price elasticity of demand? In terms of percentage changes, what is its formula?
3) When does a decrease in supply raise the price more: When demand is elastic or when
demand is inelastic? When OPEC decreases the supply of oil, the price of gasoline skyrockets.
Hence is the demand for gasoline elastic or inelastic?
4) What does a horizontal demand curve indicate about the price elasticity of demand?
5) What are the three cases for the price elasticity of demand? Briefly define each.
6) In a study session, your friend says, “Demand is elastic if the percentage change in the price
exceeds the percentage change in quantity demanded.” Is your friend correct?
7) If the percentage change in quantity demanded is greater than the percentage change in price,
can you determine if the demand is elastic, unit elastic, or inelastic? Explain your answer.
8) Does the fact that the price elasticity of demand for a good is inelastic violate the law of
demand?
9) What factors determine the size of the price elasticity of demand?
10) Explain why the number of substitutes influences the price elasticity of demand.
11) “The fewer the number of substitutes for a product, the more elastic the demand for that
product.” Is the previous statement true or false?
12) If a good has only a few, poor substitutes, is its demand elastic or inelastic?
13) Which is larger: The price elasticity of demand for food or the price elasticity of demand for
oranges? Why?
14) Water is considered a necessity. So, is the demand for water elastic or inelastic?
15) Studies have shown that the price elasticity of demand for necessities, such as food, are
higher in developing countries and lower in developed countries. What is the reason for this
difference in elasticity?
16) What happens to the price elasticity of demand moving down along a downward-sloping,
linear demand curve?
17) What effect does a price hike have on the total revenue of the producers?
18) The demand for oil is inelastic. So, does an increase in the price of oil mean an increase in
total revenue or a decrease in total revenue for oil producers?
19) Anna owns the Sweet Alps Chocolate store. She charges $10 per pound for her hand made
chocolate. You, the economist, have calculated the elasticity of demand for chocolate in her town
to be 2.5. If she wants to increase her total revenue, what advice will you give her?
20) You are the brand manager of Crest toothpaste and you observe that when you increase the
price of Crest, your total revenue increases. How is that possible?
21) Explain the total revenue test.
22) If a decrease in price increases total revenue, what can you determine about the elasticity of
demand for the good?
23) “If the price falls and, as a result, the total revenue decreases, demand is elastic.” Is the
previous assertion correct?
24) Recently the governor of Vermont proposed that cigarette taxes in Vermont should be
increased substantially, from 44 cents a pack to 66 cents a pack. He estimates that Vermont can
raise $20 million in revenue from this tax hike. He also pointed out that the neighboring state of
New Hampshire was considering an increase in cigarette taxes.
a. How can it be that an increase in cigarette taxes will increase tax revenue, because, after all, a
higher tax will increase cigarette prices and thereby decrease the quantity demanded?
b. If New Hampshire chooses not to increase cigarette taxes, is it likely that Vermont can still
raise $20 million in tax revenue? Why or why not? Explain
25) Suppose the price of flour increases from $0.80 to $1.00 a pound and the quantity demanded
decreases from 100 pounds to 95 pounds. Using the midpoint method, what is the price elasticity
of demand for flour? Is the demand for flour elastic or inelastic?
26) If the price of suntan lotion increases from $6 to $8 per bottle and quantity demanded
decreases from 900,000 bottles to 845,000 bottles, using the midpoint method, what is the price
elasticity of demand for suntan lotion?
27) If the price of a magazine increases from $5 to $7 and the quantity demanded of the
magazines decreases from 10 million per month to 8 million per month, using the midpoint
method, what is the price elasticity of demand? Show your work. Is the demand elastic, inelastic,
or unit elastic?
28) Suppose the price elasticity of demand for bouquets of flowers is 4.0. You are charging $8
per bouquet. If you want to increase the quantity of bouquets you sell by 20 percent, what price
should you charge?
29) The table above gives the demand schedule for a good. Using the midpoint method, find the
price elasticity of demand between points A and B, between B and C, between C and D, and
between D and E.
30) The figure above shows the demand curve for pizza. Using the midpoint method and moving
from point A to point B, calculate the
a. percentage change in price.
b. percentage change in quantity demanded.
c. price elasticity of demand.
31) In the figure above, at which point (a, b, or c) along the linear demand curve illustrated
would demand be
a. most elastic?
b. most inelastic?