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Chapter 04 - Elasticity
4-1
CHAPTER 4
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
P = $9, Qd = 24
P = $7, Qd = 32
P = $5, Qd = 40
Using the midpoint formula, what is the price elasticity of demand between: (a) $11 and $9; (b) $9 and $7;
(c) $7 and $5?
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?
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?
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
best-selling doll by 10% and the total revenues from doll sales increased by 10%.
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
membership by 5% and the number of members paying the same fee fell by 7%.
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
economic rationale for this decision.
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?
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.
Chapter 04 - Elasticity
4-2
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.
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?
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.
Chapter 04 - Elasticity
4-3
17. The following is a straight-line demand curve that confronts a single firm.
Price Quantity demanded
(3)
(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.
PriceQuantity 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
curve. On the second graph: (a) plot the total revenue on the vertical axis and the quantity demanded on
the horizontal axis; (b) indicate the elastic, unitary, and inelastic portions of the demand and total revenue
curves. (Note: The scale for quantity demanded that you plot on horizontal axis of each graph should be
the same on both graphs.)
Chapter 04 - Elasticity
4-4
20. Based on the determinants of elasticity as discussed in the text, explain what the price elasticity of demand
of the following products would be: (a) ballpoint pens; (b) Crest toothpaste; (c) diamond rings; (d) sugar;
and (e) refrigerators.
21. Explain how each of four different factors can affect the price elasticity of demand. Give an example for
each determinant.
22. Explain why the following situations would occur in terms of the factors that affect elasticity.
(a) Demand for cellular service is inelastic in the short run, but more elastic in the long run.
(b) Demand for a bakery’s bread is elastic, while demand for bread is inelastic.
(c) Demand for personal computers is elastic.
23. 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
tax revenue? Give examples of products in your answer.
24. Explain the perspective that tougher enforcement of drug laws for cocaine or other drug laws may actually
increase the crime rate. Use the concepts of demand, supply, and elasticity in your explanation.
25. Discuss the pros and cons of legalizing drugs such as heroin or cocaine from an economic perspective using
the concepts of supply, demand, and elasticity.
26. What is the price elasticity of supply? How is it measured?
27. What is the main determinant of the price elasticity of supply? Explain.
28. Why is there no total revenue test for elasticity of supply?
29. 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.
30. Explain the difference between the market period, the short run, and the long run as they relate to price
elasticity of supply.
31. Draw three supply and demand graphs that illustrate the effect of time on the elasticity of supply using the
below graphs. The three graphs should show: (a) the market period; (b) the short run; and (c) the long run.
Chapter 04 - Elasticity
4-5
32. 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.
PriceQuantity suppliedElasticity coefficient Character of supply
$11 130
_____ _____
9 110
_____ _____
7 90
_____ _____
5 70
_____ _____
3 50
33. Explain how the price elasticity of supply is related to the prices of antiques and gold.
34. Why would it be valuable for a business to know the cross elasticity of demand for the two products it
produces: peanuts and popcorn?
35. 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.
36. 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 XCross elasticity type
A 5 7 __________
B 9 6 __________
C 5 −5 __________
D 3 0 __________
E −2 10 __________
37. 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: ________________
Chapter 04 - Elasticity
4-6
38. Use the information in the table below to identify the income elasticity type of each of the following
products, A to E.
ProductPercent 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 __________
39. 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.
40. What is the practical significance of income elasticity coefficients? Explain the significance using as
examples an income elasticity of 3.0 for automobiles and an income elasticity of 0.20 for home-cooked
meals.
41. (Last Word) Give three examples of how businesses or nonprofit institutions use elasticity of demand to
charge consumers different prices.
Chapter 04 - Elasticity
4-7
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
P = $9, Qd = 24
P = $7, Qd = 32
P = $5, Qd = 40
Using the midpoint formula, what is the price elasticity of demand between: (a) $11 and $9; (b) $9 and $7;
(c) $7 and $5.
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?
Chapter 04 - Elasticity
4-8
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?
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
best-selling doll by 10% and the total revenues from doll sales increased by 10%.
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
membership by 5% and the number of members paying the same fee fell by 7%.
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
economic rationale for this decision.
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?
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
Chapter 04 - Elasticity
4-9
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.
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?
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 _____
Chapter 04 - Elasticity
4-10
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.
17. The following is a straight-line demand curve that confronts a single firm.
Price Quantity demanded
(3)
(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.
Chapter 04 - Elasticity
4-11
(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.
PriceQuantity 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 _____
Chapter 04 - Elasticity
4-12
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
curve. On the second graph: (a) plot the total revenue on the vertical axis and the quantity demanded on
the horizontal axis; (b) indicate the elastic, unitary, and inelastic portions of the demand and total revenue
curves. (Note: The scale for quantity demanded that you plot on horizontal axis of each graph should be
the same on both graphs.)
20. Based on the determinants of elasticity as discussed in the text, explain what the price elasticity of demand
of the following products would be: (a) ballpoint pens; (b) Crest toothpaste; (c) diamond rings; (d) sugar;
and (e) refrigerators.
Chapter 04 - Elasticity
4-13
21. Explain how each of four different factors can affect the price elasticity of demand. Give an example for
each determinant.
22. Explain why the following situations would occur in terms of the factors that affect elasticity.
(a) Demand for cellular service is inelastic in the short run, but more elastic in the long run.
(b) Demand for a bakery’s bread is elastic, while demand for bread is inelastic.
(c) Demand for personal computers is elastic.
23. 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
tax revenue? Give examples of products in your answer.
Chapter 04 - Elasticity
4-14
24. Explain the perspective that tougher enforcement of drug laws for cocaine or other drug laws may actually
increase the crime rate. Use the concepts of demand, supply, and elasticity in your explanation.
25. Discuss the pros and cons of legalizing drugs such as heroin or cocaine from an economic perspective using
the concepts of supply, demand, and elasticity.
26. What is the price elasticity of supply? How is it measured?
27. What is the main determinant of the price elasticity of supply? Explain.
28. Why is there no total revenue test for elasticity of supply?
Chapter 04 - Elasticity
4-15
29. 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.
30. Explain the difference between the market period, the short run, and the long run as they relate to price
elasticity of supply.
31. Draw three supply and demand graphs that illustrate the effect of time on the elasticity of supply using the
below graphs. The three graphs should show: (a) the immediate market period; (b) the short run; and (c)
the long run.
32. 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.
PriceQuantity suppliedElasticity coefficient Character of supply
$11 130
_____ _____
9 110
_____ _____
7 90
_____ _____
5 70
_____ _____
3 50
Chapter 04 - Elasticity
4-16
33. Explain how the price elasticity of supply is related to the prices of antiques and gold.
34. Why would it be valuable for a business to know the cross elasticity of demand for the two products it
produces: peanuts and popcorn?
35. 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.
36. 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 XCross elasticity type
A 5 7 __________
B 9 6 __________
C 5 −5 __________
D 3 0 __________
E −2 10 __________
Chapter 04 - Elasticity
4-17
37. 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: ________________
38. Use the information in the table below to identify the income elasticity type of each of the following
products, A to E.
ProductPercent 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 __________
39. 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.
Chapter 04 - Elasticity
4-18
40. What is the practical significance of income elasticity coefficients? Explain the significance using as
examples an income elasticity of 3.0 for automobiles and an income elasticity of 0.20 for home-cooked
meals.
41. (Last Word) Give three examples of how businesses or nonprofit institutions use elasticity of demand to
charge consumers different prices.
