3) When we calculate the price elasticity of demand, we use percentages of the average price and
the average quantity in order to get the same value for the elasticity regardless of whether the
price falls or rises.
4) If the quantity demanded of a good decreases by 10 percent when the price of the good
increases by 5 percent, the elasticity of demand is -2.00.
5) If the demand for cigarettes decreases after the U.S. Surgeon General publicizes five new
diseases associated with smoking, this is conclusive evidence that the demand for cigarettes is
elastic.
6) If the demand for a good is perfectly elastic, then the demand curve is horizontal.
7) The elasticity of demand is constant along a downward sloping straight-line demand curve.
8) If the demand for KFC chicken is price elastic, a fall in the price of KFC chicken will raise the
total revenue.
9) If the demand is unit elastic, a price cut will leave the quantity demanded unchanged.
10) If the demand for KFC chicken is price inelastic, a fall in the price of KFC chicken will raise
the total revenue.
11) If Taco Bell determines that the demand for its food is elastic, Taco Bell should raise its
price to increase its total revenue.
12) If a hot dog vendor on a street corner experiences an increase in total revenue after lowering
the price of a hot dog, then the demand for the hot dogs must be elastic.
13) The larger the portion of a person’s total budget spent on a good, the more inelastic the
demand for the good.
14) A necessity (such as food and shelter) generally has an inelastic demand.
15) If the price of a pumpkin rises and consumers’ total expenditure on pumpkins increases, then
the demand for pumpkins is inelastic.
16) The cross elasticity of demand for substitutes is always positive.
17) If the cross elasticity of demand between Jeep Cherokees and Chevy Lumina Vans is 1.55,
then the two vehicles are not substitutes in the eyes of car buyers.
18) For inferior goods, the income elasticity of demand is negative.
19) An inferior good is a good whose income elasticity of demand is less than 0.
20) Studies show that smoking cigars is inversely related to income. Thus cigars are an inferior
good.
21) If the demand for farm products is income elastic, that would mean that farm products were a
necessity.
22) Damage from floods and hurricanes which destroy a large portion of this year’s crop of
oranges will definitely make oranges more price inelastic in supply.
23) For baseball memorabilia fans, the baseball with which Hank Aaron hit his 735th career
home run is perfectly inelastic in supply and in demand.
24) Fantastic growing conditions that produce a bumper crop of oranges on each tree this year
will definitely make the short run supply of oranges more price elastic.
25) Goods or services that can be produced only by using unique or rare productive resources
tend to have a low elasticity of supply.
156
8 Extended Problems
Price
(dollars per ride)
Quantity demanded
(rides per month)
3
160
4
120
5
80
6
40
7
0
1) The number of taxicabs in Motorville and the taxicab fares are regulated. The fare currently
charged is $5 a ride. Motorville taxicab drivers want to obtain government’s permission to raise
the fare to increase their revenues and ask you to be their economic adviser. After studying the
market, you come up with the following demand schedule for taxicab rides:
a) Calculate the price elasticity of demand for taxicab rides as the fare rises from $5 to $6. (Use
the midpoint method in your calculations.) Is the demand price elastic or inelastic for this fare
rise?
b) What happens to the taxicab drivers’ total revenue if the fare rises from $5 to $6? How can
you use your answers in part a to answer this question? Should the drivers try to obtain
permission to raise the fare?
c) Calculate the price elasticity of demand for taxicab rides as the fare falls from $5 to $4. (Use
the midpoint method in your calculations.) Is the demand price elastic or inelastic for this fare
decrease?
d) What happens to the taxicab drivers’ total revenue if the fare falls from $5 to $4? How can
you use your answers in part c to answer this question? Should the drivers try to obtain
permission to lower the fare?
e) What fare will maximize the taxicab drivers’ total revenue? Explain.
2) The cab fare in Horseville is regulated. Recently, the government decided to raise it from
$2.00 to $2.50 per ride. After this rise in fare, cab ridership decreased by 10 percent.
a) What is the price elasticity of demand for cab rides in Horseville? (Use the midpoint formula
to calculate the percentage change in the price.) Is the demand for rides elastic or inelastic?
b) According to your estimate, what happened to the cab drivers’ revenue after the fare rose?
Explain.
c) Why might your estimate of elasticity be inaccurate?
158
Price
(dollars per CD)
Quantity
demanded, 2009
(CDs per year)
Quantity
demanded, 2010
(CDs per year)
4
40
70
8
30
50
12
20
30
16
10
10
18
5
0
20
0
0
3) Cory enjoys listening to all types of music. His demand schedules for CDs in 2009 and 2010
are shown in the table above. Cory’s income was $30,000 in 2009 and $35,000 in 2010. In 2010,
he bought an iPad so he started to download music files from the Internet.
a) Draw Cory’s demand curves for CDs in 2009 and 2010. How did Cory’s demand for CDs
change? Why?
b) For each year, calculate Cory’s price elasticity of demand as the price of CDs decreases from
$16 to $12. (Use the midpoint method in your calculations.)
c) Why might the price elasticity of Cory’s demand for CDs in 2010 be different from that in
2009?
d) If all CD buyers have the same demand as does Cory, what price should the record
companies charge in 2010 to maximize their total revenue from CD sales?
160
Quantity
demanded
business travelers
(tickets per week)
Quantity
demanded leisure
travelers
(tickets per week)
1,800
1,600
1,600
1,200
1,400
800
1,200
400
1,000
0
800
0
4) Suppose that business travelers and leisure travelers have the demand schedules for airline
tickets from Atlanta to Philadelphia given in the table above.
a) Draw both demand curves.
b) As the price of tickets rises from $200 to $300, what is the price elasticity of business
travelers’ demand? What is the price elasticity of leisure travelers’ demand? (Use the midpoint
method in your calculations.)
c) Why do business travelers and leisure travelers have different price elasticities of demand for
airline tickets?
d) At what price is the price elasticity of demand equal to 1 for business travelers? For leisure
travelers? Explain.
161