Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
CHAPTER 4
DEMAND ELASTICITY
QUESTIONS
1. Elasticity refers to the percentage change in one variable relative to a percentage change in another
2. Point elasticity (in connection with the price elasticity of demand) refers to the elasticity at a given
To make an upward movement have the same elasticity coefficient as a movement down, average
quantity and average price are used in the formula.
In practical business situations, arc elasticity would probably be the more useful concept, because a
3. This result follows from an application of the notion of elasticity of derived demand. The demand
for skilled crafts people is probably more inelastic than the demand for industrial workers, since the
4. a. Probably fairly inelastic since mayonnaise is a staple and accounts for a small portion of a
b. Probably fairly elastic, since there are many good substitutes for a specific brand of
Demand Elasticity 19
e. Probably rather elastic. It represents a significant expenditure. Further, a repair may
5. The income elasticity for restaurant food is probably quite high. Thus, during declines in economic
6. a. Negative – they are complements..
7. When the demand curve is inelastic, marginal revenue is negative. Thus, selling on the inelastic
8. Most likely automobiles, since they represent a larger expenditure and are more likely to be
9. Yes. Elasticity of demand is expected to be higher in the long run. Thus, a larger decrease in
10. A five-cent increase probably did not affect consumption of gasoline significantly since it was a
11. Since the demand curve for cigarettes and alcohol is generally thought to be rather inelastic,
12. No. Since the percentage changes between quantity and price are different at each point of the
demand curve.
Copyright © 2014 Pearson Education, Inc.
Demand Elasticity 20
13. This firm is faced by considerable competition. Theoretically, if it raises its price by any small
14. False. If a company’s demand curve is elastic, a price decrease will increase its revenue. But if, as it
15. a. Less than 1. Elasticity may actually be negative if consumers switch to more expensive butter
b. Most likely greater than 1. This is a luxury item and increased income may bring about a larger
c. Probably close to 1. But, as incomes increase, consumers may switch to more expensive
d. Probably greater than 1. Since lobsters are generally an expensive food, people with increasing
16. A one percent increase in income will bring about a .25% increase in spending on tomatoes.
17. Elasticity would indicate a movement along the demand curve. However, the drop in used car prices
18. The decision-makers at the U.S. Postal Service are assuming that the demand for mail services is
inelastic, and that the price increase will bring about a smaller than proportional percentage
19. Providing the U.S. Olympic Team with free clothing items would qualify as an advertising expense.
Copyright © 2014 Pearson Education, Inc.
Demand Elasticity 21
PROBLEMS
1. % change Q .2
————— = — = -2
% change P -.1
2. a. Q = 20 - 2P; slope ∆Q/∆P = -2
b. At P = 5, Q = 10
c. Price Quantity Total Revenue
3. a. Q = 2000 – 100(6)
b. 1800 = 2000 – 100P
c. Q = 2000 – 100(0)
d. 0 = 2000 – 100P
e. Slope = ΔQ/ΔP = 100
4. a. When price changes by 1, quantity will change by 10 in the opposite direction. When income
b. Point elasticity:
Copyright © 2014 Pearson Education, Inc.
Demand Elasticity 22
Q = 100 - (10)(7) + (.5)(50)
Slope = - 10
c. Point elasticity
d. Point elasticity
Q = 100 - (10)(8) + (.5)(70) = 55
5. a. At P = 7, Q = 30 - (2)(7) = 16
b. At P = 5, Q = 30 - (2)(5) = 20
c. Elasticity will be the same. Equation is now
Copyright © 2014 Pearson Education, Inc.
Demand Elasticity 23
6. a. (x - 4000) (63 - 70)
-2.5 = ———— / ————
(x + 4000) (63 + 70)
Revenue will increase, because demand curve is elastic.
(x - 3000) (22 - 25)
7. a. -3 = ———— / ————
(x + 3000) (22 + 25)
(x - 3000) (24 - 28)
b. .3 = ———— / ————
(x + 3000) (24 + 28)
8. If price elasticity is -4, and the Redbirds wish to increase attendance from 50,000 to 80,000, the
price (x) must be:
(80000 - 50000) (x - 30)
-4 = —————— / ———
(80000 + 50000) (x + 30)
If price is lowered from $30 to 27, and attendance rises from 50,000 to 60,000, price elasticity is:
9. Arc price elasticity for spreadsheet program:
Copyright © 2014 Pearson Education, Inc.
Demand Elasticity 24
The graphics program is a complementary commodity to the spreadsheet program, and its quantity
sold benefited from the price decrease in the spreadsheet program. The cross-elasticity is -0.85 (the
negative sign shows complementarity), and is quite strong.
10. Demand Elasticity
Total Marginal
Price Quantity Arc Point Revenue Revenue
7.00 100 700
11. a. Negative: television sets and DVRs are complements.
b. Positive: rye bread and whole-wheat bread are substitutes.
12. a. 130 – 70 2.50 – 3.50
Ep = —————— / ————
Copyright © 2014 Pearson Education, Inc.
Demand Elasticity 25
13. a. The price elasticity for shoes in the U.S. is 0.7. However, the elasticity for Brown Shoe
b. The quantity of shoes sold in the U.S. would rise by 9%.
14. 1.5 = -30%/-20%. UBS would lose 30% of its sales.
15. a. There is a 14.3% decrease in price. With a 20% increase in quantity, this implies an elasticity
b. Syrup is a complementary good in relation to ice cream. Cross elasticity would measure this
c. Yes, revenues for both ice cream and syrup rise. Unless costs rise more quickly (a very dubious
conclusion), this action should increase the supermarket's profit.
16. In computing the elasticities, remember that an elasticity measure can be calculated only if all other
things remain constant.
Price elasticities
Months 3-4 -1.00 20/(220+240)/2
-10/(120+110)/2
Copyright © 2014 Pearson Education, Inc.
Demand Elasticity 26
17. a. 1800 2000 - 200
b. $0 2000 = 2000 - 20P
Copyright © 2014 Pearson Education, Inc.
Demand Elasticity 27
18. a. 672,000 x $1 $672,000
b. Ep = ((672000-623000)/(672000+623000)) / ((1-1.15)/(1+1.15))
c. Increases in gasoline prices and automobile insurance during the year may have mitigated the
19. Ep = ((355000-518000)/(355000+518000))/((45-30)/(45+30))
20. EA = 1050 – 900 x 10000 + 15000
15000 – 10000 900 + 1050
Demand Elasticity 28
The elasticity of 0.38 means that for every 1% increase in advertising
expense, sales will increase by 0.38%.
If the cost is $80 per garment, then:
Advertising = $10000 Advertising = $15000
Sales 900 x 120 108000 1050 x 120 126000
By increasing its advertising expenses, the company increased its
21. a. EI = 12000 - 10000 / 34000 - 32000
12000 + 10000 34000 + 32000
b. EP = 11500 - 12000 / 100______
11500 + 12000 1600 + 1500
Company’s revenue: Before price increase 12000 x 1500 = 18,000,000
c. The demand curve appears to be inelastic; thus a further increase in price could increase
revenue.
22. Using the arc elasticity formula:
P1 = 599 and P2 = 434; Q1 = 270 and Q2 = 1,119
Demand Elasticity 29
Copyright © 2014 Pearson Education, Inc.
