978-0133020267 Chapter 4 Solution Manual

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

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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.

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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.

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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:

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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

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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:

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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 = —————— / ————

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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

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17. a. 1800 2000 – 200

b. $0 2000 = 2000 – 20P

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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

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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

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