Answers to Additional Problems and Applications
10. With higher fuel costs, airlines raised their average fare from 75¢ to $1.25 per
passenger mile and the number of passenger miles decreased from 2.5
million a day to 1.5 million a day.
a. What is the price elasticity of demand for air travel over this price range?
The price elasticity of demand equals the percentage change in the quantity
demanded divided by the percentage change in the price. The quantity demanded
changes by 1.0 million passenger miles and the average passenger miles is 2.0
b. Describe the demand for air travel.
11. Figure 4.2 shows the demand for DVD rentals.
a. Calculate the elasticity of demand
when the price of a DVD rental rises
from $3 to $5.
The price elasticity of demand is 2. When
the price of a DVD rental rises from $3 to
$5, the quantity demanded of DVDs
decreases from 75 to 25 a day. The price
elasticity of demand equals the
percentage change in the quantity
b. At what price is the elasticity of demand for DVD rentals equal to 1?
The price elasticity of demand equals 1 at $3 a DVD. The price elasticity of
Use the following table to work Problems 12 to 14.
The demand schedule for computer chips is in the table.
12.a. What happens to total revenue if the
price falls from $400 to $350 a chip and
from $350 to $300 a chip?
When the price of a chip is $400, 30
million chips are sold and total revenue
equals $12,000 million. When the price of a
When the price is $350 a chip, 35 million chips are sold and total revenue is
$12,250 million. When the price of a chip is $300, 40 million chips are sold and
b. At what price is total revenue at a maximum?
Total revenue is maximized at $350 a chip. When the price of a chip is $300, 40
million chips are sold and total revenue equals $12,000 million. When the price is
$350 a chip, 35 million chips are sold and total revenue equals $12,250 million.
13. At an average price of $350, is the demand for chips elastic, inelastic, or unit
elastic? Use the total revenue test to answer this question.
The demand for chips is unit elastic. The total revenue test says that if the price
changes and total revenue remains the same, the demand is unit elastic at the
14. At $250 a chip, is the demand for chips elastic or inelastic? Use the total
revenue test to answer this question.
The demand for chips is inelastic. The total revenue test says that if the price falls
15. Your price elasticity of demand for bananas is 4. If the price of bananas rises
by 5 percent, what is
a. The percentage change in the quantity of bananas you buy?
The quantity of bananas you buy decreases by 20 percent. The price elasticity of
demand equals the percentage change in the quantity demanded divided by the
b. The change in your expenditure on bananas?
Your total expenditure decreases because your demand is elastic. The fall in
Price
(dollars
per chip)
Quantity
demanded
(millions of
chips per year)
200 50
250 45
300 40
16. As Gasoline Prices Soar, Americans Slowly Adapt
As gas prices rose in March 2008, Americans drove 11 billion fewer miles than
in March 2007. Realizing that prices are not going down, Americans adapted
to higher energy costs. Americans spent 3.7 percent of their disposable
income on transportation fuels. How much we spend on gasoline depends on
the choices we make: what car we drive, where we live, how much time we
spend driving, and where we choose to go. For many people, higher energy
costs mean fewer restaurant meals, deferred weekend outings with the kids,
less air travel, and more time closer to home.
Source: International Herald Tribune, May 23, 2008
a. List and explain the elasticities of demand that are implicitly referred to in
the news clip.
The elasticities to which the clip refers are the income elasticity of demand, the
price elasticity of demand, and the cross elasticity of demand. The income
elasticity of demand is reAected in the news clip’s discussion of the fraction of
income spent on transportation fuels. More references are made to the factors that
inAuence the price elasticity of demand. The article lists many substitutions
households can make in response to higher fuel prices. In particular the type of car
b. Why, according to the news clip, is the demand for gasoline inelastic?
One factor listed that helps make the demand for gasoline inelastic is the point
that gasoline accounts for only a relatively small fraction of people’s incomes.
Another factor is more qualitative: none of the substitutions listed for gasoline—the
Use this information to work Problems 17 and 18.
Economy Forces Many to Shorten Holiday Plans
This year Americans are taking fewer exotic holidays by air and instead are visiting
Source: USA Today, May 22, 2009
17. Given the prices of the two holidays, is the income elasticity of demand for
exotic holidays positive or negative? Are exotic holidays a normal good or an
inferior good? Are local holidays a normal good or an inferior good?
The income elasticity of demand for exotic holidays is positive so exotic holidays
18. Are exotic holidays and local holidays substitutes? Explain your answer.
Exotic holidays and local holidays are substitutes. The article points out that in
19. When Alex’s income was $3,000, he bought 4 bagels and 12 donuts a month.
Now his income is $5,000 and he buys 8 bagels and 6 donuts a month.
Calculate Alex’s income elasticity of demand for (a) bagels and (b) donuts.
a. The income elasticity of demand equals the percentage change in the quantity
demanded divided by the percentage change in income. The change in income is
b. From part (a), the percentage change in income is 50 percent. The change in the
−1.33.
20. Wal-Mart’s Recession-Time Pet Project
During the recession, Wal-Mart moved its pet food and supplies to in front of
its other fast growing business, baby products. Retail experts point out that
kids and pets tend to be fairly recession-resistant businesses—even in a
recession, dogs will be fed and kids will get their toys.
Source: CNN, May 13, 2008
a. What does this news clip imply about the income elasticity of demand for
pet food and baby products?
The news clip implies that both pet food and baby food are necessities. Their
b. Would the income elasticity of demand be greater or less than 1? Explain.
21. If a 5 percent fall in the price of chocolate sauce increases the quantity
demanded of chocolate sauce by 10 percent and increases the quantity of ice
cream demanded by 15 percent, calculate the:
a. Price elasticity of demand for chocolate sauce.
The price elasticity of demand for chocolate sauce equals the percentage change
b. Cross elasticity of demand for ice cream with respect to the price of
chocolate sauce.
The cross elasticity of demand for ice cream with respect to the price of chocolate
sauce equals the percentage change in the quantity of ice cream demanded
22. To Love, Honor, and Save Money
In a survey of caterers and event planners, nearly half of them said that they
were seeing declines in wedding spending in response to the economic
slowdown; 12% even reported wedding cancellations because of Gnancial
concerns.
Source: Time, June 2, 2008
a. Based upon this news clip, are wedding events a normal good or inferior
good? Explain.
Based on the news clip, wedding events are a normal good. The economic
b. Are wedding events more a necessity or a luxury? Would the income
elasticity of demand be greater than 1, less than 1, or equal to 1? Explain.
Wedding events are a luxury. Wedding events are not necessities because couples
23. The table sets out the supply
schedule of long-distance phone
calls. Calculate the elasticity of
supply when
percentage change in the
b. The average price is 20¢ a minute.
The elasticity of supply is 1. The formula for the elasticity of supply calculates the
elasticity at the average price. So to Gnd the elasticity at an average price of 20
cents a minute, change the price such that 20 cents is the average price—for
Price
(cents
per minute)
Quantity supplied
(millions of
minutes per day)
24. Weak Coal Prices Hit China’s Third-Largest Coal Miner
The chairman of Yanzhou Coal Mining reported that the recession had
decreased the demand for coal, with its sales falling by 11.9 per cent to 7.92
million tons from 8.99 million tons a year earlier, despite a 10.6 percent cut in
the price.
Source: Dow Jones, April 27, 2009
Calculate the price elasticity of supply of coal. Is the supply of coal elastic or
inelastic?
The price elasticity of supply of coal equals the percentage change in the quantity
of coal supplied divided by the percentage change in the price of coal. Using the
Economics in the News
25. After you have studied Economics in the News on pp. 98–99, answer the
following questions.
a. Looking at Fig. 1 on p. 99, explain what must have happened in 2014 to the
supply of co9ee.
b. Given the information in Fig. 1 and the estimated elasticity of demand for
co9ee, by what percentage did the quantity of co9ee change in 2014 and in
which direction?
The price of co9ee rose from $1.00 per pound to $1.60 per pound. Therefore the
percentage increase in the price of co9ee is ($1.60 – $1.00)/$1.30 = 46 percent.
c. The news article says that farmers’ revenue shrank as the price of co9ee
fell. Explain why this fact tells us that the demand for co9ee is inelastic.
The total revenue test shows that total revenue falls when the price falls only if the
demand for the product is inelastic. Therefore, because farmers’ total revenue
d. How does the total revenue test work for a rise in the price? What do you
predict happened to total revenue in 2014? Why?
If the demand for a product is inelastic and the price rises, the total revenue
e. Co9ee isn’t just co9ee. It comes in di9erent varieties, the main two being
Arabica and Robusta. Would you expect the elasticity of demand for Arabica
to be the same as the elasticity of demand for co9ee? Explain why or why
not.
There are more close substitutes for the speciGc type of co9ee, Arabica, than there
26. Comcast Deal Won’t Lead to Net)ix Price Hike
Under the deal, NetAix will buy Internet service from Comcast, rather than
connect directly for free with some smaller ISPs like Cablevision as it does
now.
Source: CNN, April 24, 2014
a. How will NetAix’s decision to buy more expensive Internet service inAuence
NetAix’s supply of online movie viewing?
b. Given your answer to part (a), explain why NetAix says it will not hike its
price.
c. What can you say about the price elasticity of demand for NetAix online
movie viewing?