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CHAPTER 5
1.1 The slope of the demand curve in Figure a is: (5 – 3) / (10 – 20) = 2 / −10 = −0.2.
2.1 (a) +25%
2.2 (a) Neither. Since demand is unit elastic, revenue will remain the same whether the price is raised
2.3 (a) % change in P = –22.2%; % change in Q =+22.2% ; Elast. = –1.0.
2.4 (a) Between Points A and B: –3.666. Between Points C and D: –1. Between Points E and F:
2.5 (a) Disagree. Buyers will spend more. Since demand is inelastic, the percent decline in quantity
2.6 (a) Disagree. The top half of the demand curve is elastic.
2.7 Total revenue is P x Q. When price rises (cab fare goes up), quantity demanded goes down, by an
2.8 (a) % Δ Q ÷ % Δ P = 0.2.
2.9 (a) If price decreases when demand is elastic, total revenue will rise.
2.10 When the price goes from $3 to $8, the price elasticity of demand is:
Total revenue
Quanty demanded
Unitary elasc
Elasc Inelasc
Total revenue
0
2.11
Demand is inelastic when total revenue decreases as price decreases. Since price and quantity
Demand is unitary elastic when total revenue does not change as price changes. The point on the
3.1 The answer to both questions lies in the cross elasticities. Soda is a complement to Frank’s
3.2 (a) Tap water is likely to have an inelastic demand due to lack of close substitutes and its
4.1 The problem in the expensive East and West Coasts seems to be zoning and land use regulation.
4.2 (a) The elasticity of labor supply: negative and less than 1 in absolute value.
4.3 Products A and B are most likely complements since the cross-price elasticity is negative.
4.4 (a) If income is rising and income elasticity of demand is positive, demand for the good is
(b) If income is rising and income elasticity of demand is negative, demand for the good is
(d) If income is falling and income elasticity of demand is negative, demand for the good is
5.1 (a) Under Simpson’s plan, the brewery would continue to produce 20,000 cases. The town would
(b) Under Simpson’s plan, price elasticity of demand would have to be: (20,000 – 20,000) /
(c) Burpee Beer currently receives $18 x 20,000 = $360,000 in total revenue. Under Simpson’s
5.2 An elasticity of 1.87 indicates that for every 1 percent change in the tax rate, migration will
