978-1259291814 Chapter 6 Solution Manual

Chapter 6: Elasticity

Solutions Manual

Learning Objectives for Chapter 6

After reading this chapter, you should know

LO 06-01. How to compute price elasticity of demand.

LO 06-02. The relationships between price changes, price elasticity, and total revenue.

LO 06-03. What the cross-price elasticity of demand measures.

LO 06-04. What the income elasticity of demand tells us.

LO 06-05. What the elasticity of supply measures.

Questions for Discussio

1. Is the demand for enrollments in your college price-elastic? How could you find out?

(LO 06-01)

Answer: This discussion question may have surprising answers, and the answers can make

use of students’ familiarity with a school to understand the elasticity concept better.

Following is the answer for a private college of 5,000 students:

You could run an experiment based on your colleges enrollment data, yet it is important to

keep in mind the ceteris paribus assumption.

2. If the price of gasoline doubled, how would consumption of (a) cars, (b) public

transportation, and (c) in-theater movies be affected? How quickly would these adjustments

be made? (LO 06-03)

Answer:

(a) Consumption of cars would fall because cars are a complementary good used with

(b) Consumption of public transportation methods might rise if they are effectively substitute

(c) Consumption of in-theater movies would fall. Movies and gasoline are generally

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3. Identify two goods each whose demand exhibits (a) high income elasticity, (b) low income

elasticity, (c) high price elasticity, and (d) low price elasticity. What accounts for the

differences in elasticity? (LO 06-04)

Answer: Answering this question requires an understanding of the determinants of elasticity.

The determinants of elasticity of demand include if the good is a necessity or luxury, the

availability of substitutes, the relative price of the good to income, and how much time

consumers have had to adjust to the price change.

4. Identify two pairs each of products that are (a) substitute goods and (b) complementary

goods. (LO 06-03)

Answer: Substitute goods are goods that can be purchased instead of each other or

5. Why does the price elasticity of demand for cigarettes differ for teenagers and adults (see

Table 6.2)? (LO 06-01)

Answer: In the short run (one year), the price elasticity of demand for cigarettes by adults is

6. If you owned a movie theater, would you want the demand for movies to be elastic or

inelastic? (LO 06-02

Answer: You would do better if movie demand were inelastic. That way you could raise

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7. How has the Internet affected the price elasticity of demand for air travel? (LO 06-01)

8. If the elasticity of demand for coffee is so low (Table 6.1), why doesn’t Starbucks raise the

price of coffee to $10 a cup? (LO 06-02)

9. What would happen to unit sales and total revenue for this textbook if the bookstore reduced

its price? (LO 06-02)

10. Is the demand for iPhones price inelastic or elastic? Why? Is income elasticity high or low?

(LO 06-04)

11. Suppose that quantity supplied for a product falls by 10 percent. If the price elasticity of

supply is 2, what should happen to the price of the product? (LO 06-05)

Problem

1. By changing the denominator in each case, compute the percentage change in the 16GB

iPhone’s price (see text and News, p. 127), from

(a) The initial price.

(b) The final price.

(c) The average price. (LO 06-01)

Answers:

Feedback:

A percentage change is calculated by taking the ratio of this change and some base value,

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(a) Percentage change in price = change in price / initial price = ($199

−¿

$99) / $199 =

(b) Percentage change in price = change in price / final price = ($199

−¿

$99) / $99 =

(c) Percentage change in price = change in price / average price = ($199

−¿

$99) / [($199

2. What was the price elasticity of demand for iPhones in 2007 prior to the price reduction if the

percentage change in price was 40% (News, p. 123)? (LO 06-01)

Feedback:

Price elasticity (E) = percentage change in quantity demanded / percentage change in price.

−¿

3. According to Professor Becker (News, p. 123), by how much would cigarette prices have to

rise to get a 15 percent reduction in smoking in

(a) one year?

(b) three years? (LO 06-01)

Answers:

Feedback:

Price Elasticity = (% change in Consumption) / (% change in Price)

(a) Cigarette consumption drops 4 percent for every 10 percent increase in price in the first

(b) Over a three year period, cigarette consumption drops 8 percent for every 10 percent

4. What is the long-run price elasticity of demand for cigarettes among 18-year-olds (Table

6.2)? (LO 06-01)

Feedback: Price elasticity (E) = (percentage change in quantity demanded) / (percentage

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5. What was the price elasticity of demand for gasoline in 2011 (News, p. 122)? (LO 06-01

Feedback: Price Elasticity of Demand = (% change in Quantity Demanded) / (% change in

6. Suppose consumers buy 40 million packs of cigarettes per month at a price of $5 per pack. If

a $1 tax is added to that price,

(a) By what percentage does price change? (Use the midpoint formula on p. 119.)

(b) By what percentage will cigarette sales decline in the short run? (See Table 6.1 for a

clue.)

(c) According to Gary Becker, by how much will sales decline in the long run? (See the

News, p. 123.) (LO 06-01

Answers:

Feedback:

(a) Percentage change in price = change in price / average price = (6

−¿

5) / ((5 + 6) / 2 =

(b) Given the information in Table 6.1, we know that price elasticity (E) = 0.40 for cigarettes.

(c) According to Becker, the long-run (over a three-year period) elasticity of demand is 0.80

7. From Figure 6.1, compute (a) the price elasticity between each of the following points and (b)

the total revenue at each point. (LO 06-02)

Answers:

Points on

Demand

Curve

Price

(per Ounce)

Quantity

Demanded

(Ounces

per Show)

Total

Revenue

C $0.40 4 $2.10

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(a) C to D: 3.00

(b) Point C: 1.60

Feedback:

Price Elasticity = (% change in Quantity Demanded) / (% change in Price)

(a) C to D Price Elasticity: 3.00

(b) Total revenue = Price × Quantity

8. If the price of a pack of cigarettes (including taxes) was $6 before the 2015 tax hike was

approved (see the News, p. 121),

(a) What was the price after the tax hike?

(b) What was the (average) percentage increase in price?

(c) If cigarette sales decline by 7.2 percent, what is the price elasticity of demand?

(LO 06-01)

Answers:

Feedback:

(a) According to the article, the tax hike added $0.94 per pack. The price after the tax hike

(b) Average percentage increase in price = change in price / average price = ($6.94

−¿

(c) Percentage change in quantity / percentage change in price = price elasticity of demand.

9. According to the calculation on page 129, by how much will popcorn sales increase if

average income goes up by 12 percent? (LO 06-04)

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Feedback: The income elasticity of popcorn is provided as 3.29, which means that when

10. If a gasoline price hike of 5 percent caused the SUV sales drop described in the News on

page 128, what is the cross-price elasticity of demand between gasoline and SUVs?

(LO 06-03)

11. If the cross-price elasticity of demand between printed textbooks and e-books is +0.30,

(a) Are e-books and textbooks complementary (C) or substitute (S) goods?

(b) If textbook prices increase by 6 percent, by how much will e-book demand change?

(LO 06-03)

12. Suppose that in a week the price of Greek yogurt increases from $1.25/lb. to $1.75/lb. At the

same time, the quantity of Greek yogurt supplied increases from 100,000 lbs. to180,000

lbs. What is the price elasticity of supply for Greek yogurt? (LO 06-05

13. Use the following data to illustrate the (a) demand curve and (b) total revenue curve:

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(a) At what price is total revenue maximized?

(b) At that price, what is the elasticity of demand?

(c) Between what prices is demand elastic? (LO 06-02)

Answers:

//

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..

Feedback:

In order to graph the demand curve, price is on the vertical axis and quantity is on the

horizontal axis. To plot the endpoints, find the highest price and the quantity associated with

(a) Total revenue is maximized at Q = 11(see the graph above). At that quantity, price is

(b) Higher prices result in higher total revenue only if demand is inelastic. If demand is

elastic, lower prices result in higher revenues. Notice that total revenue rises as price

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(c) When demand is elastic, lower prices result in higher revenues. Notice that total revenue

14. On the graphs below, show the impact of the price reduction for iPhones, as described in the

News on pages 121 and 127. (LO 06-03)

Answer:

Feedback: According to the law of demand, a decrease in the price of a good is usually

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