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SOLUTIONS TO TEXT PROBLEMS:
Quick Quizzes
1. The price elasticity of demand is a measure of how much the quantity demanded
2. The price elasticity of supply is a measure of how much the quantity supplied of a
The price elasticity of supply might be dierent in the long run than in the short
3. A drought that destroys half of all farm crops could be good for farmers (at least
those unaected by the drought) if the demand for the crops is inelastic. The
No one farmer would have an incentive to destroy her crops in the absence of a
Chapter Quick Quiz
1. a
Questions for Review
1. The price elasticity of demand measures how much quantity demanded responds
80
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 5/Elasticity and Its Application ❖ 81
2. The determinants of the price elasticity of demand include the availability of close
3. An elasticity greater than one means that demand is elastic. When the elasticity
is greater than one, the percentage change in quantity demanded exceeds the
4. Figure 1 presents a supply-and-demand diagram, showing the equilibrium price,
Figure 1
5. If demand is elastic, an increase in price reduces total revenue. With elastic
6. A good with income elasticity less than zero is called an inferior good because as
7. The price elasticity of supply is calculated as the percentage change in quantity
8. If a !xed quantity of a good is available and no more can be made, the price
9. Destruction of half of the fava bean crop is more likely to hurt fava bean farmers
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 5/Elasticity and Its Application ❖ 82
Problems and Applications
1. a. Mystery novels have more elastic demand than required textbooks because
mystery novels have close substitutes and are a luxury good, while required
b. Beethoven recordings have more elastic demand than classical music
recordings in general. Beethoven recordings are a narrower market than
c. Subway rides during the next !ve years have more elastic demand than
subway rides during the next six months. Goods have a more elastic demand
d. Root beer has more elastic demand than water. Root beer is a luxury with
2. a. For business travelers, the price elasticity of demand when the price of tickets
b. The price elasticity of demand for vacationers is higher than the elasticity for
business travelers because vacationers can choose a substitute more easily
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 5/Elasticity and Its Application ❖ 83
3. a. The percentage change in price is equal to (2.20 – 1.80)/2.00 x 100 = 20%. If
b. Over time, consumers can make adjustments to their homes by purchasing
4. If quantity demanded fell, price must have increased according to the law of
5. a. The eect on the market for coee beans is shown in Figure 2. When a
b. The eect on the market for cups of coee is shown in Figure 2. When the
c. The eect on the market for donuts is shown in Figure 3. When the price of
coee increases and the quantity demanded of coee decreases, consumers
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Quanty
Price
Figure 2
Demand
S1
S2
Price
Suppl
y
Chapter 5/Elasticity and Its Application ❖ 84
6. If the price of coee rose sharply while the quantity sold remained the same, the
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Figure
3
D1
D2
Figure 4:
Leonard’s
Explanation
S
D
2
D1
Price of
coee
Quantity of
coee
Price of
coee
Quantity of
coee
Figure 5:
Sheldon’s
Explanation
S
D1
D
2
Figure 6:
Penny’s
Explanation
S1
D
2
D1
Price of
coee
Quantity of
coee
Price of
coee
Quantity of
coee
Figure 7:
Howard’s
Explanation
D
S2
S
1
S2
Chapter 5/Elasticity and Its Application ❖ 85
In Figure 4, supply is perfectly inelastic and demand increased. As a result, the
quantity remained the same but price increased so Leonard’s explanation could be
correct. In Figure 5, demand is perfectly inelastic and it increased. As a result, both
the price and quantity increased so Sheldon’s explanation cannot be correct. In
7. a. If your income is $20,000, your price elasticity of demand as the price of
b. If the price is $12, your income elasticity of demand as your income increases
from $20,000 to $24,000 is [(30 – 24)/27]/[(24,000 – 20,000)/22,000] =
8. a. The percentage change in price (using the midpoint formula) is (1.50 – 1.25)/
9. Walt's price elasticity of demand is zero, because he wants the same quantity
10. a. With a price elasticity of demand of 0.4, reducing the quantity demanded of
cigarettes by 20% requires a 50% increase in price, because 20/50 = 0.4. With
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Figure 8:
Raj’s
Explanation
D
S
2
S1
Price of
coee
Quantity of
coee
Chapter 5/Elasticity and Its Application ❖ 86
b. The policy will have a larger eect !ve years from now than it does one year
c. Because teenagers do not have as much income as adults, they are likely to
11. To determine whether you should increase or decrease the price of admissions,
12. A worldwide drought could increase the total revenue of farmers if the price
elasticity of demand for grain is inelastic. The drought reduces the supply of
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
