Section 4: Elasticity and Law of Demand
Question 1
1. Do you think the price elasticity of demand for Ford sport-utility vehicles (SUVs) will
increase, decrease, or remain the same when each of the following events occurs? Explain
your answer.
a. Other car manufacturers, such as General Motors, decide to make and sell SUVs.
b. SUVs produced in foreign countries are banned from the American market.
c. Due to ad campaigns, Americans believe that SUVs are much safer than ordinary passenger
cars.
d. The time period over which you measure the elasticity lengthens. During that longer time,
new models such as four-wheel-drive cargo vans appear.
Solution 1
Question 2
2. In the United States, 2015 was a bad year for growing wheat. And as wheat supply decreased,
the price of wheat rose dramatically, leading to a lower quantity demanded (a movement along
the demand curve). The accompanying table describes what happened to prices and the
quantity of wheat demanded.
2014
2015
Quantity demanded
(bushels)
2.2 billion
2.0 billion
Average price (per
bushel)
$3.42
$4.26
a. Using the midpoint method, calculate the price elasticity of demand for winter wheat.
b. What is the total revenue for U.S. wheat farmers in 2014 and 2015?
c. Did the bad harvest increase or decrease the total revenue of U.S. wheat farmers? How
could you have predicted this from your answer to part a?
Solution 2
Question 3
3. The accompanying table gives part of the supply schedule for personal computers in the
United States.
Price of computer
Quantity of computers
supplied
$1,100
12,000
900
8,000
a. Calculate the price elasticity of supply when the price increases from $900 to $1,100 using
the midpoint method.
b. Suppose firms produce 1,000 more computers at any given price due to improved
technology. As price increases from $900 to $1,100, is the price elasticity of supply now
greater than, less than, or the same as it was in part a?
c. Suppose a longer time period under consideration means that the quantity supplied at any
given price is 20% higher than the figures given in the table. As price increases from $900
to $1,100, is the price elasticity of supply now greater than, less than, or the same as it was
in part a?
Solution 3
Question 4
4. The accompanying table lists the cross-price elasticities of demand for several goods, where
the percent quantity change is measured for the first good of the pair, and the percent price
change is measured for the second good.
Good
Cross-price elasticities
of demand
Air-conditioning units and
kilowatts of electricity
−0.34
Coke and Pepsi
+0.63
High-fuel-consuming
sport-utility vehicles
(SUVs) and gasoline
−0.28
McDonald’s burgers and
Burger King burgers
+0.82
Butter and margarine
+1.54
a. Explain the sign of each of the cross-price elasticities. What does it imply about the
relationship between the two goods in question?
b. Compare the absolute values of the cross-price elasticities and explain their magnitudes. For
example, why is the cross-price elasticity of McDonald’s burgers and Burger King burgers
less than the cross-price elasticity of butter and margarine?
c. Use the information in the table to calculate how a 5% increase in the price of Pepsi affects
the quantity of Coke demanded.
d. Use the information in the table to calculate how a 10% decrease in the price of gasoline
affects the quantity of SUVs demanded.
Solution 4
Question 5
5. What can you conclude about the price elasticity of demand in each of the following
statements?
a. “The pizza delivery business in this town is very competitive. I’d lose half my customers if
I raised the price by as little as 10%.”
b. “I owned both of the two Jerry Garcia autographed lithographs in existence. I sold one on
eBay for a high price. But when I sold the second one, the price dropped by 80%.”
c. “My economics professor has chosen to use the Krugman/Wells textbook for this class. I
have no choice but to buy this book.”
d. “I always spend a total of exactly $10 per week on coffee.”
Solution 5
Question 6
6. The accompanying table shows the price and yearly quantity of souvenir T-shirts demanded in
the town of Crystal Lake according to the average income of the tourists visiting.
Price of T-
shirt
Quantity of T-
shirts demanded
when average
tourist income is
$20,000
Quantity of T-
shirts
demanded
when average
tourist income
is $30,000
$4
3,000
5,000
5
2,400
4,200
6
1,600
3,000
7
800
1,800
a. Using the midpoint method, calculate the price elasticity of demand when the price of a T-
shirt rises from $5 to $6 and the average tourist income is $20,000. Also calculate it when
the average tourist income is $30,000.
b. Using the midpoint method, calculate the income elasticity of demand when the price of a
T-shirt is $4 and the average tourist income increases from $20,000 to $30,000. Also
calculate it when the price is $7.
Solution 6
Question 7
7. A recent study determined the following elasticities for Volkswagen Beetles:
Price elasticity of demand = 2
Income elasticity of demand = 1.5
The supply of Beetles is elastic. Based on this information, are the following statements true
or false? Explain your reasoning.
a. A 10% increase in the price of a Beetle will reduce the quantity demanded by 20%.
b. An increase in consumer income will increase the price and quantity of Beetles sold.
Solution 7
Question 8
8. In each of the following cases, do you think the price elasticity of supply is (i) perfectly
elastic; (ii) perfectly inelastic; (iii) elastic, but not perfectly elastic; or (iv) inelastic, but not
perfectly inelastic? Explain using a diagram.
a. An increase in demand this summer for luxury cruises leads to a huge jump in the sales
price of a cabin on the Queen Mary 2.
b. The price of a kilowatt of electricity is the same during periods of high electricity demand
as during periods of low electricity demand.
c. Fewer people want to fly during February than during any other month. The airlines cancel
about 10% of their flights as ticket prices fall about 20% during this month.
d. Owners of vacation homes in Maine rent them out during the summer. Due to the soft
economy this year, a 30% decline in the price of a vacation rental leads more than half of
homeowners to occupy their vacation homes themselves during the summer.
Solution 8
Question 9
9. Use an elasticity concept to explain each of the following observations.
a. During economic booms, the number of new personal care businesses, such as gyms and
tanning salons, is proportionately greater than the number of other new businesses, such as
grocery stores.
b. Cement is the primary building material in Mexico. After new technology makes cement
cheaper to produce, the supply curve for the Mexican cement industry becomes relatively
flatter.
c. Some goods that were once considered luxuries, like a telephone, are now considered virtual
necessities. As a result, the demand curve for telephone services has become steeper over
time.
d. Consumers in a less developed country like Guatemala spend proportionately more of their
income on equipment for producing things at home, like sewing machines, than consumers
in a more developed country like Canada.
Solution 9
Question 10
10. A 2015 article published by the American Journal of Preventive Medicine studied the effects
of an increase in alcohol prices on the incidence of new cases of sexually transmitted
diseases. In particular, the researchers studied the effects that a Maryland policy increasing
alcohol taxes had on the decline in gonorrhea cases. The report concluded that an increase in
the alcohol tax rate by 3% resulted in 1,600 fewer cases of gonorrhea. Assume that prior to