Exam 5: Elasticity

Suppose that the price elasticity of demand for an ice cream cone is -1.9. If the local ice cream shop owner wants to increase total revenue, what would you recommend he or she do?

Suppose that the price of a pound of potatoes increases from $0.75 to $0.90. Use the midpoint formula to calculate the percentage change in price.

When the price of toothpaste increases by 15 percent, the quantity of toothpaste demanded falls by 30 percent. Calculate the price elasticity of demand. Is the demand for toothpaste elastic, inelastic, or unit elastic?

The local barber in a small town has decided to raise the price of his haircuts by 25% because he realizes he is the only barber in town and of course "everyone has to get a haircut". His rational is that the demand for his services is price inelastic? What mistake is he making?

Customers often complain about the high price of accessories for their cell phone including batteries, chargers and head sets. Often these items can cost even more than the price of the phone. Explain using price elasticity why this might be the case.

The average price of gasoline in June of 2008 in the United States was $3.79. This was up by 82 cents from the previous year. Forecasters are expecting a drop in gasoline consumption of about 1% for the first time in 16 years. Even though this is a historic moment what do the figures still demonstrate about the elasticity of demand for gasoline? If the price increases go unabated what is likely to happen to the long-run price elasticity for gasoline and why?

The price elasticity of demand for new stereos is -2. Suppose a stereo store wishes to increase its sales by 15 percent. What should the firm do?

When the price of a bagel rises from $0.45 to $0.65, the quantity of cream cheese demanded falls from 12,000 to 10,000 ounces per year. Use the midpoint formula to calculate the cross-price elasticity between bagels and cream cheese. What does the sign imply about the relationship between these two goods?

Why is it a bad business practice to assume that raising prices will lead to increases in total revenue?

The price of pizza falls by 25 percent. If the elasticity of demand for pizza is equal to -1.5, what will happen to the quantity of pizza demanded?

Explain the time dimension as it relates to elasticity. Be sure to include in your answer the difference in elasticity between the short run and the long run.

In many large American cities it is common to witness private motorists pulling up to municipal bus stations and allowing perfect strangers to ride into downtown with them in order to take advantage of the high occupancy vehicle lanes that require two or more drivers. Using the concept of elasticity of demand and total revenue explain why public transit authorities might be concerned with this practice.

An art museum raises its admission price, and ends up with a decrease in its total revenue. How could you explain this situation to the museum director?

The price of cabbage rises from $0.20 per pound to $0.30 per pound. The quantity of cabbage demanded falls from 800 pounds per week to 600 pounds per week. Use the midpoint formula to calculate the price elasticity of demand for cabbage. Is the demand elastic, inelastic, or unit elastic?

If the price elasticity of demand for chocolate is -2.0 what should we expect would happen to consumption of chocolate if the price falls by 10%? What about a 50% decrease?

Is demand more elastic in the short run or the long run? Why?

Refer to the information provided in Scenario 5 below to answer the following questions. SCENARIO 5: In 1999 Disk Monger sold 1,100 digital video disks (DVD) at a price of $15 each. Across the street, Audio Haven sold 700 DVD players at a price of $500 each. In 2000, Audio Haven reduced the price of DVD players to $250 each and sold 3,000 players. In the same year, Disk Monger sold 1,300 DVDs at a constant price of $15 each. -Refer to Scenario 5. What will be the effect on total revenue for Audio Haven if it raises the price for DVD players?

Explain using price elasticity of demand why air conditioning manufacturers would actually have sales in the middle of the summer when customers have the most acute need? Explain this apparent paradox.

When the price of bread rises from $1.25 to $1.50 per loaf, quantity demanded falls from 5,800 per week to 5,500. Calculate total revenue both before and after the price change. What can we tell about the price elasticity of demand for bread?

Why is the price elasticity of demand generally a negative number?