Exam 5: Elasticity

The price of a new portable CD player falls from $100 to $90. The quantity of CD players demanded rises from 15,000 per year to 20,000 per year. Use the midpoint formula to calculate the price elasticity of demand for portable CD players. Is the demand elastic, inelastic, or unit elastic?

Many people have bemoaned the fact that hand-written personal letters have become largely a thing of the past. They have also noted that the number of emails they receive have increased quite dramatically and can hardly be compared to the volume of letters that they used to receive by mail. Explain in terms of opportunity cost why this might be the case. Explain why junk email is probably more of a problem than traditional junk mail delivered to our mail box.

Suppose that the price elasticity of demand for museum tickets is equal to -1.8. If the price of a museum ticket rises by 30 percent, what will happen to quantity demanded?

Explain how it is possible for a downward-sloping demand curve to have a constant slope but still have a variation of elasticity of demand along it.

Assume you are working at a department store and you are told by the manager to cut prices by 20% for all the new women's sweaters that are currently priced at $50. What will be the new price of these sweaters? Suppose the manager tells you to raise the prices back up by 20%. What is the new price of the sweaters? Why is your answer not the same as the original price of the sweaters? What importance does this have for why the midpoint formula is used in calculating price elasticity?

The cross-price elasticity between natural gas and heating oil is estimated to be 2.3. The cross-price elasticity between natural gas and electricity is estimated to be -0.8. What is the relationship between natural gas and heating oil? What is the relationship between natural gas and electricity? Explain.

Would you expect the income elasticity of demand for Cadillacs to be positive or negative? Why is this true?

Suppose that the price elasticity of demand for snow shovels is -1.2. What would have to happen to the price of a snow shovel for the quantity demanded to fall from 2,000 to 1,800? Use the midpoint formula in your calculations.

Suppose that the price elasticity of demand for mittens is -2.5. What would happen to the quantity of mittens demanded if the price of mittens rose from $5 to $6? Use the midpoint formula in your calculations.

The recent reduction in the price of oil has increased the demand for foreign automobiles. Based on this statement, what may be concluded about price, cross-price, or income elasticity of demand?

Refer to Scenario 2. Over a long period of time, in the absence of any restrictions in the market, would you expect the price elasticity of demand for crabs to be more elastic or inelastic? Explain.

Assume that that the two graphs below are identical demand curves for hamburger. The only difference is that the one on the left measures hamburger in pounds and the one on the right measures hamburger in ounces. The elasticity of demand between the prices of $3 and $2 should be the same in both cases. However, prove that calculating the slopes between these two points on each graph would not be helpful in determining elasticity of demand.

In the past dating was a fairly simple activity in the United States. If there was someone you wanted to go out with you would call them or ask them to go out for dinner and a movie. Nowadays it appears that many people are willing to pay large amounts of money to professional dating services to find a compatible mate. This idea is not a new one but it has increased quite dramatically in popularity. What does this suggest about what kind of good dating services might be and why? Are we likely to find this type of service be more or less prevalent in poorer countries?

If the elasticity of demand were positive what would this imply about the shape of the demand curve? Why is it that we are unlikely to find a price elasticity of demand with a positive value?

If leisure is a normal good and the economy expands so that national income rises by 3% next year then theoretically what ought to happen to the amount of work that should take place?

Even though airfares have been increasing, the revenue earned by airlines has declined. Based on this statement, what may be concluded about price, cross-price, or income elasticity of demand?

Suppose a movie theater raises its ticket prices by 10% and the total revenue it receives in ticket sales doesn't change one bit from the previous week. What can you say about the price elasticity of demand at that new price? Could this go on indefinitely? In other words, would continued price increases leave total revenue unchanged without bound? Why or why not?

Name three determinants of elasticity identified in the text. Explain how each one affects the responsiveness of demand.

Which is likely to be more elastic: the demand for orange juice or the demand for a particular brand of orange juice? Explain.

Why isn't slope as useful as elasticity to measure the responsiveness of one variable to another?