Deck 5: Elasticity

Question 1

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?

Answer 1

Price elasticity of demand = [-30/15] = -2. Since the absolute value of the price elasticity is greater than one, the demand for toothpaste is elastic.

Question 2

How does one determine whether demand is elastic, inelastic, or unit elastic?

Answer 2

If the absolute value of the price elasticity of demand is greater than one, demand is elastic. If it is less than one, demand is inelastic. If the absolute value of the price elasticity of demand is equal to one, demand is unit elastic.

Question 3

When the price of toilet paper falls by 20 percent, the quantity of toilet paper demanded rises by 10 percent. Calculate the price elasticity of demand. Is the demand for toilet paper elastic, inelastic, or unit elastic?

Answer 3

Price elasticity of demand = [10/-20] = -0.5. Since the absolute value of the price elasticity is less than one, the demand for toilet paper is inelastic.

Question 4

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.

Question 5

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?

Question 6

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.

Question 7

What does elasticity measure?

Question 8

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?

Question 9

What does it mean for a good to have a perfectly inelastic demand? Draw a demand curve of this type. Explain why it has the shape that it does.

Question 10

Assume a customer of natural gas is negotiating with his supplier over the telephone. At the time prices of all the supplier's competitors are precisely the same. The customer tells the supplier that if he raises his price even one penny he will walk away. What does the perceived demand curve for natural gas look like for this customer? Why?

Question 11

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

Question 12

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.

Question 13

What does it mean for a good to have a perfectly elastic demand? Draw a demand curve of this type. Explain why it has the shape that it does.

Question 14

The price elasticity of demand for gasoline is -0.8. What must occur to the price of gasoline in order for quantity demanded to rise by 20 percent?

Question 15

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

Question 16

Define price elasticity of demand. What does it measure?

Question 17

Refer to the information provided in Scenario 1 below to answer the following questions.
SCENARIO 1: The following diagram represents the U.S. market for oil.
Refer to Scenario 1. Use the total revenue test (on all oil sold) to determine elasticity of demand with a price drop from $18 to $16.

Question 18

Compare and contrast the two demand curves depicted in the graph below.

Question 19

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?

Question 20

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?

Question 21

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?

Question 22

What is the midpoint formula for calculating a percentage change?

Question 23

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?

Question 24

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?

Question 25

Using the graph below explain why the elasticity of demand will be greater between $15 and $9 as opposed to between $9 and $4. Hint: You do not need to perform any calculations to prove that this is true.

Question 26

Suppose that the quantity of staplers demanded falls from 10,000 per week to 8500. Use the midpoint formula to calculate the percentage change in quantity demanded.

Question 27

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.

Question 28

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?

Question 29

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?

Question 30

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. Calculate the price elasticity of demand for DVD players. Is demand for players elastic, inelastic, or unitary?

Question 31

What is the likely price elasticity of demand for crabs? Why?

Question 32

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?

Question 33

Refer to the information provided in Scenario 1 below to answer the following questions.
SCENARIO 1: The following diagram represents the U.S. market for oil.
Refer to Scenario 1. Use the midpoint formula to calculate the price elasticity of demand between $18 and $16.

Question 34

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?

Question 35

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?

Question 36

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.

Question 37

What is the "midpoint formula" and why is it used?

Question 38

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.

Question 39

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.

Question 40

The university you attend needs to increase total revenue. The president suggests that by raising tuition by 5%, total revenue will increase. However, after the tuition increase, total revenue actually fell. What can you infer about the price elasticity of demand for an education at your university? Why is this likely to be true? What did your university president assume to be true about the price elasticity of demand for an education at your university?

Question 41

Comment on the following statement: "Elasticity is constant along a straight-line demand curve".

Question 42

Compare and contrast the relative elasticities that you are likely to find between toothpicks and furniture. Explain your answer.

Question 43

Explain how the availability of substitutes affects demand elasticity.

Question 44

"The recent availability of satellite television has reduced the price of cable television subscriptions." Based on this statement, what may be concluded about price, cross-price, or income elasticity of demand?

Question 45

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?

Question 46

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.

Question 47

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?

Question 48

When the price of a Sony portable CD player rises from $125 to $150, quantity demanded falls from 750 per week to 600. Calculate total revenue both before and after the price change. What can we tell about the price elasticity of demand for Sony portable CD players?

Question 49

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?

Question 50

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

Question 51

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?

Question 52

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?

Question 53

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

Question 54

In the face of gasoline prices approaching $4.00 automobile dealerships are heavily marketing their compact cars and hybrid vehicles. However, an interesting development is that many of these dealerships are offering their economy cars at MSRP (manufacturers suggested retail price) without offering discounts. What do you suppose these dealerships believe about the price elasticity of demand for these economy cars?

Question 55

Explain with the use of a graph how total revenue changes along a linear downward-sloping demand curve.

Question 56

The demand for tobacco is price inelastic. Suppose there is a drought that destroys a large portion of the tobacco crop. What will happen in the market for tobacco? Will the equilibrium price and quantity change? If so, how? What will happen to the total revenue earned by tobacco farmers?

Question 57

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

Question 58

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.

Question 59

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.

Question 60

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

Question 61

What does the income elasticity of demand measure? How is it calculated?

Question 62

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?

Question 63

Billy's income elasticity of demand for ground beef is -0.5 and his income elasticity of demand for pork chops is 1.2. Is ground beef a normal or inferior good? Explain. What about pork chops?

Question 64

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.

Question 65

The owner of a local restaurant comes to you for help. He needs to know whether or not he should increase the price of the meals he serves. To answer his question, what information would you like to know?

Question 66

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?

Question 67

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?

Question 68

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

Question 69

Compare and contrast the relative price elasticities of Marlboro brand cigarettes with cigarettes in general. Why is there a difference?

Question 70

If a good is income inelastic what does this imply would happen to consumption of this good if you were to win the lottery?

Question 71

In the 1970s a typical college student's consumption might be represented by the following items: a small used car, black and white television set, macaroni and cheese and generic brand beer. As many of these students graduated from college what do you expect happened to the composition and quantity of the goods mentioned? Explain.

Question 72

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.

Question 73

When Frank's income rises from $29,000 to $34,000 per year, he increases his purchases of tomatoes from 20 pounds to 28 pounds per year. What is Frank's income elasticity of demand for tomatoes? (Use the midpoint formula.) According to Frank, are tomatoes an inferior or normal good?

Question 74

What does the cross-price elasticity of demand measure? How is it calculated?