Economics Homework (6 questions)

Questions for Review: 2,4,6Problems and Applications: 1,2,3

• The price elasticity of demand measures how
much the quantity demanded responds to
changes in the price. Demand tends to be more
elastic if close substitutes are available, if the
good is a luxury rather than a necessity, if the
market is narrowly defined, or if buyers have
substantial time to react to a price change.

• The price elasticity of demand is calculated as
the percentage change in quantity demanded
divided by the percentage change in price. If
quantity demanded moves proportionately less
than the price, then the elasticity is less than 1,
and demand is said to be inelastic. If quantity
demanded moves proportionately more than ”
the price, then the elasticity is greater than 1,
and demand is said to be elastic.

• Total revenue, the total amount paid for a good,
equals the price of the good times the quantity
sold. For inelastic demand curves, total revenue
moves in the same direction as the price. For
elastic demand curves, total revenue moves in
the opposite direction as the price.

• The income elasticity of demand measures
how much the quantity demanded responds to

•

•
•

CHAPTER 5 ELASTICITY AND ITS APPLICATION 107

changes in consumers’ income. The cross-price
elasticity of demand measures how much the
quantity demanded of one good responds to
changes in the price of another good.

The price elasticity of supply measures how
much the quantity supplied responds to changes
in the price. This elasticity often depends on the ·
time horizon under consideration. In most.mar-
kets, supply is more elastic in ·the long run than
in the short run.

The price elasticity of supply is calculated as the
percentage change in quantity supplied divided
by the percentage change in price. If quantity
supplied moves proportionately less than the
price, then the elasticity is less than 1, and sup-
ply is said to be inelastic. If quantity supplied
moves proportionately more than the price, then
the elasticity is greater than 1, and supply is said
to be elastic.

The tools of supply and demand can be applied
in many different kinds of markets. This chap-
ter uses them to analyze the market for wheat,
the market for oil, and the market for illegal
drugs.

elasticity, p. 90
price elasticity of demand, p. 90
total revenue, p. 94

income elasticity of

demand, p. 97

cross-price elasticity of

price elasticity of supply, p. 98

demand, p. 97

Define the price elasticity of demand and the
income elasticity of demand.

2. List and explain the four determinants of the
price elasticity of demand discussed in the
chapter.

3. What is the main advantage of using the
midpoint method for calculating elasticity?

4. If the elasticity is greater than 1, is demand
elastic or inelastic? If the elasticity equals 0,
is demand· perfectly elastic or perfectly
inelastic?

5. On a supply-and-demand diagram, show
equilibrium price, equilibrium quantity, and
the total revenue received by producers.

6. If demand is elastic, how will an increase in
price change total revenue? Explain.

7. What do we call a good whose income
elasticity is less than 0?

8. How is the price elasticity of supply calculated?
Explain what it measures.

9. What is the price elasticity of supply of Picasso
paintings?

108 PART II HOW MARKETS WORK

10. Is the price elasticity of supply usually larger in

the short run or in the long run? Why?

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1. For each of the following pairs of goods, which

good would you expect to have more elastic
demand and why?
a. required textbooks or mystery novels
b. Beethoven recordings or classical music

recordings in general
c. subway rides during the next six months or

subway rides during the next five years
d. root beer or water

2. Suppose that business travelers and vacationers
have the following demand for airline tickets
from New York to Boston:

Price

$150
200
250
300

Quantity Demanded
(business travelers)

2, 1 00 tickets
2,000
1,900
1,800

Quantity Demanded
(vacationers)

1,000 tickets
800
600
400

a. As the price of tickets rises from $200 to
$250, what is the price elasticity of demand
for (i) business travelers and (ii) vacation-
ers? (Use the midpoint method in your
calculations.)

b. Why might vacationers have a different
elasticity from business travelers?

3. Suppose the price elasticity of demand for
heating oil is 0.2 in the short run and 0.7 in the
long run.
a. if the price of heating oil rises from $1.80

to $2.20 per gallon, what happens to the
quantity Qf heating oil demanded in the short
run? In the long run?.(Use the midpoint
method in your calculations.)

b. Why might this elasticity depend on the time
horizon?

4. A price change causes the quantity demanded
of a good to decrease by 30 percent, while
the total revenue of that good increases by
15 percent. Is the demand curve elastic or
inelastic? Explain.

,.

11. How can elasticity help explain why drug
interdiction could reduce the supply of drugs,
yet possibly increase drug-related crime?

5. The equilibrium price of coffee mugs rose sharply
last month, but the equilibrium quantity was
the same as ever. Three people tried to explain
the situation. Which explanations could be
right? Explain your logic.

BILLY: Demand increased, but supply was
totally inelastic.

MARIAN: Supply increased, but so did
demand.

\( ALERIE: Supply decreased, but demand was
· totally inelastic.

6. Suppose that your demand schedule for DVDs
is as follows:

Price

$ 8
10
12
14
16

Quantity Demanded
(income= $10,000)

40 DVDs
32
24
16
8

Quantity Demanded
(income= $12,000}

50 DVDs
45
30
20
12

a. Use the midpoint method to calculate your
price elasticity of demand as the price of
DVDs increases from $8 to $10 if (i) your
income is $10,000 and (ii) your income is
$12,000.

b. Calculate your income elasticity of demand
as your income increases from $10,000 to
$12,000 if (i) the price is $12 and (ii) the price
is $16.

7. You have the following information about good
X and goodY:
• Income elasticity of demand for good X: -3
• Cross-price elasticity of demand for good X

with respect to the price of goodY: 2
Would an increase in income and a decrease in
the price of good Y unambiguously decrease
the demand for good X? Why or why not?

8. Maria has decided always to spend one-third of
her income on clothing.