Economics

Michael Parkin

Chapter 4

Elasticity - all with Video Answers

Educators

Chapter Questions

Problem 1

Rain spoils the strawberry crop, the price rises from $\$ 4$ to $\$ 6$ a box, and the quantity demanded decreases from 1,000 to 600 boxes a week.
a. Calculate the price elasticity of demand over this price range.
b. Describe the demand for strawberries.

Anand Jangid

Anand Jangid

Numerade Educator

Problem 2

If the quantity of dental services demanded increases by 10 percent when the price of dental services falls by 10 percent, is the demand for dental services inelastic, elastic, or unit elastic?

Alejandro Ruiz

Numerade Educator

Problem 3

The demand schedule for hotel rooms is
a. What happens to total revenue when the price falls from $\$ 400$ to $\$ 250$ a room per night and from $\$ 250$ to $\$ 200$ a room per night?
b. Is the demand for hotel rooms elastic, inelastic, or unit elastic?

Alejandro Ruiz

Numerade Educator

Problem 4

The figure shows the demand for pens.
Calculate the elasticity of demand when the price rises from $\$ 4$ to $\$ 6$ a pen. Over what price range is the demand for pens elastic?

Alejandro Ruiz

Numerade Educator

Problem 5

In $2003,$ when music downloading first took off, Universal Music slashed the average price of a CD from $\$ 21$ to $\$ 15 .$ The company expected the price cut to boost the quantity of CDs sold by 30 percent, other things remaining the same.
a. What was Universal Music's estimate of the price elasticity of demand for CDs?
b. If you were making the pricing decision at Universal Music, what would be your pricing decision? Explain your decision.

Alejandro Ruiz

Numerade Educator

Problem 6

When Judy's income increased from $\$ 130$ to $\$ 170$ a week, she increased her demand for concert tickets by 15 percent and decreased her demand for bus rides by 10 percent. Calculate Judy's income elasticity of demand for (a) concert tickets and (b) bus rides.

Alejandro Ruiz

Numerade Educator

Problem 7

If a 12 percent rise in the price of orange juice decreases the quantity of orange juice demanded by 22 percent and increases the quantity of apple juice demanded by 14 percent, calculate the
a. Price elasticity of demand for orange juice.
b. Cross elasticity of demand for apple juice with respect to the price of orange juice.

Alejandro Ruiz

Numerade Educator

Problem 8

If a rise in the price of sushi from 98 t to $\$ 1.02$ a piece decreases the quantity of soy sauce demanded from 101 units to 99 units an hour and decreases the quantity of sushi demanded by 1 percent an hour, calculate the:
a. Price elasticity of demand for sushi.
b. Cross elasticity of demand for soy sauce with respect to the price of sushi.

Alejandro Ruiz

Numerade Educator

Problem 9

The table sets out the supply schedule of jeans.
$$\begin{array}{cc}
\begin{array}{c}
\text { Price } \\
\text { (dollars per pair) }
\end{array} & \begin{array}{c}
\text { Quantity supplied } \\
\text { (millions of pairs per year) }
\end{array} \\
\hline 120 & 24 \\
125 & 28 \\
130 & 32 \\
135 & 36
\end{array}$$
a. Calculate the elasticity of supply when the price rises from $\$ 125$ to $\$ 135$ a pair.
b. Calculate the elasticity of supply when the average price is $\$ 125$ a pair.
c. Is the supply of jeans elastic, inelastic, or unit elastic?

Alejandro Ruiz

Numerade Educator

Problem 10

With higher fuel costs, airlines raised their average fare from $75 \%$ to $\$ 1.25$ per passenger mile and the number of passenger miles decreased from 2.5 million a day to 1.5 million a day.
a. What is the price elasticity of demand for air travel over this price range?
b. Describe the demand for air travel.

Anand Jangid

Numerade Educator

Problem 11

The figure shows the demand for DVD rentals.
a. Calculate the elasticity of demand when the price of a DVD rental rises from $\$ 3$ to $\$ 5$
b. At what price is the elasticity of demand for DVD rentals equal to $1 ?$

Alejandro Ruiz

Numerade Educator

Problem 12

a. What happens to total revenue if the price falls from $\$ 400$ to $\$ 350$ a chip and from $\$ 350$ to $\$ 300$ a chip?
b. At what price is total revenue at a maximum?

Alejandro Ruiz

Numerade Educator

Problem 13

At an average price of $\$ 350,$ is the demand for chips elastic, inelastic, or unit elastic? Use the total revenue test to answer this question.

Alejandro Ruiz

Numerade Educator

Problem 14

At $\$ 250$ a chip, is the demand for chips elastic or inelastic? Use the total revenue test to answer this question.

Alejandro Ruiz

Numerade Educator

Problem 15

Your price elasticity of demand for bananas is 4 If the price of bananas rises by 5 percent, what is
a. The percentage change in the quantity of bananas you buy?
b. The change in your expenditure on bananas?

Alejandro Ruiz

Numerade Educator

Problem 16

Over 15 Million Households Plan To Ration Energy Use This Winter to Cope With Soaring Bills The cost of energy is rising and British consumers are left to cope with a harsh winter. Seeing their energy bills rise, millions of households are planning to cut back as much as they can on their energy use despite the cold temperature, putting their health at risk. Many bill payers will cope by spending less on food so that they can afford to keep their homes warm. Household disposable income has been substantially affected by rising energy costs and prices are expected to keep increasing. Some estimate that the average UK home will spend $£ 53$ more on energy this year. Source: This is Money, November 6,2014
a. List and explain the elasticities of demand that are implicitly referred to in the news clip.
b. Why, according to the news clip, is the demand for energy inelastic?

Alejandro Ruiz

Numerade Educator

Problem 17

Given the prices, is the income elasticity of demand for fruit and vegetables positive or negative? Are fruit and vegetables a normal good or an inferior good? Are processed foods a normal good or inferior good?

Alejandro Ruiz

Numerade Educator

Problem 18

Are fruits and vegetables and processed foods substitutes? Explain.

Alejandro Ruiz

Numerade Educator

Problem 19

When Alex's income was $\$ 3,000$, he bought 4 bagels and 12 donuts a month. Now his income is $\$ 5,000$ and he buys 8 bagels and 6 donuts a month. Calculate Alex's income elasticity of demand for
(a) bagels and
(b) donuts.

Alejandro Ruiz

Numerade Educator

Problem 20

The economy has slowed down again but Britain's animal lovers have not stopped themselves from spending on gourmet pet food, spoiling their pets even though their budgets are tight. In fact, more than a third of pet owners claim that they would cut back on their own food purchases before that of their pets.

Source: The Independent, April 14,2015
a. What does this news clip imply about the income elasticity of demand for gourmet pet food?
b. Would the income elasticity of demand be greater or less than 1 ? Explain.

Alejandro Ruiz

Numerade Educator

Problem 21

If a 5 percent fall in the price of chocolate sauce increases the quantity demanded of chocolate sauce by 10 percent and increases the quantity of ice cream demanded by 15 percent, calculate the
a. Price elasticity of demand for chocolate sauce.
b. Cross elasticity of demand for ice cream with respect to the price of chocolate sauce.

Alejandro Ruiz

Numerade Educator

Problem 22

In a survey of caterers and event planners, nearly half of them said that they were seeing declines in wedding spending in response to the economic slowdown; $12 \%$ even reported wedding cancellations because of financial concerns.
Source: $T$ ime, June 2,2008
a. Based upon this news clip, are wedding events a normal good or an inferior good? Explain.
b. Are wedding events more a necessity or a luxury? Would the income elasticity of demand be greater than $1,$ less than $1,$ or equal to $1 ?$ Explain.

Alejandro Ruiz

Numerade Educator

Problem 23

The table sets out the supply schedule of longdistance phone calls.
Calculate the elasticity of supply when
a. The price falls from 40 c to 30 t a minute.
b. The average price is $20 \varphi$ a minute.

Alejandro Ruiz

Numerade Educator

Problem 24

The chairman of Yanzhou Coal Mining reported that the recession had decreased the demand for coal, with its sales falling by 11.9 percent to 7.92 million tons from 8.99 million tons a year earlier, despite a 10.6 percent cut in the price.

Calculate the price elasticity of supply of coal. Is the supply of coal elastic or inelastic?

Alejandro Ruiz

Numerade Educator

Problem 25

After you have studied Economics in the News on pp. $136-137,$ answer the following questions.
a. Looking at Fig. 1 on $\mathrm{p}$. 137 , explain what must have happened in 2014 to the supply of coffee.
b. Given the information in Fig. 1 and the estimated elasticity of demand for coffee, by what percentage did the quantity of coffee change in 2014 and in which direction?
c. The news article says that farmers' revenue shrank as the price of coffee fell. Explain why this fact tells us that the demand for coffee is inelastic.
d. How does the total revenue test work for a rise in the price? What do you predict happened to total revenue in 2014 ? Why?
e. Coffee isn't just coffee. It comes in different varieties, the main two being Arabica and Robusta. Would you expect the elasticity of demand for Arabica to be the same as the elasticity of demand for coffee? Explain why or why not.

Alejandro Ruiz

Numerade Educator

Problem 26

Hutchinson Whampoa, owner of Three, UK's fastest growing mobile network, has started exclusive talks to buy Telefónica's O2 for $£ 10.25$ billion. This has caused price-rise concerns among British phone users. Source: The Financial Times, January 23,2015
a. If the prices of telecom services rise because of the deal, how will this influence the supply of telecom services?
b. Given your answer to part (a), explain why Hutchison Whampoa can afford to raise mobile tariffs?
c. What can you say about the price elasticity of demand for services in the UK telecoms market with respect to the deal between Hutchinson Whampoa and Telefónica?

Alejandro Ruiz

Numerade Educator