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Chapter 5

Elasticity and Its Application

Educators

ED
EA
ST

Problem 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 6 months or subway rides during the next 5 years
d. root beer or water

ED
Ethan D.
Numerade Educator

Problem 2

Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston:
$$
\begin{array}{ccc}
\text { Price } & \begin{array}{c}
\text { Quantity Demanded } \\
\text { (business travelers) }
\end{array} & \begin{array}{c}
\text { Quantity Demanded } \\
\text { (vacationers) }
\end{array} \\
\hline \$ 150 & 2,100 \text { tickets } & 1,000 \text { tickets } \\
200 & 2,000 & 800 \\
250 & 1,900 & 600 \\
300 & 1,800 & 400
\end{array}
$$
a. As the price of tickets rises from $\$ 200$ to $\$ 250,$ what is the price elasticity of demand for (i) business travelers and (ii) vacationers? (Use the midpoint method in your calculations.)
b. Why might vacationers have a different elasticity from business travelers?

EA
Erwin A.
Numerade Educator

Problem 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 of 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?

ED
Ethan D.
Numerade Educator

Problem 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.

ED
Ethan D.
Numerade Educator

Problem 5

Cups of coffee and donuts are complements. Both have inelastic demand. A hurricane destroys half the coffee bean crop. Use appropriately labeled diagrams to answer the following questions.
a. What happens to the price of coffee beans?
b. What happens to the price of a cup of coffee? What happens to total expenditure on cups of coffee?
c. What happens to the price of donuts? What happens to total expenditure on donuts?

EA
Erwin A.
Numerade Educator

Problem 6

The price of coffee rose sharply last month, while the quantity sold remained the same. Five people suggest various explanations:

LEONARD: Demand increased, but supply was perfectly inelastic.
SHELDON: Demand increased, but it was perfectly inelastic.
PENNY: Demand increased, but supply decreased at the same time.
HOWARD: Supply decreased, but demand was unit elastic.
RAJ: Supply decreased, but demand was perfectly inelastic.

Who could possibly be right? Use graphs to explain your answer.

ED
Ethan D.
Numerade Educator

Problem 7

Suppose that your demand schedule for pizza is as follows:
a. Use the midpoint method to calculate your price elasticity of demand as the price of pizza increases
from \$8 to \$10 if (i) your income is \$20,000 and (ii) your income is \$24,000.
b. Calculate your income elasticity of demand as your income increases from \$20,000 to \$24,000 if (i) the price is \$12 and (ii) the price is \$16.

EA
Erwin A.
Numerade Educator

Problem 8

The $\textit{New York Times}$ reported (Feb. 17, 1996) that subway ridership declined after a fare increase: "There were nearly four million fewer riders in December 1995, the first full month after the price of a token increased 25 cents to \$1.50, than in the previous December, a 4.3 percent decline."
a. Use these data to estimate the price elasticity of demand for subway rides.
b. According to your estimate, what happens to the Transit Authority's revenue when the fare rises?
c. Why might your estimate of the elasticity be unreliable?

EA
Erwin A.
Numerade Educator

Problem 9

Two drivers, Walt and Jessie, each drive up to a gas station. Before looking at the price, each places an order. Walt says, "I'd like 10 gallons of gas." Jessie says, "I'd like \$10 worth of gas." What is each driver's price elasticity of demand?

ST
Sounak T.
Numerade Educator

Problem 10

Consider public policy aimed at smoking.
a. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes currently costs \$5 and the government wants to reduce smoking by 20 percent, by how much should it increase the price?
b. If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking 1 year from now or 5 years from now?
c. Studies also find that teenagers have a higher price elasticity of demand than adults. Why might
this be true?

Majid B.
Numerade Educator

Problem 11

You are the curator of a museum. The museum is running short of funds, so you decide to increase revenue. Should you increase or decrease the price of admission? Explain.

ED
Ethan D.
Numerade Educator

Problem 12

Explain why the following might be true: A drought around the world raises the total revenue that farmers
receive from the sale of grain, but a drought only in Kansas reduces the total revenue that Kansas farmers receive.

ED
Ethan D.
Numerade Educator