CH 5 HW
The following graph shows the daily demand curve for bippitybops in Philadelphia. Use the green rectangle (triangle symbols) to compute total revenue at various prices along the demand curve. Note: You will not be graded on any changes made to this graph. On the following graph, use the green point (triangle symbol) to plot the daily total revenue when the market price is $30, $45, $60, $75, $90, $105, and $120 per bippitybop. According to the midpoint method, the price elasticity of demand between points A and B on the initial graph is approximately_______ . Suppose the price of bippitybops is currently $120 per bippitybop, shown as point A on the initial graph. Because the price elasticity of demand between points A and B is________ , a $15-per-bippitybop decrease in price will lead to a _________ in total revenue per day. In general, in order for a price increase to cause a decrease in total revenue, demand must be _________ .
At a price of $30 per bippitybop, consumers will purchase 100 bippitybops per day. Total revenue is equal to price times quantity. At a price of $30 per bippitybop, you can compute total revenue in the following way: Total Revenue = Price×Quantity = $30 per bippitybop×100 bippitybops per day = $3,000 per day Therefore, the first point on the total revenue curve is (30, 3,000). Using the same method, you can find total revenue at each of the prices listed in the following table: Price Quantity Total Revenue ($/per bippitybop). (Bippitybops per day). (Dollars) 30 100 3,000 45 90 4,050 60 80 4,800 75 70 5,250 90 60 5,400 105 50 5,250 120 40 4,800 - 1.67 The price elasticity of demand measures the responsiveness of consumers to changes in price. For example, if consumers change their purchasing behavior very little in response to a drastic change in price, demand is said to be inelastic; but if consumers change their purchasing behavior a lot in response to a small change in price, demand is said to be elastic. The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. According to the midpoint method, you can compute the percentage change in quantity demanded between points A and B in the following way: Percentage Change in Quantity = 100×Q2−Q1 / Q2+Q1 / 2 = 100×50−40 / 50+40 / 2 = 100×0.2222= 22.22% You can also calculate the percentage change in price between points A and B in the following way: Percentage Change in Price= 100 × P2−P1 / P2+P1 / 2 = 100×$105−$120/$105+$120/ 2 = 100×(−0.1333) = −13.33% The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price (ignoring the negative sign): Price Elasticity of Demand= Percentage Change in Quantity/Percentage Change in Price = 22.22% / 13.33% = 1.67 Since the price elasticity of demand is greater than 1, demand is elastic between these two points. -ELASTIC, INCREASE Recall that the price elasticity of demand between points A and B is 1.67. This means that the elasticity between these two points is greater than 1. Therefore, demand is elastic between these two points. Total revenue is equal to price times quantity. When price decreases by $15 per bippitybop, quantity demanded increases from 40 to 50 bippitybops per day, and total revenue rises from $4,800 to $5,250 per day. Holding everything else constant, a decrease in price will decrease total revenue, but an increase in quantity will increase total revenue. When demand is elastic, such as between points A and B, the increase in quantity is large enough to more than offset the decrease in price. Therefore, the net effect is that total revenue rises. - ELASTIC . When demand is inelastic, price and total revenue move in the same direction. This happens because in elastic demand means that consumers are not very sensitive to changes in price. Specifically, when price changes, the percentage change in quantity will be less than the percentage change in price. You can see this mathematically by examining the equation for price elasticity of demand when demand is inelastic: Price Elasticity of Demand < 1 Percentage Change in Quantity / Percentage Change in Price < 1 Percentage Change in Quantity < Percentage Change in Price Total revenue is equal to price times quantity. Because price and quantity move in opposite directions when you move along a demand curve, a price change will cause total revenue to move in the direction of whichever variable is dominant.When demand is inelastic, you know that the percentage change in price is larger than the percentage change in quantity. This means that total revenue will move in the same direction as the price change. Thus, when price increases, so does total revenue; and when price decreases, total revenue decreases as well.When demand is elastic, you know that the percentage change in price is smaller than the percentage change in quantity, because consumers are highly sensitive to changes in price. This means that price and total revenue move in opposite directions. Thus, when price decreases, total revenue increases; and when price increases, total revenue decreases.Finally, when demand is unit elastic, total revenue remains constant when the price changes in either direction, since the percentage change in quantity demanded is equal to the percentage change in price.
Suppose that during the past year, the price of a laptop computer rose from $2,100 to $2,550. During the same time period, consumer sales decreased from 470,000 to 363,000 laptops. Calculate the elasticity of demand between these two price-quantity combinations by using the following steps. After each step, complete the relevant part of the table with the appropriate answers. (Note: For decreases in price or quantity, enter values in the Change column with a minus sign.) Original New Average. Change % Change Quantity 470,000. 363,000. 416,500 -107,000 -25.69% Price $2,100 $2,550 $2,325 $450 19.35% Using the midpoint method, the elasticity of demand for laptops is about (step 5)
Step 1: Fill in the appropriate values for original quantity, new quantity, original price, and new price. Step 2: Calculate the average quantity by adding the original quantity and the new quantity and then dividing by 2. Do the same for the average price. Step 3: Calculate the change in quantity by subtracting the original quantity from the new quantity. Do the same for the change in price. Step 4: Calculate the percentage change in quantity demanded by dividing the change in quantity by the average quantity. Do the same to calculate the percentage change in price. Step 5: Calculate the price elasticity of demand by dividing the percentage change in quantity demanded by the percentage change in price, ignoring the negative sign. 1.33
The following graph shows the daily demand curve for bippitybops in Denver. Use the green rectangle (triangle symbols) to compute total revenue at various prices along the demand curve. Note: You will not be graded on any changes made to this graph. According to the midpoint method, the price elasticity of demand between points A and B on the initial graph is approximately_________ . Suppose the price of bippitybops is currently $15 per bippitybop, shown as point B on the initial graph. Because the price elasticity of demand between points A and B is ________ , a $5-per-bippitybop increase in price will lead to _______ in total revenue per day. In general, in order for a price decrease to cause a decrease in total revenue, demand must be________ .
At a price of $10 per bippitybop, consumers will purchase 81 bippitybops per day. Total revenue is equal to price times quantity. At a price of $10 per bippitybop, you can compute total revenue in the following way: Total Revenue = Price×Quantity = $10 per bippitybop×81 bippitybops per day = $810 per day Therefore, the first point on the total revenue curve is (10, 810). Using the same method, you can find total revenue at each of the prices listed in the following table: Price Quantity Total Revenue ($ per bippitybop). (Bippitybops per day). (Dollars) 10 81 810 15 72 1,080 20 63 1,260 25 54 1,350 30 45 1,350 35 36 1,260 40 27 1,080 0.47 The price elasticity of demand measures the responsiveness of consumers to changes in price. For example, if consumers change their purchasing behavior very little in response to a drastic change in price, demand is said to be inelastic; but if consumers change their purchasing behavior a lot in response to a small change in price, demand is said to be elastic. The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. According to the midpoint method, you can compute the percentage change in quantity demanded between points A and B in the following way: Percentage Change in Quantity = 100×Q2−Q1 / Q2+Q1 / 2 = 100×72-63 / 72+63 / 2 = 100×0.1333= 13.33% You can also calculate the percentage change in price between points A and B in the following way: Percentage Change in Price= 100 × P2−P1 / P2+P1 / 2 = 100×$15−$20/$15+$20/ 2 = 100×(−0.2857) = −28.57% The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price (ignoring the negative sign): Price Elasticity of Demand= Percentage Change in Quantity/Percentage Change in Price = 13.33% / −28.57% = 0.47 Since the price elasticity of demand is less than 1, demand is inelastic between these two points. Inelastic, an Increase Recall that the price elasticity of demand between points A and B is 0.47. This means that the elasticity between these two points is less than 1. Therefore, demand is inelastic between these two points. Total revenue is equal to price times quantity. When price increases by $5 per bippitybop, quantity demanded decreases from 72 to 63 bippitybops per day, and total revenue rises from $1,080 to $1,260 per day. Holding everything else constant, an increase in price will increase total revenue, but a decrease in quantity will decrease total revenue. When demand is inelastic, such as between points A and B, the increase in price is large enough to more than offset the decrease in quantity. Therefore, the net effect is that total revenue rises. inelastic When demand is inelastic, price and total revenue move in the same direction. This happens because inelastic demand means that consumers are not very sensitive to changes in price. Specifically, when price changes, the percentage change in quantity will be less than the percentage change in price. You can see this mathematically by examining the equation for price elasticity of demand when demand is inelastic: Price Elasticity of Demand < 1 Percentage Change in Quantity / Percentage Change in Price < 1 Percentage Change in Quantity < Percentage Change in Price Total revenue is equal to price times quantity. Because price and quantity move in opposite directions when you move along a demand curve, a price change will cause total revenue to move in the direction of whichever variable is dominant. When demand is inelastic, you know that the percentage change in price is larger than the percentage change in quantity. This means that total revenue will move in the same direction as the price change. Thus, when price increases, so does total revenue; and when price decreases, total revenue decreases as well. When demand is elastic, you know that the percentage change in price is smaller than the percentage change in quantity, because consumers are highly sensitive to changes in price. This means that price and total revenue move in opposite directions. Thus, when price decreases, total revenue increases; and when price increases, total revenue decreases. Finally, when demand is unit elastic, total revenue remains constant when the price changes in either direction, since the percentage change in quantity demanded is equal to the percentage change in price.
The following graph shows the daily market for jeans when the tax on sellers is set at $0 per pair. Suppose the government institutes a tax of $5.80 per pair, to be paid by the seller. (Hint: To see the impact of the tax, enter the value of the tax in the Tax on Sellers field and move the green line to the after-tax equilibrium by adjusting the value in the Quantity field. Then, enter zero in the Tax on Sellers field. You should see a tax wedge between the price buyers pay and the price sellers receive.) Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly. Fill in the following table with the quantity sold, the price buyers pay, and the price sellers receive before and after the tax. Quantity Price Buyers Pay Price Sellers Receive (Pairs of jeans) ($ per pair) ($ per pair) Before Tax: 500 25.00 25.00 After Tax: 460 30.00 24.20 Using the data you entered in the previous table, calculate the tax burden that falls on buyers and sellers, respectively, and calculate the price elasticity of demand and supply throughout the relevant ranges using the midpoint method. Enter your results in the following table. Tax Burden (Dollars per pair) Elasticity Buyers 5.00 0.46 Sellers 0.80 2.56 The burden of the tax falls more heavily on the________ elastic side of the market.
Filled chart out to the left. Before tax: look at the equilibrium before changing the tax. X is the quantity and Y is Buyers and Sellers Price. After Tax: Change the tax and the equilibrium x is the quantity y is buyers price. Price sellers receive is buyers price - tax. 30-24.20 Tax burden graph is filled out to the left. The tax burden refers to the distribution of the tax paid by buyers and sellers. For buyers, the tax burden is the difference between the price paid before the tax and the price paid after the tax. Because buyers pay $25.00 per pair before the tax and $30.00 per pair after the tax, their burden is $30.00 per pair−$25.00 per pair=$5.00 per pair$30.00 per pair−$25.00 per pair=$5.00 per pair. For sellers, the tax burden is the difference between the price received before the tax and the price received after the tax. Because sellers receive $25.00 per pair before the tax and $24.20 per pair after the tax, their burden is $25.00 per pair−$24.20 per pair=$0.80 per pair$25.00 per pair−$24.20 per pair=$0.80 per pair. The price elasticity of demand measures the buyers' responsiveness to changes in price, and the price elasticity of supply measures the sellers' responsiveness to changes in price. Formally, the price elasticities of demand and supply are equal to the percentage change in quantity divided by the percentage change in the price paid (demand) or received (supply) after the tax. Using the midpoint method, you can compute the percentage change in quantity and price before and after the tax in the following way: Percentage Change in Quantity= 100×(Q2−Q1)/(Q2+Q1)/2 100×(460−500)/(460+500)2 −8.33% Percentage Change in Demand Price 100×(P2−P1)/(P2+P1)/2 100×($30.00−$25.00)/($30.00+$25.00)/2 18.18% Percentage Change in Supply Price Percentage Change in Quantity/Percentage Change in Price 8.33% / 18.18% 0.46 Price Elasticity of Supply =Percentage Change in Quantity/Percentage Change in Price 8.33% / 3.25% 2.562.56 less
Fill in the following table with the quantity sold, the price buyers pay, and the price sellers receive before and after the tax. Quantity Price Buyers Pay Price Sellers Receive (Bottles of wine). ($ per bottle). ($ per bottle) Before Tax: 250 25.00 25.00 After Tax: 230 30.00 24.20 Using the data you entered in the previous table, calculate the tax burden that falls on buyers and sellers, respectively, and calculate the price elasticity of demand and supply throughout the relevant ranges using the midpoint method. Enter your results in the following table. Tax Burden (Dollars per bottle) Elasticity Buyers 5.00 0.46 Sellers 0.80 2.56 The burden of the tax falls more heavily on the ________ elastic side of the market.
Filled it out on the left side. The intersection of the demand and supply curves determines the equilibrium price and quantity. Before the tax is instituted, the equilibrium quantity is 250 bottles of wine, while the equilibrium price is $25.00 per bottle. Because the tax is levied on sellers, it effectively shifts the supply curve up by $5.80. To see the impact of the tax, use the graph input tool and enter $5.80 in the Tax on Sellers box. The new intersection of the demand and supply curves now occurs at a quantity of 230 bottles of wine and a price of $30.00 per bottle. The price that buyers pay is $30.00 per bottle; sellers receive $5.80 less than the buyers' price, or $24.20 per unit: Price Sellers Receive = Price Buyers Pay−Tax =$30.00 per bottle−$5.80 per bottle =$24.20 per bottle Put another way, the lowest price that sellers are willing to accept while still producing 230 bottles of wine is $24.20 per bottle. The most buyers are willing to pay for 230 bottles of wine is $30.00 per bottle. Because sellers receive $24.20 after the tax if they sell wine at $30.00 per bottle, the equilibrium price in this market is the same as the buyer's price of $30.00 per unit. Tax Burden (Dollars per bottle) Elasticity Buyers 5.00 0.46 Sellers 0.80 2.56 The tax burden refers to the distribution of the tax paid by buyers and sellers. For buyers, the tax burden is the difference between the price paid before the tax and the price paid after the tax. Because buyers pay $25.00 per bottle before the tax and $30.00 per bottle after the tax, their burden is $30.00 per bottle−$25.00 per bottle=$5.00 per bottle$30.00 per bottle−$25.00 per bottle=$5.00 per bottle. For sellers, the tax burden is the difference between the price received before the tax and the price received after the tax. Because sellers receive $25.00 per bottle before the tax and $24.20 per bottle after the tax, their burden is $25.00 per bottle−$24.20 per bottle=$0.80 per bottle$25.00 per bottle−$24.20 per bottle=$0.80 per bottle. The price elasticity of demand measures the buyers' responsiveness to changes in price, and the price elasticity of supply measures the sellers' responsiveness to changes in price. Formally, the price elasticities of demand and supply are equal to the percentage change in quantity divided by the percentage change in the price paid (demand) or received (supply) after the tax. Using the midpoint method, you can compute the percentage change in quantity and price before and after the tax in the following way: less Recall that the burden of the tax falls more heavily on sellers and the sellers exhibited a lower elasticity than the buyers. Therefore, a tax falls more heavily on the less elastic side of the market. Tax Burden (Dollars per pair) Elasticity Result Buyers: 5.00 0.46 Lighter tax burden, more elastic Sellers: 0.80. 2.56 Heavier tax burden, less elastic Intuitively, if demand is more elastic than supply, then buyers' willingness to pay a higher price does not exceed sellers' willingness to accept a lower price. So when the tax is instituted, its burden falls more heavily on sellers. The reverse is true if demand is less elastic than supply.
You work for a marketing firm that has just landed a contract with Run-of-the-Mills to help them promote three of their products: guppy gummies, flopsicles, and cannies. All of these products have been on the market for some time, but, to entice better sales, Run-of-the-Mills wants to try a new advertisement that will market two of the products that consumers will likely consume together. As a former economics student, you know that complements are typically consumed together while substitutes can take the place of other goods. Run-of-the-Mills provides your marketing firm with the following data: When the price of guppy gummies increases by 2%, the quantity of flopsicles sold increases by 6% and the quantity of cannies sold decreases by 1%. Your job is to use the cross-price elasticity between guppy gummies and the other goods to determine which goods your marketing firm should advertise together. Complete the first column of the following table by computing the cross-price elasticity between guppy gummies and flopsicles, and then between guppy gummies and cannies. In the second column, determine if guppy gummies are a complement to or a substitute for each of the goods listed. Finally, complete the final column by indicating which good you should recommend marketing with guppy gummies.
Flopsicles: 3.00, Substitute, No Cannies: -0.50, Complement, Yes The cross-price elasticity of demand measures the sensitivity of the quantity demanded of one good to changes in the price of another good. To determine the cross-price elasticity of demand between guppy gummies and flopsicles, divide the percentage change in the quantity demanded of flopsicles (6%) by the percentage change in the price of guppy gummies (2%). (Note: Remember to keep track of the direction of change. The sign of the cross-price elasticity of demand can be positive or negative, and important information is conferred by the sign.) Cross-Price Elasticity of DemandCross = Percentage Change in Quantity of Flopsicles Demanded / Percentage Change in Price of Guppy Gummies 6% / 2% = 3 -1% / 2%= -0.5 Using similar calculations, the cross-price elasticity of demand between guppy gummies and cannies is -0.5. Two goods are said to be complements when an increase in the price of one good decreases the quantity demanded for the other or when a decrease in the price of one good increases the quantity demanded for the other. On the other hand, two goods are said to be substitutes when an increase in the price of one good increases the quantity demanded for the other or when a decrease in the price of one good decreases the quantity demanded for the other. Because cross-price elasticity measures how the change in the price of one good affects the quantity demanded of another good, a negative value for cross-price elasticity indicates that the two goods are likely complements while a positive value for cross-price elasticity signals that the two goods are likely substitutes. A value of zero for cross-price elasticity would indicate that the two goods are unrelated—a change in the price of one good would not affect the quantity sold of the other good. Therefore, flopsicles are a substitute for guppy gummies, and cannies are a complement to guppy gummies. Your marketing firm should advertise guppy gummies and cannies together.
You work for a marketing firm that has just landed a contract with Run-of-the-Mills to help them promote three of their products: penguin patties, frizzles, and mookies. All of these products have been on the market for some time, but, to entice better sales, Run-of-the-Mills wants to try a new advertisement that will market two of the products that consumers will likely consume together. As a former economics student, you know that complements are typically consumed together while substitutes can take the place of other goods. Run-of-the-Mills provides your marketing firm with the following data: When the price of penguin patties decreases by 5%, the quantity of frizzles sold increases by 4% and the quantity of mookies sold decreases by 6%. Your job is to use the cross-price elasticity between penguin patties and the other goods to determine which goods your marketing firm should advertise together. Complete the first column of the following table by computing the cross-price elasticity between penguin patties and frizzles, and then between penguin patties and mookies. In the second column, determine if penguin patties are a complement to or a substitute for each of the goods listed. Finally, complete the final column by indicating which good you should recommend marketing with penguin patties.
Frizzle: -0.80, Compliment, yes Mookies: 1.20, Substitute, no The cross-price elasticity of demand measures the sensitivity of the quantity demanded of one good to changes in the price of another good. To determine the cross-price elasticity of demand between penguin patties and frizzles, divide the percentage change in the quantity demanded of frizzles (4%) by the percentage change in the price of penguin patties (-5%). (Note: Remember to keep track of the direction of change. The sign of the cross-price elasticity of demand can be positive or negative, and important information is conferred by the sign.) Cross-Price Elasticity of Demand= Percentage Change in Quantity of Frizzles Demanded/ Percentage Change in Price of Penguin Patties = 4%/−5% = −0.8 =6%/5%= 1.20 Two goods are said to be complements when an increase in the price of one good decreases the quantity demanded for the other or when a decrease in the price of one good increases the quantity demanded for the other. On the other hand, two goods are said to be substitutes when an increase in the price of one good increases the quantity demanded for the other or when a decrease in the price of one good decreases the quantity demanded for the other. Because cross-price elasticity measures how the change in the price of one good affects the quantity demanded of another good, a negative value for cross-price elasticity indicates that the two goods are likely complements while a positive value for cross-price elasticity signals that the two goods are likely substitutes. A value of zero for cross-price elasticity would indicate that the two goods are unrelated—a change in the price of one good would not affect the quantity sold of the other good. Therefore, frizzles are a complement to penguin patties, and mookies are a substitute for penguin patties. Your marketing firm should advertise penguin patties and frizzles together.
The following graph shows the long-run supply curve for plums. Place the orange line (square symbol) on the graph to show the most likely short-run supply curve for plums. (Note: Place the points of the line either on W and R or on W and M.)
Line will slightly go left. Connect bottom point to the top left. (short run) Supply is typically more elastic in the long run than in the short run. In the short run, plum growers cannot quickly expand production in response to an increase in prices. In the long run, however, there are more ways to adjust the quantity produced in response to changes in the market price of plums. For example, growers can expand existing plum groves, plant new varieties of trees, or convert land from other uses into plum groves. Only a short-run supply curve passing through the points W and M shows a short-run supply curve in which the quantity supplied is less responsive to price than in the long run. A short-run supply curve passing through points W and R shows a short-run supply curve in which quantity supplied is more responsive to price than in the long run.
The following graph shows the daily market for shoes when the tax on sellers is set at $0 per pair. Suppose the government institutes a tax of $40.60 per pair, to be paid by the seller. (Hint: To see the impact of the tax, enter the value of the tax in the Tax on Sellers field and move the green line to the after-tax equilibrium by adjusting the value in the Quantity field. Then, enter zero in the Tax on Sellers field. You should see a tax wedge between the price buyers pay and the price sellers receive.) Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly. Fill in the following table with the quantity sold, the price buyers pay, and the price sellers receive before and after the tax. Quantity. Price Buyers. PayPrice Sellers Receive (Pairs of shoes) (Dollars per pair) (Dollars per pair) Before Tax ____ _____ _____ After Tax ____ _____ _____ Using the data you entered in the previous table, calculate the tax burden that falls on buyers and sellers, respectively, and calculate the price elasticity of demand and supply throughout the relevant ranges using the midpoint method. Enter your results in the following table. Tax Burden Elasticity (Dollars per pair) Buyers _______ _____ Sellers ______ _____ The burden of the tax falls more heavily on the ______ elastic side of the market.
Quantity. Price Buyers. PayPrice Sellers Receive. ( (Pairs of shoes) ($/ pair) ($/ pair) Before Tax: 500 100 100 (Look at graph before moving anything) After Tax: 430 105.60 65.00 (Plug in the tax and then look at supply/demand) The intersection of the demand and supply curves determines the equilibrium price and quantity. Before the tax is instituted, the equilibrium quantity is 500 pairs of shoes, while the equilibrium price is $100.00 per pair. Because the tax is levied on sellers, it effectively shifts the supply curve up by $40.60. To see the impact of the tax, use the graph input tool and enter $40.60 in the Tax on Sellers box. The new intersection of the demand and supply curves now occurs at a quantity of 430 pairs of shoes and a price of $105.60 per pair. The price that buyers pay is $105.60 per pair; sellers receive $40.60 less than the buyers' price, or $65.00 per unit: Price Sellers Receive= Price Buyers Pay−TaxPrice Buyers Pay−Tax = $105.60 per pair−$40.60 per pair = $65.00 per pair Put another way, the lowest price that sellers are willing to accept while still producing 430 pairs of shoes is $65.00 per pair. The most buyers are willing to pay for 430 pairs of shoes is $105.60 per pair. Because sellers receive $65.00 after the tax if they sell shoes at $105.60 per pair, the equilibrium price in this market is the same as the buyer's price of $105.60 per unit. Tax Burden Elasticity (Dollars per pair) Buyers 5.60 2.76 Sellers 35.00 0.35 The tax burden refers to the distribution of the tax paid by buyers and sellers. For buyers, the tax burden is the difference between the price paid before the tax and the price paid after the tax. Because buyers pay $100.00 per pair before the tax and $105.60 per pair after the tax, their burden is $105.60 per pair−$100.00 per pair=$5.60 per pair. For sellers, the tax burden is the difference between the price received before the tax and the price received after the tax. Because sellers receive $100.00 per pair before the tax and $65.00 per pair after the tax, their burden is $100.00 per pair−$65.00 per pair=$35.00 per pair. The price elasticity of demand measures the buyers' responsiveness to changes in price, and the price elasticity of supply measures the sellers' responsiveness to changes in price. Formally, the price elasticities of demand and supply are equal to the percentage change in quantity divided by the percentage change in the price paid (demand) or received (supply) after the tax. Using the midpoint method, you can compute the percentage change in quantity and price before and after the tax in the following way: Percentage Change in Quantity= 100×Q2−Q1 / Q2+Q1 / 2 =100×430−500/430+500/2 =−15.05% Percentage Change in Demand Price = 100×P2−P1/P2+P1/2 = 100×$105.60−$100.00/$105.60+$100.00/2 = 5.45% Percentage Change in Supply = 100×P2−P1/P2+P1/2 = 100×$65.00−$100.00/$65.00+$100.00/2 = −42.42% Therefore, the price elasticities of demand and supply (ignoring the negative sign) are as follows: Price Elasticity of Demand = Percentage Change in Quantity/Percentage Change in Price = 15.05%/5.45% = 2.76 Price Elasticity of Supply = Percentage Change in Quantity/ percentage Change in Price = 15.05%/42.42% = 0.35 less Recall that the burden of the tax falls more heavily on sellers and the sellers exhibited a lower elasticity than the buyers. Therefore, a tax falls more heavily on the less elastic side of the market. Tax Burden (Dollars per pair) Elasticity Result Buyers: 5.00 0.46 Lighter tax burden, more elastic Sellers: 0.80. 2.56 Heavier tax burden, less elastic Intuitively, if demand is more elastic than supply, then buyers' willingness to pay a higher price does not exceed sellers' willingness to accept a lower price. So when the tax is instituted, its burden falls more heavily on sellers. The reverse is true if demand is less elastic than supply.
Consider some determinants of the price elasticity of demand: • The availability of close substitutes. •The proportion of a consumer's budget spent on the good. •The time horizon being considered A good with many close substitutes is likely to have relatively _____ demand, because consumers can easily choose to purchase one of the close substitutes if the price of the good rises. A good's price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the least elastic demand? - Sports car or Amputation Procedures for diabetics Price elasticity for a good depends on the share of a consumer's budget spent on a good. Other things being equal, which of the following goods has the most elastic demand? -Toothbrush -Lightbulbs -TV and Internet service plan The price elasticity of demand for a good also depends on how you define the good. Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to have the least elastic demand, and which will have demand that falls in between. Merlot, Wine, Beverages The price elasticity of demand is also affected by the given time horizon. Other things being equal, the demand for natural gas will tend to be ________ elastic in the short run than in the long run.
elastic The price elasticity of demand measures the responsiveness of consumers to changes in price. For example, if consumers change their purchasing behavior very little in response to a drastic change in price, demand is said to be inelastic; but if consumers change their purchasing behavior a lot in response to a small change in price, demand is said to be elastic. Amputation Procedures for patients with Diabetes When people buy a luxury good, such as a sports car, the price of the good and the prices of similar goods (for example, other sports cars) will be major factors in their purchasing decisions. When people decide whether to purchase a necessary medical treatment, price is much less of a factor—especially if no other treatments can achieve the same result. Since the price elasticity of demand measures the responsiveness of buyers to changes in price, the elasticity of demand for amputation procedures for patients with diabetes is likely to be much lower than the elasticity of demand for sports cars. TV and Internet service plan Merlot- Most elastic Wine- In between Beverages- least elastic Less
Deborah is a stay-at-home parent who lives in San Francisco and does some consulting work for extra cash. At a wage of $20 per hour, she is willing to work 2 hours per week. At $35 per hour, she is willing to work 11 hours per week. Using the midpoint method, the elasticity of Deborah's labor supply between the wages of $20 and $35 per hour is approximately_____ , which means that Deborah's supply of labor within this wage range is_________
2.54 elastic Percentage Change in Quantity = 100×(Q2−Q1) / [(Q2+Q1)/2] = 54.55 100(11-2)/((11+2)/2) Percentage Change in Price = 100× (P2−P1) / [(P2+P1)/2] =138.46 100(35-20)/((35+20)/2) 138.46/54.55=2.54
The following graph shows the short-run supply curve for pears. Place the orange line (square symbol) on the graph to show the most likely long-run supply curve for pears. (Note: Place the points of the line either on O and D or on O and S.)
Line will slightly go to the right. Connect line from bottom point to the right point (Long run) Supply is typically more elastic in the long run than in the short run. In the short run, pear growers cannot quickly expand production in response to an increase in prices. In the long run, however, there are more ways to adjust the quantity produced in response to changes in the market price of pears. For example, growers can expand existing pear groves, plant new varieties of trees, or convert land from other uses into pear groves. Only a long-run supply curve passing through the points O and D shows a long-run supply curve in which the quantity supplied is more responsive to price than in the short run. A long-run supply curve passing through points O and S shows a long-run supply curve in which quantity supplied is less responsive to price than in the short run.
The following graph displays four demand curves (LL, MM, NN, and OO) that intersect at point A. Using the graph, complete the table that follows by indicating whether each statement is true or false. Between points A and D, curve NN is elastic. Between points A and E, curve OO is perfectly inelastic. Curve NN is more elastic between points A and D than curve MM is between points A and C.
False True False The price elasticity of demand measures the responsiveness of quantity demanded to changes in price. For example, if consumers change their purchasing behavior significantly in response to a small change in price, demand is said to be elastic; however, if consumers change their purchasing behavior only minimally in response to a large change in price, demand is said to be inelastic. An economist would say that a flatter demand curve is relatively elastic, whereas a steeper demand curve is relatively inelastic. The previous graph shows the two most extreme types of demand elasticities: perfectly elastic demand and perfectly inelastic demand. Curve LL is perfectly elastic, as it indicates that quantity demanded is as responsive as possible to any given change in price. Intuitively, you can see this by observing that if price increases, quantity demanded falls to zero. On the other hand, curve OO is perfectly inelastic because, no matter how much the price changes, quantity demanded is unaffected.
The following graph displays four demand curves (LL, MM, NN, and OO) that intersect at point A. Using the graph, complete the table that follows by indicating whether each statement is true or false. Curve NN is less elastic between points A and D than curve MM is between points A and C. Between points A and C, curve MM is elastic. Between points A and B, curve LL is perfectly elastic.
True True True
Megan is a college student who lives in San Francisco and teaches tennis lessons for extra cash. At a wage of $30 per hour, she is willing to teach 6 hours per week. At $50 per hour, she is willing to teach 16 hours per week. Using the midpoint method, the elasticity of Megan's labor supply between the wages of $30 and $50 per hour is approximately ________ , which means that Megan's supply of labor within this wage range is__________
1.82 elastic Percentage Change in Quantity = 100×(Q2−Q1) / [(Q2+Q1)/2] = 90.91 100(16-6)/((16+6)/2) Percentage Change in Price = 100× (P2−P1) / [(P2+P1)/2] =50 100(50-30)/((50+30)/2) Price Elasticity of SupplyPrice Elasticity of Supply = Percentage Change in Quantity/Percentage Change in Price 90.91/50 = 1.82
The following graph shows the daily market for wine when the tax on sellers is set at $0 per bottle. Suppose the government institutes a tax of $5.80 per bottle, to be paid by the seller. (Hint: To see the impact of the tax, enter the value of the tax in the Tax on Sellers field and move the green line to the after-tax equilibrium by adjusting the value in the Quantity field. Then, enter zero in the Tax on Sellers field. You should see a tax wedge between the price buyers pay and the price sellers receive.) Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly. Fill in the following table with the quantity sold, the price buyers pay, and the price sellers receive before and after the tax. Quantity Price Buyers Pay. Price Sellers Receive. (Bottles of wine). ($ per bottle) ($ per bottle) Before Tax. 250 25.00 25.00 After Tax. 230 30.00 24.20 Using the data you entered in the previous table, calculate the tax burden that falls on buyers and sellers, respectively, and calculate the price elasticity of demand and supply throughout the relevant ranges using the midpoint method. Enter your results in the following table. Tax Burden (Dollars per bottle) Elasticity Buyers 5.00 0.46 Sellers 0.80 2.56 The burden of the tax falls more heavily on the______________ elastic side of the market.
Quantity Price Buyers Pay. Price Sellers Receive. (Bottles of wine). ($ per bottle) ($ per bottle) Before Tax. 250 25.00 25.00 After Tax. 230 30.00 24.20 Tax Burden (Dollars per bottle) Elasticity Buyers 5.00 0.46 Sellers 0.80 2.56 less Recall that the burden of the tax falls more heavily on buyers and the buyers exhibited a lower elasticity than the sellers. Therefore, a tax falls more heavily on the less elastic side of the market. Tax Burden Result (Dollars per bottle)Elasticity Buyers5.000.46Heavier tax burden, less elasticSellers0.802.56Lighter tax burden, more elastic Intuitively, if demand is less elastic than supply, then buyers' willingness to pay a higher price exceeds sellers' willingness to accept a lower price. So when the tax is instituted, its burden falls more heavily on buyers. The reverse is true if demand is more elastic than supply.
The following graph shows the daily demand curve for bippitybops in San Diego. Use the green rectangle (triangle symbols) to compute total revenue at various prices along the demand curve. Note: You will not be graded on any changes made to this graph. On the following graph, use the green point (triangle symbol) to plot the daily total revenue when the market price is $20, $30, $40, $50, $60, $70, and $80 per bippitybop. According to the midpoint method, the price elasticity of demand between points A and B on the initial graph is approximately__________ . Suppose the price of bippitybops is currently $10 per bippitybop, shown as point B on the initial graph. Because the price elasticity of demand between points A and B is________ , a $10-per-bippitybop increase in price will lead to_______ in total revenue per day. In general, in order for a price decrease to cause a decrease in total revenue, demand must be____________ .
Graph will be an upside down U At a price of $20 per bippitybop, consumers will purchase 32 bippitybops per day. Total revenue is equal to price times quantity. At a price of $20 per bippitybop, you can compute total revenue in the following way: Total Revenue = Price×Quantity = $20 per bippitybop×32 bippitybops per day = $640 per day Therefore, the first point on the total revenue curve is (20, 640). Using the same method, you can find total revenue at each of the prices listed in the following table: Price Quantity Total Revenue ($/per bippitybop). (Bippitybops per day). (Dollars) 20 32 640 30 28 840 40 24 960 50 20 1,000 60 16 960 70 12 840 80 8 640 0.18 The price elasticity of demand measures the responsiveness of consumers to changes in price. For example, if consumers change their purchasing behavior very little in response to a drastic change in price, demand is said to be inelastic; but if consumers change their purchasing behavior a lot in response to a small change in price, demand is said to be elastic. The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. According to the midpoint method, you can compute the percentage change in quantity demanded between points A and B in the following way: Percentage Change in Quantity = 100×Q2−Q1 / Q2+Q1 / 2 = 100×36-32 / 36+32 / 2 = 100×0.1176= 11.76% You can also calculate the percentage change in price between points A and B in the following way: Percentage Change in Price= 100 × P2−P1 / P2+P1 / 2 = 100×$10−$20/$10+$20/ 2 = 100×(−0.6667) = −66.67% The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price (ignoring the negative sign): Price Elasticity of Demand= Percentage Change in Quantity/Percentage Change in Price = 11.76% / −66.67% = 0.18 Since the price elasticity of demand is less than 1, demand is inelastic between these two points. inelastic, an increase Recall that the price elasticity of demand between points A and B is 0.18. This means that the elasticity between these two points is less than 1. Therefore, demand is inelastic between these two points. Total revenue is equal to price times quantity. When price increases by $10 per bippitybop, quantity demanded decreases from 36 to 32 bippitybops per day, and total revenue rises from $360 to $640 per day. Holding everything else constant, an increase in price will increase total revenue, but a decrease in quantity will decrease total revenue. When demand is inelastic, such as between points A and B, the increase in price is large enough to more than offset the decrease in quantity. Therefore, the net effect is that total revenue rises. inelastic When demand is inelastic, price and total revenue move in the same direction. This happens because inelastic demand means that consumers are not very sensitive to changes in price. Specifically, when price changes, the percentage change in quantity will be less than the percentage change in price. You can see this mathematically by examining the equation for price elasticity of demand when demand is inelastic: Price Elasticity of Demand < 1 Percentage Change in Quantity / Percentage Change in Price < 1 Percentage Change in Quantity < Percentage Change in Price Total revenue is equal to price times quantity. Because price and quantity move in opposite directions when you move along a demand curve, a price change will cause total revenue to move in the direction of whichever variable is dominant. When demand is inelastic, you know that the percentage change in price is larger than the percentage change in quantity. This means that total revenue will move in the same direction as the price change. Thus, when price increases, so does total revenue; and when price decreases, total revenue decreases as well. When demand is elastic, you know that the percentage change in price is smaller than the percentage change in quantity, because consumers are highly sensitive to changes in price. This means that price and total revenue move in opposite directions. Thus, when price decreases, total revenue increases; and when price increases, total revenue decreases. Finally, when demand is unit elastic, total revenue remains constant when the price changes in either direction, since the percentage change in quantity demanded is equal to the percentage change in price.
The following graph input tool shows the daily demand for hotel rooms at the Triple Sevens Hotel and Casino in Las Vegas, Nevada. To help the hotel management better understand the market, an economist identified three primary factors that affect the demand for rooms each night. These demand factors, along with the values corresponding to the initial demand curve, are shown in the following table and alongside the graph input tool. Demand Factor Initial Value Average American household income$50,000 per year Round trip airfare from Los Angeles (LAX) to Las Vegas (LAS)$100 per round trip Room rate at the Exhilaration Hotel and Casino, which is near the Triple Sevens$250 per night For each of the following scenarios, begin by assuming that all demand factors are set to their original values and that Triple Sevens is charging $200 per room per night. If average household income increases by 20%, from $50,000 to $60,000 per year, the quantity of rooms demanded at the Triple Sevens______ from_______ rooms per night to_______ rooms per night. Therefore, the income elasticity of demand is________ , meaning that hotel rooms at the Triple Sevens area ____________ If the price of an airline ticket from LAX to LAS were to increase by 10%, from $100 to $110 round trip, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Triple Sevens________ from _____ rooms per night to________ rooms per night. Because the cross-price elasticity of demand is_________ , hotel rooms at the Triple Sevens and airline trips between LAX and LAS are ____________ Triple Sevens is debating decreasing the price of its rooms to $175 per night. Under the initial demand conditions, you can see that this would cause its total revenue to ________ . Decreasing the price will always have this effect on revenue when Triple Sevens is operating on the ________ portion of its demand curve.
Rises, 300, 350, positive, normal good Falls, 300, 250, negative, compliments Decrease, inelastic
You work for a marketing firm that has just landed a contract with Run-of-the-Mills to help them promote three of their products: splishy splashies, raskels, and kipples. All of these products have been on the market for some time, but, to entice better sales, Run-of-the-Mills wants to try a new advertisement that will market two of the products that consumers will likely consume together. As a former economics student, you know that complements are typically consumed together while substitutes can take the place of other goods. Run-of-the-Mills provides your marketing firm with the following data: When the price of splishy splashies increases by 4%, the quantity of raskels sold decreases by 5% and the quantity of kipples sold increases by 3%. Your job is to use the cross-price elasticity between splishy splashies and the other goods to determine which goods your marketing firm should advertise together. Complete the first column of the following table by computing the cross-price elasticity between splishy splashies and raskels, and then between splishy splashies and kipples. In the second column, determine if splishy splashies are a complement to or a substitute for each of the goods listed. Finally, complete the final column by indicating which good you should recommend marketing with splishy splashies.
Raskels: -1.25, Complement, Yes Kipples, 0.75, Substitute, No Cross-Price Elasticity of Demand = Percentage Change in Quantity of Raskels Demanded / Percentage Change in Price of Splishy SplashiesPercentage −5% / 4% = −1.25 3% / 4% = 0.75 Using similar calculations, the cross-price elasticity of demand between splishy splashies and kipples is 0.75. Two goods are said to be complements when an increase in the price of one good decreases the quantity demanded for the other or when a decrease in the price of one good increases the quantity demanded for the other. On the other hand, two goods are said to be substitutes when an increase in the price of one good increases the quantity demanded for the other or when a decrease in the price of one good decreases the quantity demanded for the other. Because cross-price elasticity measures how the change in the price of one good affects the quantity demanded of another good, a negative value for cross-price elasticity indicates that the two goods are likely complements while a positive value for cross-price elasticity signals that the two goods are likely substitutes. A value of zero for cross-price elasticity would indicate that the two goods are unrelated—a change in the price of one good would not affect the quantity sold of the other good. Therefore, raskels are a complement to splishy splashies, and kipples are a substitute for splishy splashies. Your marketing firm should advertise splishy splashies and raskels together.
