Chapter 6: Elasticity

Last year Stephen purchased 60 pounds of potatoes to feed his family of four when his income was $30,000. This year his income fell to $20,000, and he purchased 70 pounds of potatoes. Using the midpoint method, one decimal place, and the negative sign if necessary, Stephen's income elasticity for potatoes is _____.

-0.4

The price of gasoline increased by 30% and the quantity of large SUVs demanded decreased by 45%. Using one decimal place and the negative sign if necessary, the cross-price elasticity between gasoline and large SUVs is _____.

-1.5

The amount of jelly sold decreases from 100 jars to 50 jars when the price of peanut butter increases from $2 to $3. Using the midpoint method, the cross-price elasticity between peanut butter and jelly is _____.

-1.675

The price of peanut butter increased by 25% and the quantity of jelly demanded decreased by 50%. Using one decimal place and the negative sign if necessary, the cross-price elasticity between peanut butter and jelly is _____.

-2.0

If the price of golf clubs increases by 10% and the quantity of golf balls demanded decreases by 25%, then the cross-price elasticity, using one decimal place and the negative sign if necessary, between golf clubs and golf balls is _____.

-2.5

Gas prices recently increased by 25%. In response, purchases of gasoline decreased by 5%. According to this finding, the price elasticity of demand for gas is:

0.2.

Suppose the price of university sweatshirts increases from $10 to $20 and the quantity supplied increases from 20 to 30. The price elasticity of supply, using the midpoint formula, is:

0.60.

QUIZ Q's///////////////////////////////////////////// If the price of a good increases by 20% and the quantity demanded changes by 15%, then the price elasticity of demand is equal to:

0.75.

(Table: Price Elasticity) Use Table: Price Elasticity. What is the price elasticity of demand (using the midpoint formula) between $1.25 and $1.00?

0.82

Attina always spends 20 % of her income on dinglehoppers. Assume that her income increases by some percentage while the price of dinglehoppers remains constant (and that all dinglehoppers cost the same). What is her income elasticity of demand for dinglehoppers?

1

Last week, Michelle spent $30 on caviar. Today, Michelle still spends $30 on caviar even though its price has doubled. What is Michelle's price elasticity of demand for caviar? (Use the midpoint formula for your calculation.)

1

1.) A 20% price increase for Product A causes a 10% decrease in its quantity demanded, but no change in the quantity demanded for Product B. ~ cross-price elasticity between A and B: relationship between A and B: 2.) Product C increases in price from $3 a pound to $4 a pound. This causes the quantity demanded for Product D to increase from 44 units to 85 units. ~ cross-price elasticity between C and D: relationship between C and D: 3.) When the price of Product E decreases 9% , this causes its quantity demanded to increase by 14% and the quantity demanded for Product F to increase 12% . ~ cross-price elasticity between E and F: relationship between E and F:

1.) 0 No Relationship 2.) 2.2 Substitutes 3.) -1.3 Complements

The table shows the demand for jeans. The price elasticity of demand between $60 and $80 is:

1.0

If a 10% increase in the price of fiber-optic cable leads to a 12% increase in the quantity of fiber-optic cable supplied, the elasticity of supply for fiber-optic cable is (using one decimal place) _____.

1.2

After Sally's income increased from $12,000 to $16,000 per year, her purchases of CDs increased from 40 to 60 per year. Using the midpoint method, one decimal place, and the negative sign if necessary, her income elasticity for CDs is _____.

1.4

If a 10% increase in the price of cranberries leads to an 18% increase in the quantity of cranberries supplied, the elasticity of supply for cranberries is (using one decimal place) _____.

1.8

The figure shows the demand curve for bicycles. Increasing the price from $150 to $200 will change total revenue from $_____ to $_____, which means that demand is _____ in this price range.

10,500; 12,000; inelastic

The figure shows the demand curve for bicycles. If the price increases from $300 to $350, total revenue changes from $_____ to $_____, which means that demand is _____ in this price range.

12,000; 10,500; elastic

The figure shows the demand curve for bicycles. If the price decreases from $250 to $200, total revenue changes from $_____ to $_____, which means that demand is _____ in this price range.

12,500; 12,000; inelastic

If the price elasticity of demand for tennis rackets is 2, then a 10% increase in the price of tennis rackets will result in a:

20% decrease in the quantity demanded.

If the elasticity of supply of umbrellas is 0.75, the price of umbrellas would need to increase by _____% (using one decimal place) in order to increase the quantity of umbrellas supplied by 15%.

20.0

If the price elasticity of aspirin is 0.4 and the price increases by 60%, the quantity demanded decreases by _____%.

24

The price of notebooks is $5, and at that price consumers demand 12 notebooks. If the price rises to $7, consumers will decrease quantity demanded to 4 notebooks. Using the midpoint formula, what is the price elasticity of demand for notebooks?

3

HOMEWORK////////////////////////////////// In anticipation of a major hurricane hitting the Gulf Coast, the quantity gasoline of sales rise from 360 million gallons to 375 million gallons. Based on this information, what is the percent change in gasoline sales? Please specify your answer to one decimal place and use the midpoint formula. change:

4.1%

14.) What is the percentage decrease in gonorrhea cases? a decrease of___% What is the cross-price elasticity of demand between alcohol and the incidence of gonorrhea? Are alcohol and gonorrhea complements or substitutes?

??? ??? Complements

There are several close substitutes for Bayer aspirin but fewer substitutes for a complete medical examination. Therefore, all other things equal, you would expect the demand for:

Bayer aspirin to be more price-elastic than is the demand for medical examinations.

The graph depicts five demand curves. Please rank each curve in terms of elasticity. A curve that is more elastic than another curve for any given quantity can be considered more elastic

C E B D A

The table shown lists two goods along with their cross-price elasticities, where the percentage change in quantity is measured for Good 1 and the percentage change in price is for Good 2. Identify the relationship between each of the pairs of goods.

Complements Substitutes Complements Substitutes Substitutes

In the figure provided, which demand curve is elastic?

D : small negative slant

Referring to the table, determine the impact of Nile.com's discount on total revenue. After the discount, the company's total revenue will ______ for group A and ______ for group B.

Decrease Increase

LEARNING CURVE/////////////////////////////////////////// True or False: The price elasticity of demand is the % change in the quantity supplied divided by the% change in the quantity demanded. This is _____.

False

True or False: If the income elasticity of demand for computers is 3, computers are a necessity. This is _____.

False

True or False: The price elasticity of supply is the ratio of the percent change in the quantity supplied to the percent change in quantity demanded. This is _____.

False

True or False: When demand is perfectly inelastic, the quantity demanded changes by a large amount when price changes. This is _____.

False

True or False: When the demand curve is horizontal, demand is perfectly inelastic. This is _____.

False

WORK IT OUT////////////////////////////////////// The accompanying table shows how the two groups respond to the discount. Using the midpoint method, calculate the price elasticity of demand for group A and B in the table.

Group A: 0.625 = [(1.65-1.55)/(1.65+1.55)/2] x 100 = (6.25/10%) Group B: 1.25 = [(1.7-1.5)/(1.7+1.5)/2] x 100 = (12.5/10%)

Label each scenario with the term that best describes it. Use the midpoint method when applicable.

Perfectly Inelastic Supply Perfectly Elastic supply Elastic Supply Unit- Elastic Supply Inelastic Supply

Determine whether each of the statements given is true or false.

TRUE: A Swiffer floor sweeper.... FALSE: When supply is perfectly inelastic... The short-run elasticity of supply... When the price increases... A key consideration as to whether...

If Nile.com wants to increase its total revenue , should discounts be offered to group A or to group B, to neither group, or to both groups?

The discount should be offered only to group B.

Which elasticity number indicates an elastic supply?

The elasticity of supply of sleeping bags is 1.22.

15.) What assumption about one of the elasticities you learned about in this chapter has to be true for poorer households to be disproportionately affected?

The income elasticity of demand for energy products is between zero and one.

The price elasticity of demand for fresh tomatoes has been estimated to be 2.22. If a new insecticide and fertilizer treatment yields a 20% increase in the nation's fresh tomato crop, how will that affect total revenue from fresh tomatoes, all other things unchanged?

Total revenue will rise.

True or False: Demand is perfectly inelastic when the quantity demanded does not respond at all to a change in price. This is _____.

True

Label demand as elastic, unit elastic, or inelastic for each scenario. Use the midpoint method when applicable to calculate the price elasticity of demand.

Unit Elastic Inelastic Elastic

The graph shows the demand for bicycles. The price elasticity of demand between $350 and $300 is 1.86. This means that: content_hint: Refer to Equation 6-5.

a 1% change in price causes a 1.86% change in quantity demanded.

Which of the following diagrams represent the good with the most price inelastic demand?

a) Graph A

Lorena considers coffee and tea to be substitutes. Therefore, the cross elasticity of demand between coffee and tea for Lorena must be:

a) positive

16.) a.) The cross-price elasticity is b.) According to the cross-price elasticity, Prii and regular gasoline are c.) Does the cross-price elasticity for these two goods make sense?

a.) 0.26 b.) Substitutes c.) Yes, because one of Prius buyers' primary concerns is fuel efficiency.

a.) Using the midpoint method, calculate the price elasticity of demand for winter wheat. Record your answer as an absolute value. b.) What was the total revenue for U.S. wheat farmers in 2014, to two decimal places? $____billion ~ What was the total revenue for U.S. wheat farmers in 2015, to two decimal places? $____billion c.) Did the bad harvest increase or decrease the total revenue of U.S. wheat farmers? How could you have predicted this from your answer to part a?

a.) 0.43 = [(2.0-2.2)/2.1] x 100=-9.5% ; [(4.26-3.42)/3.84] x 100=21.9%; (9.5/21.9) b.) $7.524 = (3.42 x 2.2) $ 8.52 = (4.26 x 2.0) c.) Increase, because demand was inelastic and the price rose.

a.) Calculate, using the midpoint method, the price elasticity of supply when the price increases from $900 to $1,100. Price elasticity of supply: b.) Suppose firms produce 1,000 more computers at any given price due to improved technology. As price increases from $900 to $1,100, is the price elasticity of supply now greater than, less than, or the same as it was originally? c.) Suppose a longer time period under consideration means that the quantity supplied at any given price is 20% higher than the figures given in the table. As price increases from $900 to $1,100, is the price elasticity of supply now greater than, less than, or the same as it was originally?

a.) 2 = [(12,000-8,000)/ {(8,000+12,000)/2} x 100]=40% = [(1,100-900)/{(900+1,100)/2} x 100=20% = (40%/20%) b.) Less Than = (36%/20%)={1.8% < 2%} c.) The Same = (40%/20%)={2% = 2%}

7.) a.) Calculate the price elasticity of demand when the price of a T‑shirt rises from $5 to $6, and the average tourist income is $20,000. $20,000 income, price elasticity: b.) Also, calculate the price elasticity of demand when the average tourist income is $30,000. $30,000 income, price elasticity: c.) Calculate the income elasticity of demand when the price of a T‑shirt is $4, and the average tourist income increases from $20,000 to $30,000. $4 price, income elasticity: d.) Also, calculate the income elasticity of demand when the price is $7. $7 price, income elasticity:

a.) 2.2 b.) 1.8 c.) 1.25 d.) 1.9

a.) The negative cross-price elasticity for air-conditioning units and kilowatts of electricity, and for SUVs and gasoline, means they are: The positive cross-price elasticity for Coke and Pepsi, McDonald's and Burger King burgers, and butter and margarine means they are: b.) Compare the absolute values of the cross-price elasticities and explain their magnitudes. For example, why is the cross-price elasticity of McDonald's burgers and Burger King burgers less than the cross-price elasticity of butter and margarine? c.) Use the information in the table to calculate, to two decimal places, how a 5% increase in the price of Pepsi affects the quantity of Coke demanded. The quantity demanded will change by_____% d.) Use the information in the table to calculate, to one decimal place, how a 10% decrease in the price of gasoline affects the quantity of SUVs demanded. The quantity demanded will change by___%

a.) Complements Substitutes b.) Since the cross-price elasticity of butter and margarine is larger than the cross-price elasticity of McDonald's burgers and Burger King burgers, butter and margarine are closer substitutes than are McDonald's and Burger King burgers. c.) 3.15% d.) 2.8% http://www.brookscollegeprep.org/sites/default/files/courses/chapter6solutions.pdf

5.) What can you conclude about the price elasticity of demand in each of the following statements? a.) "The pizza delivery business in this town is very competitive. I would lose half my customers if I raised the price by as little as 10%." Price elasticity of demand is b.) "I owned both of the Jerry Garcia-autographed lithographs in existence. I sold one on eBay for a high price. But when I sold the second one, the price dropped by 80%." Price elasticity of demand is c.) "My economics professor has chosen to use the Krugman/Wells textbook for this class. I have no choice but to buy this book." Price elasticity of demand is d.) "I always spend a total of exactly $10 per week on coffee." Price elasticity of demand is

a.) Elastic b.) Inelastic c.) Inelastic d.) Unit-Elastic

END OF CHAPTER///////////////////////////////////// 1.) Do you think the price elasticity of demand for Ford sport-utility vehicles (SUVs) will increase, decrease, or remain the same when each of the following events occurs? Explain your answers. a.) Other car manufacturers, such as General Motors, decide to make and sell SUVs. The answer above is correct because______. b.) SUVs produced in foreign countries are banned from the American market. The answer above is correct because______.

a.) Increase ; Consumers now have more substitutes form which to choose. b.) Decrease ; There will be fewer substitutes available for consumers.

10.) a.) During economic booms, the number of new personal care businesses, such as gyms and tanning salons, is proportionately greater than the number of other new businesses, such as grocery stores. b.) Cement is the primary building material in Mexico. After new technology makes cement cheaper to produce, the supply curve for the Mexican cement industry becomes relatively flatter. c.) Some goods that were once considered luxuries, like a telephone, are now considered virtual necessities. As a result, the demand curve for telephone services has become steeper over time. d.) Consumers in a less developed country like Guatemala spend proportionately more of their income on equipment for producing things at home, like sewing machines, than consumers in a more developed country like Canada.

a.) Luxury vs. Normal Goods b.) Supply Elasticity and competition c.) Availability of close substitutes d.) Normal vs. Inferior Goods

9.) a.) An increase in demand this summer for luxury cruises leads to a huge jump in the sales price of a cabin on the Queen Mary 2. b.) The price of a kilowatt of electricity is the same during periods of high electricity demand as during periods of low electricity demand. c.) Fewer people want to fly during February than during any other month. The airlines cancel about 10% of their flights as ticket prices fall about 20% during this month. d.) Owners of vacation homes in Maine rent them out during the summer. Due to the soft economy this year, a 30% decline in the price of a vacation rental leads more than half of homeowners to occupy their vacation homes themselves during the summer.

a.) Perfectly Inelastic b.) Perfectly Elastic c.) Inelastic, but not perfectly inelastic d.) Elastic, but not perfectly elastic

a.) A 10% increase in the price of a Beetle will reduce the quantity demanded by 20%. b.) An increase in consumer income will increase the price and quantity of Beetles sold.

a.) True: a 1% increase in price results in a 2% decrease in quantity demand, so a 10% increase in price results in a 20% decrease in quantity demanded. b.) True: the positive income elasticity means an increase in income will lead to an increase in quantity demanded at every price, shifting the demand curve to the right. At the new equilibrium, both price and quantity will be higher.

PRE-CLASS TUTORIALS///////////////////////////////////// If the quantity demanded of personal computers increases by 5% every time the price of personal computers decreases by 10%, the price elasticity of personal computers is (remember to report the absolute value):

b) 0.5

If the quantity demanded of sunglasses decreases by 2% every time the price of sunglasses increases by 20%, we know the demand for sunglasses is price:

b.) Inelastic

Which of the following pairs of goods are most likely to have a negative cross-price elasticity?

bicycles and bicycle helmets

c.) Due to ad campaigns, Americans believe that SUVs are much safer than ordinary passenger cars. The answer above is correct because_____. d.) The time period over which you measure the elasticity lengthens. During that longer time, new models, such as four-wheel-drive cargo vans, appear. The answer above is correct because_____.

c.) Decrease ; Consumers now consider themselves to have fewer close substitutes from which to choose. d.) Increase ; The price elasticity of demand increases over time.

The price elasticity of demand can be found by:

comparing the percentage change in quantity demanded to the percentage change in price.

The price of pretzels increases and the demand for tortilla chips decreases, so we can assume that these two goods are:

complementary.

Which of the following goods probably has the highest price elasticity of supply?

d) blue pencils

You sell t-shirts in the street corner in order to support some of your tuition costs. Around the middle of the semester, your friend Carlos gives you the following advice: "if you increase the price of each t-shirt you sell you will be able to make a lot more money selling your t-shirts". For Carlos to be right, the price elasticity of t-shirts must be price:

d.) Inelastic

If the income elasticity for food is 0.6 and income decreases by 5%, the demand for food will _____ by _____%.

decrease; 3

The price elasticity of demand along a demand curve with a constant slope:

decreases in absolute value as quantity demanded rises.

A men's tie store sold an average of 30 ties per day at $5 per tie but sold 50 of the same ties per day at $3 per tie. The price elasticity of demand, by the midpoint method, is:

equal to 1.

A major state university in the South recently raised tuition by 12%. An economics professor at this university asked his students, "How many of you will transfer to another university because of the increase in tuition?" One student in about 300 said that he or she would transfer. Based on this information, the price elasticity of demand for education at this university is:

highly inelastic.

The income elasticity of demand for eggs has been estimated to be 0.57. If income grows by 5% in a period, all other things unchanged, demand will:

increase by about 2.9%.

If the Nerd Squad computer repair company is in the inelastic part of its demand curve, in order to increase total revenue it should:

increase prices.

If the price of the textbook required for an economics class increases from $100 to $120 and the bookstore still supplies the same number of books, supply is:

perfectly inelastic.

Coke and Pepsi are considered to be substitutes by many consumers. Therefore, their cross-price elasticity should be:

positive

If a change in price causes total revenue to change in the same direction, we can conclude that the demand is:

price inelastic.

Suppose that an increase in the price of a good leads to an increase in total revenue. Ignoring other factors (like supply), at its current price the good must be:

price-inelastic.

(Figure: The Demand Curve for Oil) Use Figure: The Demand Curve for Oil. The price elasticity of demand between $20 and $21 is _____ since the price elasticity is _____.

price-inelastic; less than 1.

Demand is perfectly inelastic when the:

quantity demanded does not respond at all to a change in price.

If the price of chocolate-covered peanuts increases and the demand for strawberry licorice twists increases, this indicates that these two goods are _____ goods.

substitute

~ If the firm lowers DVD prices from $16 to $14 , what is the change in revenue, assuming quantity remains the same? In other words, focus only on the price effect. $_____. ~ What is the change in revenue that results just from the increased quantity at $14 ? In other words, focus only on the quantity effect. $____. ~ What is the overall net effect of this price decrease on the firm's total revenue? $____. ~ What is the price elasticity of demand?

~ $-400 ~ $1400 ~ $ 1000 ~ elastic

Blake eats two bags of potato chips each day. Blake's hourly wage increases from $7 to $15 , and he decides to stop eating generic chips and instead eats a name-brand potato chip. Use the midpoint method to calculate Blake's income elasticity of demand for generic potato chips. Round your answer to two decimal places. ~ This good is

~ -2.75 ~ an inferior good.

~ If the price of Product E decreasing by 2% causes its quantity demanded to increase by 14% and the quantity demanded for Product F to increase by 17% , what is the cross-price elasticity of demand? Round your answer to one decimal place. ~ What is the relationship between these goods?

~ -8.5 ~ complements

If a 25% price increase for Product A causes a 10% decrease in its quantity demanded, but no change in the quantity demanded for Product B, what is the cross-price elasticity of these goods? Round your answer to one decimal place. What is the relationship between these goods?

~ 0 ~ no relationship

Lauren's salary decreases from $37,000 to $30,000. She decides to reduce the number of outfits she purchases each year from 20 to 19 . Use the midpoint method to calculate the income elasticity of demand for new outfits. Round your answer to two decimal places. ~ This good is

~ 0.245 ~ a normal good and income-inelastic.

If Good C increases in price by 30 % a pound, and this causes the quantity demanded for Good D to increase by 40% , what is the cross-price elasticity of the two goods? Round your answer to one decimal place. What is the relationship between the two goods?

~ 1.3 ~ substitutes

For each scenario, calculate the income elasticity of demand, determine whether the good is inferior or normal, and classify the good's income elasticity. When calculating the income elasticity of demand, use the midpoint formula. Round your answers to the nearest hundredth.

~ 4.20 Normal Good Income Elastic ~ -1.10 Inferior Good Neither Income Elastic nor Income Inelastic

Sylvia's annual salary increases from $102,750 to $109,500. Sylvia decides to increase the number of vacations she takes per year from three to four. Use the midpoint method to calculate her income elasticity of demand for vacations. Round your answer to two decimal places. ~ This good is

~ 4.49 ~ a normal good and income-elastic.

~ Using the midpoint formula, calculate the elasticity of supply for hot cocoa. Please round to two decimal places. ~ Supply in the market for coffee is

~ ????? ~ less elastic than supply in the market for hot cocoa.

Calculate the absolute value of the price elasticity of demand for bus tickets using the simple percentage change method. Round your answer to one decimal place. ~ price elasticity of demand= ~ Which of the statements is true?

~ ?????? ~ Demand is elastic, so decreasing ticket prices will increase revenue.

Label the scenarios as examples of elastic, inelastic, or unit elastic demand. ~ When Ruko, a device used to stream movies at home, increases prices by 42 %, total revenue decreases by 59 %. ~ When Cinema Supreme decreases ticket prices by 19 %, total revenue does not change. ~ When Bluebox, a DVD rental kiosk, increases its prices by 53 %, total revenue increases by 28 %.

~ Elastic ~ Unit Elastic ~ Inelastic

~ Over longer periods of time, demand tends to become ~ When there are fewer substitutes, demand tends to be

~ more elastic. ~ less elastic.