Microeconomics: Elasticity HW6

Adella always spends 30% of her income on thingamabobs. Assume that her income increases by some percentage while the price of thingamabobs remains constant (and that all thingamabobs cost the same). What is her income elasticity of demand for thingamabobs? HINT: To compute these elasticities, recall that if the price of thingamabobs is 𝑃𝑠 and 𝑄𝑠 is the quantity of thingamabobs consumed, then the total amount Adella spends on thingamabobs is 𝑃𝑠×𝑄𝑠. Does Adella change how many she purchases if her income changes?

1

The accompanying diagram depicts a demand curve for DVDs for a monopoly currently producing at point 𝐵. Specify answers to the nearest dollar, and use a negative sign to indicate decreases in revenue. 1. 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. 2. What is the change in revenue that results just from the increased quantity at $14? In other words, focus only on the quantity effect. 3. What is the overall net effect of this price decrease on the firm's total revenue? 4. What is the price elasticity of demand?

1. -$400 2. $1400 3. $1000 Net effect: 1400 + (-400) = 1000 4. Elastic

1. If the price of Product E decreasing by 9% causes its quantity demanded to increase by 14% and the quantity demanded for Product F to increase by 12%, what is the cross-price elasticity of demand? Round your answer to one decimal place. 2. What is the relationship between these goods?

1. -1.3 2. complements

1. 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. 2. What is the relationship between these goods?

1. 0 2. no relationship

1. If Good C increases in price by 20% a pound, and this causes the quantity demanded for Good D to increase by 30%, what is the cross-price elasticity of the two goods? Round your answer to one decimal place. 2. What is the relationship between the two goods?

1. 1.5 2. substitutes

Label the scenarios as examples of elastic, inelastic, or unit elastic demand. 1. When Ruko, a device used to stream movies at home, increases prices by 42%, total revenue decreases by 57%. 2. When Cinema Supreme decreases ticket prices by 5%, total revenue does not change. 3. When Bluebox, a DVD rental kiosk, increases its prices by 50%, total revenue increases by 31%. HINT: Mathematically, remember that Total Revenue equals Price times Quantity sold (TR = P x Q). Also, remember that an elasticity of demand greater than 1 is elastic, while an elasticity of demand less than 1 is inelastic.

1. elastic TR / P = Q 57% / 42% = 1.36 2. unit-elastic 3. inelastic TR / P = Q 31% / 50% = 0.62

Label each scenario with the term that best describes it. Use the midpoint method when applicable. 1. Marcel Duchamp was a famous artist prior to his death, and was known for his Dada artwork, including works such as, "Soft Toilet." All of his original sculptures and paintings go on sale. 2. Paul owns a Tim Horton's, a famous donut and coffee franchise. He is willing to sell as many maple glazed donuts as customers want at a price of $1.00 each, but he refuses to sell any donuts for any price lower than $1.00. 3. The price of facial tissues rises from $2.85 per box to $3.15. As a result, P&G increases production from 15 million boxes to 25 million boxes of facial tissue. 4. With the school semester starting for both high school and college, Papermate chooses to increase production of pens from 38 million to 42 million after global prices of writing instruments increase from $1.90 a package to $2.10 a package. 5. Bright Ideas increases its production of lightbulbs by 15% after a 400% increase in the price of fluorescent bulbs.

1. perfectly inelastic supply 2. perfectly elastic supply 3. elastic supply 4. unit-elastic supply 5. inelastic supply

For each scenario, calculate the cross-price elasticity between the two goods and identify how the goods are related. Please use the midpoint method when applicable, and specify answers to one decimal place. 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. a. cross-price elasticity between A and B: b. relationship between A and B: 2. Product C increases in price from $1 a pound to $2 a pound. This causes the quantity demanded for Product D to increase from 27 units to 81 units. a. cross-price elasticity between C and D: b. relationship between C and D: 3. When the price of Product E decreases 2%, this causes its quantity demanded to increase by 14% and the quantity demanded for Product F to increase 17%. a. cross-price elasticity between E and F: b. relationship between E and F:

1.a. 0 1.b. no relationship 2.a. 1.5 2.b. substitutes 3.a. -8.5 3.b. complements

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.

From most elastic to inelastic: Elastic graphs look more horizontal while Inelastic graphs look more vertical.

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

True: - A Swiffer floor sweeper and a broom would have a positive cross-price elasticity of demand. False: - When supply is perfectly inelastic, a change in demand has no effect on the price. - The short-run elasticity of supply is larger than the long-run elasticity of supply because changes in equilibrium will adjust elasticity accordingly. - When the price increases, total revenue always increases because of the price effect. - A key consideration as to whether the price elasticity of supply is elastic or inelastic is whether the good supplied is a luxury item.

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. Table: Good 1 + Good 2 = Cross-price elasticity of demand a. Automobiles + gasoline = -0.36 b. Coca-Cola + Pepsi = +0.65 c. popcorn + butter = -0.24 d. Wendy's burgers + In-N-Out burgers = +0.84 e. mystery good A + mystery good B = +1.57

a. complements b. substitutes c. complements d. substitutes e. substitutes

When there are fewer substitutes, demand tends to be

less elastic

Over longer periods of time, demand tends to become

more elastic