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ELASTICITY, Exercises of Microeconomics

Concordia University Chicago (CUC)Microeconomics

Perfectly elastic demand refers to a situation in which any price change for the good in question, no matter how small, will produce an "infinite" change in.

Typology: Exercises

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Chapter 4 – Elasticity 1
Chapter 4
ELASTICITY
Microeconomics in Context (Goodwin, et al.), 4th Edition
Chapter Overview
This chapter continues dealing with the demand and supply curves we learned about in
Chapter 3. You will learn about the notion of elasticity of demand and supply, the way in
which demand is affected by income, and how a price change has both income and
substitution effects on the quantity demanded.
Objectives
After reading and reviewing this chapter, you should be able to:
1. Define elasticity of demand and differentiate between elastic and inelastic
demand.
2. Calculate the elasticity of demand.
3. Understand how to apply an elasticity of demand to a business seeking to
maximize revenues as well as to a policy situation.
4. Define elasticity of supply and differentiate between elastic and inelastic supply.
5. Understand the income and substitution effects of a price change.
6. Discuss the differences between short-run and long-run elasticities.
Key Terms
elasticity price elasticity of demand
price-inelastic demand price-elastic demand
price-inelastic demand (technical definition) price-elastic demand (technical
definition)
perfectly inelastic demand perfectly elastic demand
unit-elastic demand price elasticity of supply
income elasticity of demand normal goods
inferior goods substitution effect of a price change
income effect of a price change short-run elasticity
long-run elasticity
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pf4
pf5
pf8
pf9
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Partial preview of the text

Download ELASTICITY and more Exercises Microeconomics in PDF only on Docsity!

Chapter 4 ELASTICITY

Microeconomics in Context Chapter Overview (Goodwin, et al.), 4 th^ Edition This chapter continues dealing with the demand and supply curves we learned about in Chapter which demand is affected by income, and how a price change 3. You will learn about the notion of elasticity of demand and supply, the way has both income and in substitution effects on the quantity demanded. Objectives After reading and reviewing this chapter, you should be able to:

    1. Define demand.Calculate the elasticity of demand. elasticity of demand and differentiate between elastic and inelastic
    1. Understand how to apply an elasticity of demand to a business seeking to maximize revenues as well as to a policy situation.Define elasticity of supply and differentiate between elastic and inelastic supply.
    1. Understand the income and substitution effects of a price change.Discuss the differences between short-run and long-run elasticities. Key Terms elasticity price elasticity of demand price price--inelastic demandinelastic demand (technical definition) priceprice definition)--elastic demandelastic demand (technical perfectly inelastic demand unit income elasticity of demand-elastic demand perfectly elastic demandprice elasticity of supplynormal goods inferior goods income effect of a price change long-run elasticity substitution effect of a price changeshort-run elasticity

Active Review Questions Fill in the blank

  1. When you drop by the only price of a cup of coffee has increased considerably since last week. You decide it’s not a big deal, since coffee isn’t a big part of your overall budget, and you buy coffee shop in your neighborhood, you notice that the a cup of coffee anyway. Most of t coffee shop make a similar calculation. neighborhood is relatively ____________________________.he other coffee drinkers who frequent the Thus, the demand for coffee in your
  2. You sell muffins for one dollar each. If you raise your price by even one penn you will lose all your customers. ____________________________________. The demand curve for your muffins is thus y,
  3. The responsiveness of demand to income is known as the __________________________ of demand.
  4. The income elasticity of demand is ________ and _______________________ for normal goods._____________ for inferior goods
  5. When demand is ___________________, revenue price change. to the seller is unaffected by a For Question #6, refer to the following graph:
  6. For a given price range, characterized by a relatively which of the supply curves in the graph shown above is greater elasticity of supply?
  7. The elasticity of demand is calculated as the percent change in ___________ divided by the percent change in _____________.
  8. When qu _____________________.antity demanded does not respond at all to price, demand is perfectly

Price Quantity

SA

SB

  1. A 20% increase in the price of milk leads to a 10% reduction in the quantity of milk demand. What is the price elasticity of demand for milk?

For Question #20, refer to the graph below.

  1. The graph shown above illustrates the demand curves for two goods: Sun hats and beach balls. Which demand curve is relatively more elastic?

Problems 1. Draw a diagram of a perfectly inelastic demand curve. Suggest an example of a good for which demand might be perfectly elastic.

  1. A limited number of Civil War uniforms have been preserved. No matter how much buyers are willing to pay for these uniforms as collectors items, there's no way to increase the quantity of uniforms in existence. Show the supply curve for authentic Civil War uniforms.

Price Quantity

Beach balls Sun hats Demand (sun hats)^ Demand (beach balls)

For Problems #3 and #4, refer to the following graph:

  1. The graph above shows the demand curve for a. Calculate the amount of revenue the seller would receive if the price is set at $3. pineapples.

b. Calculate the amount of revenue the seller would receive if the price is set at $5. c. Reasoning from the results you just calculated, is the demand for bananas elastic or inelastic, in this range of prices? How do you know?

01

23

45

6

(^0 1 2) Quantity of Pineapples 3 4 5

B A Demand

  1. Which of the following demand curves is more elastic?

Self Test 1. The price of milk doubles, but the quantity demanded changes very little. Which of the following would a. There isn't a good substitute for milk. not be a likely explanation for this phenomenon? b. c. d. People feel they need milk, rather than just wanting it.DeMilk is not a very big part of most people's budget.mand for milk is highly price elastic. e. All of the above are likely explanations for this phenomenon. Questions 2 and 3 refer to the following scenario and graph. Bob’s Bakery has two locations. The ba bakeries, to find out which price will bring in higher total revenues. The results of thekery decides to experiment with charging different prices at the two experiment are shown in the graph below.

Price Quantity^ Demand

Price Quantity^ Demand

Price of Cakes Quantity of Cakes

Downtown Bakery A Uptown BakeryDemand

A

B C

  1. The revenue earned at Downtown Bakery is equal a. area A to b. c. d. area Barea Carea A + B
  2. Area A is bigger than area C.^ e.^ area B + C This means that a. b. c. Demand for chocolate cake is highly price elastic.Demand for chocolate cake is price inelastic.The quantity demanded of chocolate cake exceeds the quantity supplied. d. e. The quantity supplied ofNone of the above. chocolate cake exceeds the quantity demanded.
  3. Suppose a study finds that as people's incomes rise, they tend to buy fewer subway tokens because they are more likely to have a car. tokens are This would mean that subway a. b. c. normal goodsinferior goodsprice elastic goods d. e. price taker goodssupply elastic goods
  4. The more money people make, the more pairs of shoes they buy. We can conclude that a. b. c. Shoes are a normal good.Shoes areDemand for shoes is highly price elastic. an inferior good. d. e. Demand for shoes has an elasticity between 0 and 1.All of the above. Questions #6 and #7 tomatoes leads to a 1% reduction in the quantity of tomatoes demanded. refer to the following scenario: A 4% increase in the price of
  5. The price elasticity of a. - 0.5 demand for tomatoes is: b. c. d. - --0.60.251. e. - 4.
  1. Which is the following income elasticities income inelastic? could correspond to a normal good that is a. b. c. 0.51.5– 1. d. e. 2.0-0.
  2. Every week you buy rice, wheat, and oatmeal. Suddenly the price of rice rises. You decide to cut down on your rice purchases and get more wheat and oatmeal instead. This is an illustration of … a. b. c. an income effecta substitution effecta normal good effect d. e. a Giffen gooda price inelastic good
  3. A population subsists largely on potatoes, plus small amounts of dairy products and vegetables. The price of potatoes rises, driving many poor poverty. As a result, these families are forced to eliminate dairy products and families deeper into vegetables from their daily diet and start eating even more potatoes than they did before. In this example potatoes are … a. b. c. normalinferior goodsGiffen goodsgoods d. e. both a and c are correct.both b and c are correct.
  4. You get a notice in the middle of the semester stating that your monthly dorm fee is being doubled, effective immediately. You don't want to pay the higher fee, but it's not practical for you to move out of the dorm mid-semester. You decide to pay the extra charge now, and look for new housing option after exams are ov the following statements best describes your situation? er. Which of a. b. c. The dorm room is a Giffen good.The dorm room is an inferior good.Your short run demand for dorm housing is relatively inelastic. d. e. Your long run demand for dorm housing is less e demand.None of the above. lastic than your short run
  1. Which of the following goods is most likely to have high price elasticity of demand? a. A staple food. b. A good that forms a very small part of a person’s total budget. c. A good for which th d. A vital medicine. ere are many close substitutes.
  2. Jake sells hot dogs at an outdoor stand.^ e. None of the above. There are several other hot dog stands in the vicinity. statements is true about the demand for Jake’s hot dogs? There is a going price in the market for hot dogs. Which of the following a. Demand for Jake’s hot dogs is perfectly inelastic. b. Demand for Jake’s hot dogs is perfectly elastic. c. Demand for Jake’s hot dogs can be represented as a vertical line. d. Demand for J e. None of the above.ake’s hot dogs can be represented as a downward sloping line.
  3. Suppose that the price elasticity toothpaste increases by 30%, what would we expe toothpaste supplied? of supply for toothpaste is 0.2.ct to happen to the quantity of If the price of a. increase by 3% b. decrease by 5% c. increase by 60% d. decrease by 15% e. increase by 6%
  4. Suppose a grocery store normally sells 100 cartons of milk per day and the price elasticity of demand for milk is 1.7. about how many cartons of milk will it then sell per week? If the store lowers the price of milk by 10%, a. 117 b. 83 c. 85 d. 100 e. 101.
  5. Which of the following is most likely to be an inferior good? a. eyeglasses b. airplane tickets c. caviar d. opera tickets e. discount bus tickets
  1. a. b. Revenue (at point B) = $5 Revenue (at point A) = Price × Quantity = $3 × 3 = $9 × 2 = $ c. In this case, an increase in price from $3 to $5 raises revenues from $9 to $10. When a price increase leads to higher revenues (that is, when revenues move in the same direction as the price), demand is inelastic.
  2. a. % change in price = [(5- 3 ) / ((5+3)/2)] × 100 = (2/4) × 100 = + 50% b. % change in quantity = [(2-3) / ((2+3)/2)] × 100 = (1/2.5) × 100 = - 40% c. Price elasticity of demand = % change in quantity demanded / % change in price = - 40% / 50% = -.
  3. We cannot tell which compare the elasticities of the two curves based on their appearance, they would have to be on the same scale and passing through the same point. demand curve is more elastic, because the scale is not shown. To

Price Quantity

Supply^ Demand

Answers to Self Test Questions 1. c

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      1. acc
      1. bab
      1. dab
      1. ecc
      1. bea
  7. e