Parallel Problems Chapter 4: Elasticity and Its Uses
Answer the following questions using the price elasticities of demand in the following table:
Which items have an elastic demand and which have an inelastic demand?
Which items have a perfectly elastic demand and
which have a perfectly inelastic demand?
What is the effect on the quantity demanded for gasoline as a result of a price decrease of 20 percent?
What is the effect on the price of housing as a result of a shift in its supply that reduces the quantity demanded by 10 percent (compare the equilibrium after the supply shift with the equilibrium before the supply shift)?
For which items will revenue decrease when the price increases?
Suppose a state
government decides that it wants to increase revenue by raising the price of road tolls for a highway. When government officials increase the price of a road toll from $4 to $5, they are pleased that their revenue actually rises. Why is this true? Assuming a linear demand curve, what is the elasticity of demand for highway when total revenue begins to rise? To maximize total revenue, at what elasticity will the government officials set the price?
What can be said about the elasticity
of supply if the equilibrium quantity demanded does not change when the demand curve shifts? How does total revenue change when the demand curve changes?
Compare a market where supply and demand are both very elastic to one where supply and demand are both very inelastic. Suppose the current equilibrium price and quantity are the same in both markets. Suppose further that the government imposes a price ceiling $0.50 below the equilibrium price. Compare, diagrammatically, the shortages
that result. Explain the difference in these two cases.
Calculate the price elasticity of demand (absolute value) for the following goods.
The price of automobiles goes up by 10%, causing the quantity demanded to go down by 5%.
The price of automobiles goes up by 10%, causing the quantity demanded to go down by 2%.
The price of oranges increases by 50%, causing the quantity demanded to go down by 5%.
The price of computer software falls by 25%,
causing the quantity demanded to increase by 1%.
Use the following data for a demand curve.
Use the midpoint formula to calculate the elasticity between a price of $14 and $15.
Use the midpoint formula to calculate the elasticity between $7 and $8.
Since this is a linear demand curve, why does
the elasticity change?
At what point is price times quantity maximized? What is the elasticity at that point?
Use the following data for a supply curve. Use the following data to calculate the elasticity of supply.
Use the midpoint formula to calculate the elasticity of supply for the price between $6
and $7.
Use the midpoint formula to calculate the elasticity of supply for the price between $1 and $2. Use the midpoint formula.
Suppose the demand for wine is elastic. If the government imposes a per unit tax on wine, it is equivalent to the supply curve shifting up vertically by the amount of the tax. Show this in a diagram. If the demand is perfectly elastic, by how much does the price including the tax increase? Why? Is this an effective way to raise government
revenue?
Given the following income elasticities of demand, would you classify the good as a luxury, necessity or inferior good?
salt�elasticity = 0.3.
potatoes�elasticity = -0.1.
frozen dinners�elasticity = .9.
restaurant meals�elasticity = 1.4.
Analyze the following data on personal computer production, assuming the demand curve did not shift and the total production equals quantity demanded.
Plot the observations on a scatter diagram with price on the vertical axis and quantity on the horizontal axis.
Assuming the demand curve did not shift, use the midpoint formula to calculate the elasticity of demand based on the change in price between 1992 and 1993, and then based on the change in price between 1993 and 1994.
Explain why a 10% tax would be more destructive in an industry where the demand for the product is highly price elastic as opposed to another industry whose product demand is price inelastic.
