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Practical topic 3
Part 1: Exercises for the classroom
1. Say whether you agree or disagree with the following statements and explain why.
a) Price elasticity of demand measures how many units the quantity demanded diminishes when the price increases 0.01€.
b) Price elasticity of supply must always be positive.
c) If price elasticity of demand is equal to one, a 4% increase in the price yields the quantity demanded to fall by 1%.
d) If income elasticity of demand is equal to 1.5, the good is luxury.
e) If there is an increase in the price of apples and oranges in 1€ and the quantity demanded of apples falls by 300 tons whereas the quantity demanded of oranges falls by 200 tons, we can state that demand for apples is more elastic than demand for oranges.
f) When elasticity of demand is equal to zero, we can say safely enough that elasticity doesn’t matter.
g) If there is a change in the price of a good and the quantity demanded of the good changes in the same proportion, we can say that the demand of that good is perfectly elastic. h) The local movie theatre lowers admission prices in an attempt to increase its revenues. The managers of the theatre must believe demand to be price inelastic.
2. If demand is elastic, how will an increase in price change total revenue? Explain.
3. For each of the following goods, which ones would you expect to have an inelastic or a elastic demand? Use the determinants of elasticity to justify your answer:
a) cigarettes b) bread c) a brand of beer d) salt e) cinema tickets f) gasoline g) electric energy
4. Suppose that business travelers and holidaymakers have the following demand for airline tickets from Birmingham to Naples:
Price Quantity demanded (business travelers)
Quantity demanded (holidaymakers) 150€ 2,100 1,
200€ 2,000 800
250€ 1,900 600
300€ 1,800 400
a) As the price of tickets rises from 200€ to 250€, what is the price elasticity of demand for (i) business travelers and (ii) holidaymakers? (Use the midpoint method in your calculations).
b) Why might holidaymakers have a different elasticity from business travelers? ( Exercise 2, page 107, Mankiw and Taylor)
5. Calculate the price elasticity of demand for the demand function Q (^) d=150-2P when P=25. 6. Suppose that elasticities of good X are the following:
Demand elasticity to Value Price of own good (X) 0.
Income 0.
Price of good Y -0.
Price of good Z 0.
Explain which type of good X is and the percentage change in the quantity demanded of good X when:
a) Price of good X rises 1% b) Income falls by 0.5% c) Price of good Y falls by 2% d) Price of good Z rises 1.25%
Part 2: Exercises for the student
7. Suppose that the inverse demand curve for a dinner-for-two special at a small local restaurant can be expressed as P = 4,900 – 3 Q D , where price is expressed in euros and quantity in number of specials. What is the price elasticity of demand when 40 specials are purchased? 8. Suppose that your demand schedule for compact discs is as follows:
Price Quantity demanded (income=10,000€)
Quantity demanded (income=12,000€) 8€ 40 50
10€ 32 45
12€ 24 30
14€ 16 20
16€ 8 12
a) Use the midpoint method to calculate your price elasticity of demand as the price of compact discs increases from 8€ to 10€ if (i) your income is 10,000€ and (ii) your income is 12,000€. b) Calculate your income elasticity of demand as your income increases from 10,000€ to 12,000€ if (i) the price is 12€, and (ii) the price is 16€. ( Exercise 3, page 107, Mankiw and Taylor)
9. When the price of a good increases from 1.2€ to 1.4€, the quantity demanded falls from 12 tons to 10 tons.
16. 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’d lose half my
costumers if I raised the price by as little as 10%”.
b) I owned both of the two 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%.
c) “My economics professor has chosen to use the Frank textbook for this class.
I have no choice but to buy this book”.
d) “I always spend a total of exactly 10€ per week on coffee”.
