MICROECONOMICS

SPRING 2020
ELASTICITY

1. If a 35 percent increase in price of golf balls led to a 42 percent decrease in quantity

demanded, then is the demand for golf balls relatively elastic, relatively inelastic, or unit
elastic? Relatively Elastic

2. Suppose that (for arguments sake), facing stiff competition, Galen University, a small
private university in Central Farm, Cayo District, decided two years ago to bolster its
academic offerings, promising students at least three hands-on experiences outside the
classroom, including research, internships and service projects. Even though it raised
tuition and fees by 29 percent, enrollment in the freshman class rose by 37 percent.
Adapted from: Jonathan D. Glater and Alan Finder, "In New Twist on Tuition Game,
Popularity Rises With the Price," New York Times, December 12, 2006

Based on the above information, is the demand for Galen University education relatively
elastic, relatively inelastic, or unit elastic? Elastic

3. Sally’s Smoothies operates near a college campus. Sally has been selling 120 smoothies a
day at $4.50 each and is considering a price cut. She estimates that he would be able to
sell 200 gyros per day at $3.50 each.

a. Calculate the price elasticity of demand using the midpoint formula.$12.50

b. Calculate the change in revenue as a result of the price cut. $4.50

4. List the five key determinants of price elasticity of demand and explain how each
determinant indicates if demand tends to be elastic or inelastic.

a. Substitutes- If a product more substitute available, it will have more elastic demand. If a
product has fewer substitute available, it will have less elastic demand.
b. Time Frame- the more time that passes, the more elastic the demand for a product
becomes.
c. Income share – The demand for a good will tend to be more elastic the larger the share of
the good in the average consumer’s budget.
 d. Luxury vs. necessity – the demand curve for a luxury is more elastic than the demand curve
for necessity.
e. Narrowness of market –The more narrowly a market is defined, the more elastic demand
will be.

5. For each pair of items below determine which product would have the higher price elasticity
of demand (in absolute value).
a. Insulin for a diabetic or aspirin for someone suffering a headache.
The demand for aspirin is more elastic than the demand for insulin. Insulin is more necessity
than luxury and has virtually no substitutes .there are substitutes for aspirin and it not necessarily
a necessity.
b. A new Whirlpool 27 cu.ft. side-by-side refrigerator or electricity to power your all-electric
home.
The demand for a new refrigerator is more price elastic than the demand for electricity to
power your home. The whirlpool refrigerator has many substitutes. Electricity to power your all
electric home is more necessity than luxury and if your home is powered only by electricity few,
if any, substitutes are available.
c. A can of Red Bull or soft drinks in general.
The demand for Red Bull is more price elastic than demand for soft drink in general.
Narrowly consumer’s budget –defined markets have many substitutes.

6. The estimated price elasticities of demand for the products listed in the table as "Product
A" are from Table 6-2 in the text. Indicate whether the products listed as "Product B" will
have a more elastic or less elastic demand than the corresponding Product A.

Is Estimated Elasticity for

Estimated Product B More Elastic or
Elasticity for Less Elastic than for
Product A Product A Product B Product A?
Presidente More elastic
Beer -0.29 Pilsner Beer
Organically
Chicken -0.37 raised chicken More Elastic
Illegal
Marijuana -0.28 narcotics Less Elastic
Independence
Cigarettes -0.25 Cigarettes More Elastic
Restaurant Hode’s
meals -0.67 Restaurant More Elastic

7. Explain the relationship between price elasticity of demand and total revenue.
 The demand for a good is inelastic (the price elasticity of demand is less than 1),
an increase in price total revenue .If demand is elastic the increase in price reduces total
and a decrease in price decrease total revenue .

8. Suppose that at a price of $55, 100 units were sold while at a price of $33, 153 units were
sold. Without calculating the price elasticity value, can you determine whether demand is
elastic, unit elastic, or inelastic? Explain your answer.
We should calculate the total revenue to help us find the answer. First total
revenue is 55*100=5,500, while the second total revenue is
33*153=5,049.Becuase total revenue decreased when price fell, demand must be
inelastic.

9. Explain the concepts of cross-price elasticity of demand and income elasticity of demand.
What do positive and negative values indicate for each of these demand elasticities?
Cross-price elasticity of demand measures the percentage change in demanded of
one good based on the percentage change in the price of another good. If cross
price elasticity is positive, the two good are substitutes. If cross price elasticity is
negative, the two good are complements.

Income elasticity of demand measures the responsiveness of quantity demanded

to changes income. If income elasticity is positive but less than one the product is
a normal good and a necessity. If income elasticity is positive and greater than
one the product is a normal good and a luxury .If income elasticity is negative ,
the product is an inferior good.

10. Suppose a 4 percent increase in income results in a 2 percent decrease in the quantity
demanded of a good. Calculate the income elasticity of demand for the good and
determine what type of good it is. 0.08 =income elasticity of demand for the good
Unit elastic = type of good

11. Table 1

Quantities Quantities
Purchased Purchased
Income Prices Good X Good Y
$30,000 Px = $6, Py = $3 2 20
50,000 Px = $6, Py = $4 5 10

11. Refer to Table 1.

a. Using the information in the table, calculate the income elasticity of demand for good X and
characterize the good. Use the midpoint formula. The income elasticity of demand for good
x=(3/3.5)/(20000/40000) =(0.8571/0.5)=1.71.x is both a normal good and luxury.

b. Can you calculate the income elasticity of demand for good Y? If you can, show your
calculation and characterize the good. If you cannot, explain why. Since both income PY change,
you cannot calculate elasticity for good y. the income elasticity can be measured if a change
income causes the quantity of y purchased to change, holding everything constant.

12. Explain the economic concept of price elasticity of supply. How is price elasticity of
supply calculated? Price elasticity of supply refers to the responsiveness of the quantity
of a product supplied to a change in price. Price elasticity of supply is calculated by
dividing the change in the quantity of a product supplied by the percentage change in the
product’s price.

13. Suppose the current price of copper is $3 per pound and the quantity supplied is 200
pounds per day. If the price of copper falls to $2.50 per pound, the quantity supplied
drops to 180 pounds per day. Use the midpoint formula to calculate the price elasticity of
supply for copper. (200-180)/50/(3-2.50)/3.80=7