Elasticity Problems

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Elasticity Problems
ECO 284 - Microeconomics - Dr. D. Foster
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Elasticity Problems

• 1. If the price of butter goes up 50 and the
  quantity demanded falls by 10, what is the price
  elasticity of demand? Is this elastic or
  inelastic? Why?

eD 10/50 .20
This is inelastic (small portion of our budgets.
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Elasticity Problems

• 2. If the price of the Rolling Stones CD,
  Semi-Serious, is reduced from 20 to 18, and the
  quantity demanded (say, on a per month basis)
  rises by 10, what is the price elasticity of
  demand? Is this elastic or inelastic? Why?

eD 10/2/20 10/10 1.0
This is unit elastic ( 1.0) It doesnt
easily fit into any categories insofar as elastic
vs. inelastic goes.
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Elasticity Problems

• 3. If the price of gas goes up by 30 and the
  quantity demanded falls from 1,000,000
  gallons/day to 900,000 gallons/day, what is the
  price elasticity of demand? Is this elastic or
  inelastic? Why?

eD 100,000/1,000,000/30 10/30 .33
This is inelastic (considered a necessity.
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Elasticity Problems

• 3. (cont) If the price, then, falls back by
  30, would you predict the response by consumers
  will be elastic or inelastic? Why?

It would still be inelastic Consumers will buy
more when the price falls. (that is just the
law of demand at work) But, they will not buy a
lot more.
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Elasticity Problems

• 4. A popular pair of Nike shoes, the Paris
  Hilton Liteweights, is reduced in price from 80
  to 40, while the quantity demanded rises from
  10,000 pairs/week to 20,000 pairs/week. What is
  the price elasticity of demand? Is this elastic
  or inelastic? Why?

eD 10,000/10,000/40/80 100/50 2.0
This is elastic ( 1.0) It is likely that
there are many substitutes available.
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Elasticity Problems

• 5. As incomes have risen by 20, the quantity
  demanded of new cars has risen by 5. What is
  the income elasticity of demand? What kind of
  good is this?

eY 5/20 .25
This is income inelastic (normal good (income elasticity is positive).
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Elasticity Problems

• 6. As incomes have fallen by 10, the quantity
  demanded of generic corn flakes (breakfast
  cereal) has risen by 20. What is the income
  elasticity of demand? What kind of good is this?

eY 20/-10 -2.0
This is income elastic ( ?1.0 ?) This is an
inferior good (income elasticity is negative).
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Elasticity Problems

• 7. DishTV has lowered its cable prices by 10
  and the subscription base for DirecTV fell by
  15. What is the cross price elasticity of
  demand for DirecTV? How are these goods related?

eX-Z -15/-10 1.50
This is elastic ( 1.0) It is positive as
these are substitutes.
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Elasticity Problems

• 8. If Pepsi lowers its price, what do you think
  that their executives expect to happen to their
  sales revenue (i.e., total revenue)? Why does
  this make sense?

Expect revenues to rise Expect that the demand
is elastic (substitutes), ?P - ?TR
9. If you are the manager of the Orpheum
Theatre, for the upcoming concert by RockHeads,
you should price your tickets where the price
elasticity is ____. Why?
1.0 At this elasticity, total revenue is
maximized.
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ElasticityProblems
10. For the accompanying graph, assume that
equilibrium starts at point A. Consider the
effects of a tax, which will decrease the supply,
for two alternative demand curves, DA and DB.
a. A .50 per unit tax is placed on this good
does S show the new supply curve?
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ElasticityProblems
10. For the accompanying graph, assume that
equilibrium starts at point A. Consider the
effects of a tax, which will decrease the supply,
for two alternative demand curves, DA and DB.
b. What is the change in total revenue along DA
and DB?
DA - From 100 to 55 total revenue fell by
45.DB - From 100 to 112 total revenue rose
by 12.
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ElasticityProblems
10. For the accompanying graph, assume that
equilibrium starts at point A. Consider the
effects of a tax, which will decrease the supply,
for two alternative demand curves, DA and DB.
... What does this tell you about the price
elasticity for each demand curve?
DA is elastic (?P - ?TR) while DB is inelastic
(?P - ?TR).
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ElasticityProblems
10. For the accompanying graph, assume that
equilibrium starts at point A. Consider the
effects of a tax, which will decrease the supply,
for two alternative demand curves, DA and DB.
Calculate the price elasticity for each demand
curve.
?D for DA is (50/100)/(.1/1) 50/10 5.0
?D for DB is (20/100)/(.4/1) 20/40 0.5
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ElasticityProblems
10. For the accompanying graph, assume that
equilibrium starts at point A. Consider the
effects of a tax, which will decrease the supply,
for two alternative demand curves, DA and DB.
c. What will be the tax revenue collected in
each case?
DA - Tax revenue (.50)50 units 25.DB -
Tax revenue (.50)80 units 40.
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ElasticityProblems
10. For the accompanying graph, assume that
equilibrium starts at point A. Consider the
effects of a tax, which will decrease the supply,
for two alternative demand curves, DA and DB.
... Who will bear the burden of this tax and
to what degree?
Consumers pay .10 more along DA and .40 more
along DB.
Sellers get .40 less along DA and .10 less
along DB.
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ElasticityProblems
10. For the accompanying graph, assume that
equilibrium starts at point A. Consider the
effects of a tax, which will decrease the supply,
for two alternative demand curves, DA and DB.
d. Societys loss here is the value of the lost
consumer and producer surplus. Shade in and find
the values.
DA - (1/2)(1.10-.60)(100-50) (.5)(.50)50
12.50
DB - (1/2)(1.40-.90)(100-80) (.5)(.50)20
5.00
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Elasticity Problems
ECO 284 - Microeconomics - Dr. D. Foster