University of Lethbridge – Department of Economics

ECON 3030 – Managerial Economics

Instructor: Michael G. Lanyi

Practice
Problem Set
Elasticity
&
Elasticity
EXTENDED
Edition
ECON 3030 Managerial Economics Michael G. Lanyi

Suppose there is a 5 percent increase in the price of good X and a resulting 10 percent decrease in the quantity of X demanded.
What is the price elasticity of demand for X?
a. 0
b. 1
c. 6
d. Infinite
e. None of the above

If the price elasticity of demand for a good is 4.0, what would result from a 10 percent increase in price?
a. a 4 percent increase in the quantity demanded
b. a 10 percent increase in the quantity demanded
c. a 40 percent increase in the quantity demanded
d. a 400 percent increase in the quantity demanded
e. None of the above

When the price of kittens was $25 each, the pet shop sold 20 per month. When they raised the price to $35 each, they sold 14 per
month. What is the elasticity of demand for kittens?
a. 0.66
b. 0.94
c. 1.06
d. 1.66
e. None of the above

Market demand is given as QD = 200 – 3P. Market supply is given as QS = 2P + 100. If price increases from $25 to $30, what is the
price elasticity of demand?
a. 0.2
b. 0.7
c. 1.4
d. 2.3
e. None of the above

What income elasticities do food and clothing tend to have, and why?
a. small income elasticities because consumers, regardless of their incomes, choose to buy these goods
b. small income elasticities because consumers will buy proportionately more at higher income levels than they will at low
income levels
c. large income elasticities because they are necessities
d. large income elasticities because they are relatively cheap
e. None of the above

Figure 4-1

Refer to Figure 4-1. If the price decreased from $18 to $15, what would happen to total revenue and what would this imply about
demand elasticity?
a. Total revenue would increase by $1200 and demand would be elastic.
b. Total revenue would increase by $800 and demand would be elastic.
c. Total revenue would decrease by $1200 and demand would be inelastic.
d. Total revenue would decrease by $800 and demand would be inelastic.
e. None of the above

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ECON 3030 Managerial Economics Michael G. Lanyi

Table 4-1
Price per Baseball Ticket Quantity Demanded
$20 2 000
$16 4 000
$12 6 000
$8 8 000
$6 10 000
$4 12 000
$2 14 000

Refer to Table 4-1. Notice that lowering the price from $8 to $6 per ticket decreases revenue by $4000. In the $6 to $8 price range,
what must the demand for baseball tickets be?
a. price inelastic
b. price elastic
c. price unit elastic
d. income elastic
e. None of the above

Figure 4-2

Refer to Figure 4-2. As price falls from PA to PB, which demand curve is most elastic?
a. D1
b. D2
c. D3
d. D4
e. None of the above

Market demand is given as QD = 60 – P. Market supply is given as QS = 3P. If price increases from $5 to $7, what is the price
elasticity of demand?

a. 0.1
b. 0.9
c. 1.1
d. 2.4
e. None of the above

Market demand is given as QD = 220 – 4P. Market supply is given as QS = 2P + 40. If price increases from $42 to $46, what is the
price elasticity of demand?
a. 0.3
b. 0.4
c. 4.0
d. 5.9
e. None of the above

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ECON 3030 Managerial Economics Michael G. Lanyi

1. The demand for good X has been estimated by Qxd = 12 – 3Px + 4Py where PX is the price of X, PY is the price of
good Y. Suppose the present price of good X is Px = $2 and Py = $1

What is the demand curve for good X? .............................................

What is the quantity demanded of good X? .............................................

What is the own-price elasticity of demand for good X? .............................................

Based on this information, we know that the demand for good X is (elastic/inelastic/unit elastic)

Based on this information, the cross price elasticity between goods X and Y is .............................................

Based on this information, goods X and Y are (substitutes / complements)

2. Suppose Qxd = 10 000 – 2 Px + 3 Py – 4.5M, where Px = $100, Py = $50, and M = $2,000.

What is the demand curve for good X? .............................................

What is the quantity demanded of good X? .............................................

What is the own-price elasticity of demand? .............................................

Based on this information, we know that the demand for good X is .............................................

Based on this information, the cross price elasticity between goods X and Y is .............................................

Based on this information, goods X and Y are .............................................

Based on this information, the income elasticity of good X is (inferior / normal)

Based on this information, good X is a/an ………….. good .............................................

3. The demand for good X is estimated to be Qxd = 4 500 – 4PX + 5PY + 2M + AX where PX is the price of X, PY is the
price of good Y, M is income and AX is the amount of advertising on X. Suppose the present price of good X is PX =
$50, PY = $100, M = $25,000, and AX = 1,000 units.

What is the demand curve for good X? .............................................

What is the quantity demanded of good X? .............................................

What is the own-price elasticity of demand for good X? .............................................

Based on this information, we know that the demand for good X is .............................................

Based on this information, the cross price elasticity between goods X and Y is .............................................

Based on this information, goods X and Y are .............................................

Based on this information, the income elasticity of good X is .............................................

Based on this information, good X is a/an ………….. good .............................................

Based on this information, the advertising elasticity of good x is: .............................................

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ECON 3030 Managerial Economics Michael G. Lanyi

4. The maker of a leading brand of low-calorie microwavable food estimated the following demand equation for its
product:
Qx = 1 500 – 400Px + 100Py – 250Pz + 0.01M + 0.20A + 0.20mw
The variables and their assumed values are
Qx = Quantity sold per month
Px = Price of the product = $5
Py = Price of some other product = $6
Pz = Price of some other product = $4
M = Per capita disposable income = $50 000
A = Monthly advertising expenditure = $2 000
mw = Number of microwave ovens sold = 5 000

What is the demand curve for good X? .............................................

What is the quantity demanded of good X? .............................................

What is the own-price elasticity of demand for good X? .............................................

Based on this information, we know that the demand for good X is .............................................

Based on this information, the cross price elasticity between goods X and Y is .............................................

Based on this information, goods X and Y are .............................................

Based on this information, the cross price elasticity between goods X and Z is .............................................

Based on this information, goods X and Z are .............................................

Based on this information, the income elasticity of good X is .............................................

Based on this information, good X is a/an ………….. good .............................................

Based on this information, the advertising elasticity of good x is: .............................................

5. Rondo & Co sells sports bicycles in the Calgary area. Demand for bicycles has been estimated to be
Qx = 100 – 5Px + 5Py + 15A – 10AR
where Qx = quantity demanded per month P = product price Py = Price of some other product
A = advertising expenditures by Rondo Corporation and AR = advertising expenditures by rival firms.

Assume that Px = $200 Py = 150 A = 30 and AR = 10.

What is the demand curve for good X? .............................................

What is the quantity demanded of good X? .............................................

What is the own-price elasticity of demand for good X? .............................................

Based on this information, we know that the demand for good X is .............................................

Based on this information, the cross price elasticity between goods X and Y is .............................................

Based on this information, goods X and Y are .............................................

Based on this information, the advertising elasticity of good x is: .............................................

Define and calculate the cross advertising elasticity of demand: .............................................

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ECON 3030 Managerial Economics Michael G. Lanyi

6. Suppose the demand function is Qxd = 100 – 8Px + 6Py – M.

If Px = $4, Py = $2, and M = $10,

What is the demand curve for good X? .............................................

What is the quantity demanded of good X? .............................................

What is the own-price elasticity of demand for good X? .............................................

Based on this information, we know that the demand for good X is .............................................

Based on this information, the cross price elasticity between goods X and Y is .............................................

Based on this information, goods X and Y are .............................................

Based on this information, the income elasticity of good X is .............................................

Based on this information, good X is a/an ………….. good .............................................

7. Suppose demand is given by Qxd = 50 – 4Px + 6Py + Ax, where Px = $4, Py = $2, and Ax = $50.

What is the demand curve for good X? .............................................

What is the quantity demanded of good X? .............................................

What is the own-price elasticity of demand for good X? .............................................

Based on this information, we know that the demand for good X is .............................................

Based on this information, the cross price elasticity between goods X and Y is .............................................

Based on this information, goods X and Y are .............................................

Based on this information, the advertising elasticity of good x is: .............................................

You are the manager of a popular shoe company. You know that the advertising elasticity of demand for your product
is 0.15. How much will you have to increase advertising in order to increase demand by 10%?
(66.7%).