Topic 6 Elasticity_ The Responsiveness of Demand and Supply

1) Price elasticity of demand measures (PED P&Q)

A) how responsive suppliers are to price changes.
B) how responsive sales are to changes in the price of a related good.
C) how responsive quantity demanded is to a change in price.
D) how responsive sales are to a change in buyers' incomes.

2) The price elasticity of demand for Stork ice cream is -4. Suppose you're told that following a
price increase, quantity demanded fell by 10 percent. What was the percentage change in price
that brought about this change in quantity demanded?

A) 40 percent
B) 25 percent
C) 2.5 percent
D) 0.4 percent

3) Seth is a competitive body builder. He says he has to have his 12-oz package of protein
powder to "feed his muscles" every day. On the basis of this information, what can you conclude
about his price elasticity of demand for protein powder?
A) It is elastic.
B) It is perfectly elastic.
C) It is perfectly inelastic.
D) The price elasticity coefficient is 1.

Figure 6-1
4) Refer to Figure 6-1. The demand curve on which elasticity changes at every point is given in
A) Panel A.
B) Panel B.
C) Panel C.
D) none of the above graphs.

5) Refer to Figure 6-1. A perfectly elastic demand curve is shown in

A) Panel A.
B) Panel B.
C) Panel C.
D) Panel D.

6) Refer to Figure 6-1. A perfectly inelastic demand curve is shown in

A) Panel A.
B) Panel B.
C) Panel C.
D) Panel D.

Figure 6-3

7) Refer to Figure 6-3. Using the midpoint formula, calculate the absolute value of the price
elasticity of demand between e and f.
A) 0.32
B) 0.4
C) 2.5
D) 3.125

8) If a 35 percent increase in price of golf balls led to an 42 percent decrease in quantity

demanded, then the demand for golf balls is
A) unit elastic.
B) perfectly elastic.
C) relatively inelastic.
D) relatively elastic.

9) At a price of $20, Daphne sells 35 hand-painted dog collars per week. When she raised her
price to $25, she sold 28 per week. Based on this information, the demand for her dog collars is
A) perfectly elastic.
B) inelastic.
C) unit elastic.
D) elastic.

Figure 6-5
10) Refer to Figure 6-5. The section of the demand curve labeled "A" represents
A) the inelastic section of the demand curve.
B) the unit-elastic section of the demand curve.
C) the elastic section of the demand curve.
D) the perfectly elastic section of the demand curve.

11) Suppose that when the price per ream of recycled printer paper rises from $4 to $4.50, the
quantity demanded falls from 800 to 600 reams per day. Using the midpoint formula, what is the
price elasticity of demand (in absolute value) over this range?
A) 0.003
B) 0.41
C) 2.43
D) 4

12) Which of the following products comes closest to having a perfectly inelastic demand?
A) gasoline
B) cholesterol medication in general
C) iPhones
D) bus rides

13) If the price of steel increases drastically, the quantity of steel demanded by the building
industry will fall significantly over the long run because
A) buyers of steel are more sensitive to a price change if they have more time to adjust to the
price change.
B) buyers of steel are less sensitive to a price change if they have more time to adjust to the
price change.
C) sales revenue in the building industry will fall sharply.
D) profits will fall by a greater amount in the long run than in the short run.

14) Holding everything else constant, the demand for a good tends to be more elastic
A) the more substitutes there are for the good.
B) the shorter the time period involved.
C) the more consumers perceive the good to be a necessity.
D) the less important the product is in consumers' budgets.

15) Total revenue equals (PxQ)

A) price per unit times quantity sold.
B) price per unit times quantity supplied.
C) price per unit times change in quantity sold.
D) change in price per unit times quantity sold.

16) If the demand for a product is perfectly inelastic, a decrease in the price of the product
A) will increase total revenue.
B) will decrease total revenue.
C) will not change total revenue.
D) any of the above are possible.

17) Suppose when Nablom's Bakery raised the price of its breads by 10 percent, the quantity
demanded fell by 15 percent. What was the effect on sales revenue?
A) Sales revenue increased.
B) Sales revenue remained unchanged.
C) Sales revenue decreased.
D) It cannot be determined without information on prices.

18) Last year, Sefton purchased 60 pounds of potatoes to feed his family of five when his
household income was $30,000. This year, his household income fell to $20,000 and Sefton
purchased 80 pounds of potatoes. All else constant, Sefton's income elasticity of demand for
potatoes is
A) negative, so Sefton considers potatoes to be an inferior good.
B) positive, so Sefton considers potatoes to be an inferior good.
C) positive, so Sefton considers potatoes to be a normal good and a necessity.
D) negative, so Sefton considers potatoes to be a normal good.

19) If a good has a negative income elasticity of demand, this indicates that the good is
A) a substitute with another good.
B) a complement with another good.
C) inferior.
D) normal.

20) If a 5 percent increase in income leads to a 10 percent increase in quantity demanded for
airline travel, then airline travel is
A) a necessity.
B) a substitute for another good.
C) a luxury.
D) an inferior good.
Applications and Problems
Question 1
What does price elasticity of demand measure? When is demand elastic? Inelastic? Unit elastic?
PED: responsiveness, price, quantity demanded
Demand Elastic: percent change in quantity demanded greater than percent change in price
Inelastic: percent change in price greater than percent change in quantity demanded
Unit Elastic: percent change in price = percent change in quantity demanded

Question 2
For each pair of items below determine which product would have the higher price elasticity of
demand (in absolute value).
a. Blood pressure medicine for someone who has high blood pressure or the purchase of
Clairol hair coloring product.
Hair coloring product, one is necessity and hair coloring product not necessity.
Hair coloring product, substitutes
b. A new Ford Fusion or a tank of gas for your current car.
New Ford Fusion – Substitutes, necessity
c. A Seiko watch or watches in general.
A Seiko watch – narrowly defined, many substitutes
Question 3
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
Estimated for Product B More
Elasticity for Elastic or Less Elastic
Product A Product A Product B than for Product A?
Beer -0.29 Carlsberg More Elastic
Organically
Chicken -0.37 raised chicken More Elastic
Cocaine -0.28 Illegal narcotics Less Elastic
Marlboro
Cigarettes -0.25 Lights More Elastic
Denny's Grand
Restaurant meals -0.67 Slam breakfast More Elastic

Question 4
Ali's Gyros operates near a college campus. Ali has been selling 120 gyros a day at $4.50 each
and is considering a price cut. He 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.

-2
b. Calculate the change in revenue as a result of the price cut.
Before price cut
Revenue = PxQ =4.50 x 120=540
After price cut
Revenue = PxQ =3.50 x 200=700
Change in Revenue = 700 – 540 = 160
Question 5
Table 6-7
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

Refer to Table 6-7.

a. Using the information in the table, calculate the income elasticity of demand for good X
and characterize the good. Use the midpoint formula.
Use income and Qdx YED= 1.71, YED > 1 luxury good
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.
YED = -1.3 ,inferior