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Microeconomics Canadian 1st Edition Hubbard Solutions Manual Download
Microeconomics Canadian 1st Edition Hubbard Solutions Manual Download
▪ The key determinants of the price elasticity of demand for a good are: the availability of
close substitutes, the passage of time, whether the good is a necessity or a luxury, the
definition of the market, and the share of the good in a consumer’s budget.
6.3 The Relationship between Price Elasticity of Demand and Total Revenue
(pages 171–175)
Understand the relationship between the price elasticity of demand and total revenue.
▪ When demand is inelastic, price and total revenue move in the same direction. When
demand is elastic, price and total revenue move inversely.
▪ Two other demand elasticities are important: the cross-price elasticity of demand measures
the responsiveness of the quantity demanded of one good to a change in the price of another
good; the income elasticity of demand measures the responsiveness of the quantity
demanded of a good to a change in income.
▪ Elasticity can help us understand many economic issues, including why the family farm
has become an endangered species and the effects of raising the federal government’s tax
on gasoline.
6.6 The Price Elasticity of Supply and Its Measurement (pages 180–184)
Define price elasticity of supply and understand its main determinants and how it is
measured.
▪ The price elasticity of supply measures the responsiveness of the quantity supplied to a
change in price.
Key Terms
Cross-price elasticity of demand, p. 175. The responsive to price, and the price elasticity of
percentage change in quantity demanded of one demand equals infinity.
good divided by the percentage change in the
price of another good. Perfectly inelastic demand, p. 166. The case
where the quantity demanded is completely
Elastic demand, p. 163. Demand is elastic when unresponsive to price, and the price elasticity of
the percentage change in quantity demanded is demand equals zero.
greater than the percentage change in price, so
the price elasticity is greater than 1 in absolute Price elasticity of demand, p. 162. The
value. responsiveness of the quantity demanded to a
change in price, measured by dividing the
Elasticity, p. 162. A measure of how much one percentage change in the quantity demanded of a
economic variable responds to changes in product by the percentage change in the
another economic variable. product’s price.
Perfectly elastic demand, p. 166. The case Unit-elastic demand, p. 163. Demand is unit
where the quantity demanded is infinitely elastic when the percentage change in quantity
Chapter Outline
Do People Respond to Changes in the Price of Gasoline?
During the summer of 2005, when the price of gasoline soared close to $1.23 per litre as a result of
Hurricane Katrina, consumers responded by buying less than they had bought a year earlier when the price
was lower. Consumers found many ways to cut back on the quantity of gasoline they purchased, including
moving closer to their work places and buying more fuel-efficient automobiles.
Elasticity is a measure of how much one economic variable responds to changes in another economic
variable. The price elasticity of demand is the responsiveness of the quantity demanded to a change in
price, measured by dividing the percentage change in the quantity demanded of a product by the percentage
change in the product’s price.
The price elasticity of demand is always negative. Because we are usually interested in the relative size of
elasticities, we often compare their absolute values.
Inelastic demand is when the percentage change in quantity demanded is less than the percentage change
in price, so the price elasticity is less than 1 in absolute value.
Unit-elastic demand refers to when the percentage change in quantity demanded is equal to the percentage
change in price, so the price elasticity is equal to 1 in absolute value.
final quantities and the average of the initial and final prices. If Q1 and P1 are the initial quantity and price
and Q2 and P2 are the final quantity and price, then the midpoint formula is:
Teaching Tips
After illustrating a perfectly inelastic demand curve, ask your students to suggest examples. They may
mention cigarettes, gasoline, or other goods that have relatively inelastic, but not perfectly inelastic,
demands. Ask whether the quantity demanded of the products they suggest would change if the price were
not only higher but lower as well. Even students who claim they would not buy less gasoline if the price
rose are unlikely to argue that they would not buy more gasoline at lower prices. This discussion will help
your students understand that very few products actually have perfectly inelastic demand curves. Within
reasonable price changes, the demand for certain drugs, such as insulin, may be perfectly inelastic. The
number of injections per day is insensitive to price changes. You don’t need to spend much time discussing
perfectly elastic demand. It should be sufficient to make a brief reference to perfect competition, a topic
covered in Chapter 12.
Extra Making
the Rewriting the Formula
Connection
Your understanding of elasticity (E) may be increased by rewriting the elasticity formula. To make this
explanation easier to follow, assume that we are interested in measuring the price elasticity of a linear
demand curve. The elasticity formula in the textbook is:
E=
(Q 2 - Q1) (P 2 - P1) .
¸
(Q1 + Q 2 ) (P1 + P 2 )
2 2
Both “2”s can be dropped from this equation. Recall that (Q2 − Q1) = ΔQ and (P2 − P1) = ΔP. Substituting,
we have:
Q ΔP
E = .
(Q1 + Q2) (P1 + P2)
Because the elasticity equation divides one fraction by another fraction, you can rewrite this expression by
multiplying the numerator by the inverse, or reciprocal, of the denominator. The associative property of
multiplication allows us to divide ΔQ by ΔP and (P1 + P2) by (Q1 + Q2). Therefore:
E = Q P1 + P 2 .
P Q1 + Q 2
Because the slope of a linear or straight line demand curve is constant and can be written as ΔP/ΔQ, the
elasticity formula can now be written as:
E = (1/slope) P1 + P 2 .
Q1 + Q 2
Writing the elasticity formula this way makes it clear that the slope is not the same as the elasticity of a
demand curve. Along a linear demand curve, the slope will have a constant value but the elasticity will
not. The formula highlights this and also can be used to make another important point. Because the law
of demand tells us that high prices are associated with relatively low values of quantity demanded (and
vice versa), the absolute values for elasticity will be high at high prices (demand is elastic) and relatively
low at low prices (demand is inelastic). This result can easily be shown by substituting in actual price
and quantity values for a given demand curve into the rewritten formula and observing the change in the
ratio of (P1 + P2) to (Q1 + Q2) as price is decreased.
2. Passage of Time
Another determinant of elasticity is the passage of time. The more time that passes, the more elastic
the demand for a product becomes.
Teaching Tips
It is useful to emphasize two points. First, each of the five determinants of the price elasticity of demand
should be considered separately from the others. A product that consumes a small part of a consumer’s
budget (this suggests demand would be relatively inelastic) may have several good substitutes (this suggests
demand would be relatively elastic). Second, changes in the market price of any product will result in
different values for price elasticity. Estimates of the price elasticity of demand use market prices for
products at a particular time. Different market prices would result in different elasticity estimates.
a. What are the key determinants of the price elasticity of demand Halloween candies?
b. Why would Nestle charge more for a box containing a single type of candy than for mixed
packages?
6.3 The Relationship between Price Elasticity of Demand and Total Revenue
(pages 171–175)
Learning Objective: Understand the relationship between the price elasticity of demand
and total revenue.
A firm is interested in price elasticity because it allows the firm to calculate how changes in price will affect
its total revenue. Total revenue is the total amount of funds received by a seller of a good or service,
calculated by multiplying the price per unit by the number of units sold. When demand is inelastic, price
and total revenue move in the same direction: An increase in price raises total revenue, and a decrease in
price reduces total revenue. When demand is elastic, price and total revenue move inversely: An increase
in price reduces total revenue, and a decrease in price raises total revenue. A less common possibility is
that demand is unit elastic. In that case, a change in price is exactly offset by a proportional change in
quantity demanded, leaving revenue unaffected.
6.4
In addition to price elasticity, two other demand elasticities are important: the cross-price elasticity of
demand and the income elasticity of demand.
The cross-price elasticity of demand is the percentage change in quantity demanded of one good divided
by the percentage change in the price of another good. The cross-price elasticity of demand will be positive
or negative depending on whether the two products are substitutes or complements. An increase in the price
of a substitute will lead to an increase in quantity demanded, so the cross-price elasticity of demand will be
positive. An increase in the price of a complement will lead to a decrease in the quantity demanded, so the
cross-price elasticity of demand will be negative. The cross-price elasticity allows managers to measure
whether products sold by other firms are close substitutes for their products.
If the quantity demanded of a good increases as income increases, then the good is a normal good. Normal
goods are often further subdivided into luxuries and necessities. The income elasticity of demand for a
necessity is positive but less than 1. The income elasticity of demand for a luxury is greater than 1. A good
is inferior if the quantity demanded falls as income increases.
Teaching Tips
Many students confuse one type of elasticity with another. Ask your students to solve the following
problem. Assume that the price elasticity of demand for good X is 2.5. Is good X a normal good? (Answer:
You cannot determine whether X is normal or inferior by knowing its price elasticity. You need to know
the income elasticity of demand for good X to answer this question).
1. There is a 20 percent increase in Toronto Transit Commission (TTC) cabs hired (fares). As a result,
the price of a taxicab ride increases by 5 percent.
2. An economic expansion causes a 5 percent increase in the incomes of tourists visiting Toronto. As a
result, the number of taxicab rides increases by 2 percent.
Describe the cross-price and income elasticity formulas and use these formulas to determine the values of
these elasticities for taxicab rides.
Because a 20 percent increase in subway fares raised the quantity demanded of taxi rides by
5 percent, the value of the cross-price elasticity is:
5 percent
= 0.25 .
20 percent
Because a 5 percent increase in income led to a 2 percent increase in taxi rides, the value of the
income elasticity is:
2 percent
= 0.4 .
5 percent
The elasticity is positive but less than 1. Therefore, a taxi ride is a normal good and a necessity.
From 1931 to 2011, the number of farms decreased from 728,623 to about 205,730, and the number of
people who lived on farms fell from 3.3 million to fewer than 1 million. Rapid growth in farm output has
combined with low price and income elasticities to make family farming difficult in Canada. Productivity
has grown very rapidly in Canadian agriculture. Total wheat production rose from about 320 million bushels
in 1931 to about 930 million bushels in 2011, thanks to development of superior strains of wheat and
improvements in farming techniques.This increase in wheat production resulted in a substantial decline in
prices because (1) the demand for wheat is inelastic, and (2) the income elasticity of demand for wheat is
low.
Extra Making
the Elasticity and Hearing Aids
Connection
Over 3 million Canadians suffer from hearing loss, but only 1 in 6 of those (500,000) wears hearing aids.
In other words, only 1/6th of the potential customers for hearing aids buy them. There are several reasons
why so few people who could benefit from hearing aids actually buy one, including the stigma that is
sometimes attached to people wearing them. But the price of hearing aids is an important factor as well.
Hearing aid prices vary, but prices of $2,000 to $4,000 or more are common. In most cases, provincial
health covers at least some of the cost of a hearing aid, but not the whole cost. Some private top-up health
insurance plans cover the remaining cost, but not everyone in Canada has this extra insurance. This means
that many Canadians cover some or most of the cost of a hearing aid out of their own pockets.
Would firms selling hearing aids raise their revenue if they were to lower the prices they charged? If the
price elasticity of demand for hearing aids is elastic (greater than 1 in absolute value), then a reduction in
prices will lead to more revenue, but if demand is inelastic (less than 1 in absolute value) a reduction in
prices will reduce total revenue. We can apply what we have learned about the determinants of price
elasticity of demand to analyze the question. Three of the determinants are important in this case.
b. If the price elasticity is −0.02, what will be the percentage increase in the quantity demanded?
c. Discuss how the size of the price elasticity of demand for cocaine is relevant to the debate over its
legalization.
We can plug into this formula the values we are given for the price elasticity and the percentage
change in price:
Percentage change in quantity demanded
−2 = .
−95%
Or rearranging:
Percentage change in quantity demanded = −2 × −95% = 190%
To measure how much quantity supplied increases when price increases, we use the price elasticity of
supply.
The price elasticity of supply is the responsiveness of the quantity supplied to a change in price, measured
by dividing the percentage change in the quantity supplied of a product by the percentage change in the
product’s price. Because of the law of supply, price elasticity of supply will be a positive number. If the
price elasticity of supply is less than 1, then supply is inelastic. If the price elasticity of supply is greater
than 1, then supply is elastic. If the price elasticity of supply is equal to 1, then supply is unit elastic.
Lobster fishing licences sell for prices of $185,000 to over $500,000 each. The number of licences in any
one jurisdiction is set by the Department of Fisheries and Oceans at 10,000.
b. Describe some of the consequences of the Department of Fisheries and Oceans limiting the
quantity of lobster licences.
Because the quantity supplied of licences does not change, the percentage change in the
quantity supplied of licences was zero, as was the price elasticity of supply. The licences supply
curve was vertical at the quantity of 10,000 medallions.
Step 3: Describe some of the consequences of the Department of Fisheries and Oceans
limiting the quantity of licences.
The high cost of licences has limited the number of fishers and may have made the price of
lobster more volatile. At the same time, by restricting supply the DFO can prevent the
overexploitation of the fishery.
Question: After studying the material in this chapter, you should understand why knowing the income and
price elasticities of their products is important to the owners and managers of firms. But what if you are not
a manager or owner? If, for example, you were interested in investing some of your hard-earned savings in
the stock market, how would knowing income and price elasticities help you?
Answer: The best advice for success in the stock market is still “buy low, sell high.” But what you learned
about elasticity also may be helpful, at least in a general way. Firms that sell products with high income
elasticities (for example, houses and automobiles) experience especially large fluctuations in sales as the
overall economy moves through the business cycle. Consumers will be wary of buying “big ticket” items
during a recession, especially if they must take out loans to do so. Sales of these same items tend to increase
rapidly when the economy moves into an expansion.
Source: Ben McClure, “The Ups and Downs of Investing in Cyclical Stocks,” October 22, 2002, www.investopedia.com.
2. If Walmart and Costco begin selling gasoline at lower prices than the conventional service stations, this
will cause the demand curves faced by the conventional service stations to shift to the left and become more
elastic, which will lower the equilibrium price of gasoline at these stations.
Review Questions
LO 6.1
1.2 The price elasticity = (Percentage change in quantity demanded)/(Percentage change in price) = –
25%/10% = –2.5. The demand for Cheerios would be elastic.
1.3 In calculating the percentage change in price and quantity, the midpoint formula divides by the
average of the starting and ending values.
Percentage changes can also be calculated by using the starting or ending value without averaging, but this
gives different results depending on whether the starting or ending value is used.
1.4 A perfectly inelastic demand curve is shown by a vertical line. Such a good will have no
substitutes—for example, a life-saving drug.
LO 6.2
2.1 The demand for most agricultural goods is inelastic. Food is a necessity, and the demand for
necessities tends to be less elastic than the demand for luxuries.
2.2 The most important determinant of the price elasticity of demand is usually the availability of
substitutes for the product. If there are good substitutes, elasticity will be high because people can switch
away to another good as the product’s price rises. Other factors determining the price elasticity of demand
for a product include the passage of time, whether the good is a necessity or a luxury, how narrowly the
market for the good is defined, and the share of the good in the consumer’s budget.
LO 6.3
3.1 If demand is inelastic, an increase in price will increase revenue because the price will increase
proportionally more than the quantity sold will decrease.
3.2 If revenue increases when price falls, then demand must be elastic.
LO 6.4
4.1 Cross-price elasticity of demand equals the percentage change in quantity demanded of one good
divided by the percentage change in the price of another good. If the cross-price elasticity is negative, then
the goods are complements; if it is positive, then they are substitutes.
4.2 Income elasticity equals the percentage change in the quantity demanded divided by the percentage
change in income. If the income elasticity is greater than 0, then the good is normal; if it is less than 0, then
the good is inferior. Goods with income elasticities between 0 and 1 are often called necessities; goods with
income elasticities greater than 1 are often called luxuries.
LO 6.5
5.1 Increasing productivity in agriculture has brought about lower prices for food products. Because
the price elasticity of demand for food is low, the lower prices have not caused a large increase in quantity
demanded. The increase in income over time has not increased the demand for food much because the
income elasticity for food is low. Farmers therefore need to sell larger and larger quantities of food at lower
and lower prices to raise the same revenue. This means that small farms can no longer be as profitable as
they once were.
LO 6.6
6.1 Price elasticity of supply = (Percentage change in quantity supplied)/(Percentage change in price).
In this case, the elasticity of supply = 9%/10% = 0.9. This is slightly inelastic. The dividing point between
elastic and inelastic is 1.0.
6.2 The main determinant of the price elasticity of supply is time. The longer the time period, the more
firms are able to adjust to a change in price. So, we would expect that as the time period increases the price
elasticity of supply will increase. An exception to this rule is products that require use of a resource that is
in fixed supply, such as wine from a particular region.
12,000,000 − 8,000,000
1.1 a. = −4,000,000
$2.00 − $3.00
12 − 8
b. = −4 . This is a much smaller value than in part (a).
$2.00 − $3.00
c. We can calculate the price elasticity using the midpoint formula as follows:
12,000,000 − 8,000,000
Percentage change in quantity demanded = 100 = 40%
10,000,000
$2.00 − $3.00
Percentage change in price = 100 = −40%
$2.50
40%
So, the price elasticity of demand = = −1
−40%
Notice that this value is significantly different from the ones calculated in parts (a) and (b).
1.3 Suppose Ford did cut the price by $1 from $440 to $439 and quantity demanded increased by 1,000
cars from 500,000 to 501,000. The midpoint price would be $439.50 and the midpoint quantity would be
500,500. Then, the percentage change in quantity = (1,000/500,500) × 100% = 0.20%. The percentage
change in price = (–$1/$439.50) × 100% = –0.23%. The price elasticity of demand = 0.20%/–0.23% = –
0.87. If Ford’s belief about the responsiveness of the quantity demanded for the Model T to a change in the
price was accurate, then the demand for the Model T was price inelastic.
1.4 At a higher price, quantity demanded will decrease, so the total revenue (= price × quantity sold)
will still be less than the total cost. Only in the very unlikely case where the demand for the magazine is
perfectly inelastic would the publisher’s analysis be correct.
LO 6.2
2.1 Milk (a) and prescription medicine (d) are likely to be price inelastic due to lack of substitutes, but
frozen cheese pizza (b) and cola (c) are likely to be price elastic because they have good substitutes.
2.2 The more narrowly a market is defined the more elastic demand will be, because more substitutes
are available. The price elasticity of Coca-Cola (or any specific brand of pop) will be higher than for pop
as a product, because there are more substitutes available for a specific product like Coca-Cola than there
are for a product category like pop.
2.3 a. We can’t know with certainty from the information given whether in this case demand will be
elastic or inelastic. We can say, though, that with a normal downward-sloping demand curve,
the quantity demanded is lower at a price of $25 than at a price of $12. Along such demand
curves, elasticity is not constant at every point. When the price is high and the quantity demanded
is low, demand is more likely to be elastic. So we would expect the demand by visitors in private,
noncommercial vehicles to be elastic.
b. Once again, we can’t answer this question with certainty from the information given. But with
a normal downward-sloping demand curve, the quantity demanded is lower at a price of $25
than at a price of $12. Along such demand curves, elasticity is not constant at every point. When
the price is high and the quantity demanded is low, demand is more likely to be elastic. So we
would expect the demand by visitors in private, noncommercial vehicles to have the largest price
elasticity of demand. By similar reasoning, when the price is low and the quantity demanded is
high, the demand is more likely to be inelastic. So we would expect the demand by visitors on
foot, bikes, and skis to have the smallest price elasticity of demand.
LO 6.3
3.1 a. We can calculate the price elasticity along D1 between points A and C as follows:
300 − 200
Percentage change in quantity demanded = 100 = 40.0%
250
$2.50 − $3.00
Percentage change in price = 100 = −18.2%
$2.75
40.0%
So, the price elasticity of demand = = −2.2
−18.2%
Similarly, the price elasticity of demand along D2 between points A and B can be calculated as
follows:
225 − 200
Percentage change in quantity demanded = 100 = 11.8%
212.5
$2.50 − $3.00
Percentage change in price = 100 = −18.2%
$2.75
11.8%
So, the price elasticity of demand = = −0.65
−18.2%
Because the quantity response is much larger to the same price cut, demand curve D1 is much
more elastic.
b. Along D1, revenue increases from $3 × 200 = $600 to $2.50 × 300 = $750. Revenue rises by
$150 as the price is cut because this demand curve is elastic. Along D2, revenue falls from
$600 to $2.50 × 225 = $562.50. Revenue falls by $37.50 as the price is cut because D2 is
inelastic.
3.2 Manager 2 is wrong. Cutting the price will increase revenue if demand is price elastic. But notice
that Manager 1 is just as wrong to say “only” as Manager 2 was to say “never.” Manager 1 says the only
way to boost revenue is by cutting the price, but if demand is inelastic, then cutting the price will decrease
revenue, not increase it.
3.3 If an increase in price resulted in an increase in revenue, demand must have been price inelastic.
However, if the demand curve is linear, after some point demand will become elastic and increases in price
will result in decreases in revenue.
3.4 The situation described in the last sentence tells us that the demand for the book is price elastic. If
demand is price elastic, total revenue will fall as price rises because the percentage increase in price is not
large enough to make up for the percentage decrease in quantity demanded.
3.5 The paperback edition is a reasonably good substitute for the e-book edition. Publishers are
experimenting with the prices of e-books because they are relatively new products, which makes estimating
price elasticity difficult.
LO 6.4
4.1 To find the cross-price elasticity, divide the percentage change in the quantity demanded of buns
by the percentage change in the price of hot dogs. At the initial price of buns ($1.20), the quantity demanded
rises from 10,000 to 12,000, so this is the change in quantity demanded that should be used.
12,000 − 10,000
Percentage change in quantity demanded = 100 = 18.2%
11,000
$1.80 − $2.20
Percentage change in the price of hot dogs = 100 = −20.0%
$2.00
18.2%
So, the cross-price elasticity = = −0.91.
−20.0%
Because the cross-price elasticity of demand is negative, we know these two goods are complements.
4.2 (a) and (c) are substitutes, so the cross-price elasticities will be positive; (b) and (d) are
complements, so the cross-price elasticities will be negative.
4.3 Most likely order: (a) bread, (b) Pepsi, (d) laptop computers, (c) Mercedes-Benz automobiles. For
normal goods that are considered necessities (such as food and clothing), their income elasticity is positive
and less than 1. For normal goods that are considered luxuries (such as laptop computers and Mercedes-
Benz automobiles), their income elasticity is positive and greater than 1. The items are ranked from most
necessary to most luxurious.
4.4 Wine and spirits are probably substitutes so that the cross-price elasticity should be positive. More
people drink wine than drink spirits, partly because spirits have a higher alcohol content than wine. As
people’s incomes rise, they often increase their consumption of wine—and begin to buy more expensive
wines—while they are less likely to consume much more spirits.
4.5 During recessions, falling consumer incomes can cause firms selling luxury goods (goods with an
income elasticity of demand greater than 1) to experience the largest decline in sales. During recessions,
falling consumer incomes can cause firms selling inferior goods (goods with an income elasticity of demand
less than 0) to see their sales increase the most.
LO 6.5
We can plug into the midpoint formula the values given for the price elasticity, the original price
of $1.15, and the new price of $1.85 (= $1.15 + $0.70):
Or rearranging, by writing out the expression for the percentage change in quantity demanded,
and solving for Q2, the new quantity demanded:
Because the price elasticity of demand for gasoline is very low (−0.55), a 60.1 percent increase
in price of gasoline leads to only about 22.5 percent decline in gasoline consumption per year.
b. The federal government would collect an amount equal to the tax per litre multiplied by the
number of litres sold: $0.30 per litre × 108.5 billion litres = $32.55 billion.
5.2 For the government policy to be effective, the demand for bribes must be elastic. The more elastic
the demand curve, the more effective the policy will be. On the graph, the burden of corruption before the
policy is enacted is represented by the area 0Q1AP1. The burden of corruption after the policy is enacted
has decreased and is represented by the area 0Q2BP2.
5.3 His reasoning is correct: Because the demand for kumquats is elastic, a price increase resulting
from the implementation of a price floor will decrease the revenue received by kumquat producers.
5.4 We measure the loss of efficiency by the deadweight loss. When demand is elastic, the deadweight
loss in the figure is A. When demand is inelastic, the deadweight loss is A + B. Therefore, the loss of
economic efficiency from a price ceiling is greater when demand is price inelastic.
LO 6.6
6.1 If the supply of oil becomes more elastic, it will intersect demand curve D2 (point C) at a price
lower than $140 (P2) and at a quantity higher than 84 million barrels per day (Q2).
6.2 To find price elasticity of supply from Figure 6.5, divide the percentage change in quantity supplied
by percentage change in price. In panel (a), the percentage change in quantity supplied =
1, 400 − 1, 200 $4 − $2
100 = 15.4% , and the percentage change in price = 100 = 66.7% . So, the price
1,300 $3
15.4%
elasticity of supply = = 0.23. In panel (b), percentage change in quantity supplied =
66.7%
2,100 − 1, 200 $2.50 − $2.00
100 = 54.5% , and the percentage change in price = 100 = 22.2%. So, the
1,650 $2.25
54.5%
price elasticity of supply = = 2.45.
22.2%
6.3 This statement is correct. A longer period of time allows farmers to respond to an increase in
demand; for example, by planting more trees. This means that the supply curve is more elastic in the long
run so that the response in price to an increase in demand is lower in the long run.
6.4 The supply curve for lots of products will be inelastic if we measure it over a short period of time,
but the supply curve will be increasingly elastic the longer the period of time over which we measure it.
This applies also to resources including labour. Because it takes several years to train an engineer, in the
short run the supply of engineers would not change much. In the long run though, more students could be
recruited and trained as engineers.
Conversely, if there is a decrease in demand for lawyers, in the short run there will be a glut of lawyers. In
the long run though, fewer people will go to law school and the supply of lawyers will fall substantially.
6.5 a.
b. Based on this information, we don’t know much at all about the price elasticity of demand for
roses. The demand curve has shifted, so the rise in the quantity of roses demanded is not caused
by the rise in their price—and we can’t calculate the demand elasticity. We have a movement
along the supply curve, so we can calculate the price elasticity of supply for roses.
Supply elasticity = (Percentage change in quantity supplied)/(Percentage change in price) =
30,000 − 8,000
19,000 1.158
= = 1.74.
$2 − 1 0.667
$1.50
The fact that the elasticity doesn’t have a negative sign is a reminder that with an upward-sloping
supply curve, an increase in price leads to an increase in the quantity supplied. So, the price
elasticity of supply must be positive.