Chapter 4

11. Figure 4.2 shows the demand for DVD rentals.

a. Calculate the elasticity of demand when the
price of a DVD rental rises from $3 to $5.
The price elasticity of demand is 2. When the
price of a DVD rental rises from $3 to $5, the
quantity demanded of DVDs decreases from 75
to 25 a day. The price elasticity of demand
equals the percentage change in the quantity
demanded divided by the percentage change in
the price. The price increases from $3 to $5, an
increase of $2 a DVD. The average price is $4
per DVD. So the percentage change in the price
equals $2 divided by $4 and then multiplied by
100, which equals 50 percent. The quantity decreases from 75 to 25 DVDs, a decrease of 50
DVDs. The average quantity is 50 DVDs. So the percentage change in quantity demanded
equals 50 divided by 50 and then multiplied by 100, which equals 100 percent. The price
elasticity of demand for DVD rentals equals 100 percent divided by 50 percent, which is 2.

b. At what price is the elasticity of demand for DVD rentals equal to 1?

The price elasticity of demand equals 1 at $3 a DVD. The price elasticity of demand equals
1 at the price halfway between the origin and the price at which the demand curve intersects
the y-axis. That price is $3 a DVD.

23

1
The table sets out the supply schedule of long-distance phone calls. Calculate the elasticity of
supply when

Price Quantity supplied

(cents (millions of
per minute) minutes per day)
10 200
20 400
a. The price falls from 40¢ to 30¢ a 30 600
minute. 40 800
The elasticity of supply is 1. The elasticity of supply is the percentage change in the
quantity supplied divided by the percentage change in the price. When the price falls from
40 cents to 30 cents, the change in the price is 10 cents and the average price is 35 cents.
The percentage change in the price is 28.57 percent. When the price falls from 40 cents to
30 cents, the quantity supplied decreases from 800 to 600 calls. The change in the quantity
supplied is 200 calls, and the average quantity is 700 calls, so the percentage change in the
quantity supplied is 28.57 percent. The elasticity of supply equals (28.57 percent)/(28.57
percent), which is 1.

b. The average price is 20¢ a minute.

The elasticity of supply is 1. The formula for the elasticity of supply calculates the elasticity
at the average price. So to find the elasticity at an average price of 20 cents a minute,
change the price such that 20 cents is the average price—for example, a fall in the price
from 30 cents to 10 cents a minute. When the price falls from 30 cents to 10 cents, the
change in the price is 20 cents and the average price is 20 cents. The percentage change in
the price is 100 percent. When the price falls from 30 cents to 10 cents, the quantity
supplied decreases from 600 to 200 calls. The change in the quantity supplied is 400 calls
and the average quantity is 400 calls. The percentage change in the quantity supplied is 100
percent. The elasticity of supply is the percentage change in the quantity supplied divided
by the percentage change in the price. The elasticity of supply is 1.

Chapter 8

17. Cindy has $70 a month to spend, and she can spend as much time as she likes
playing golf and tennis. The price of an hour of golf is $10, and the price of an hour of
tennis is $5. The table shows Cindy’s marginal utility from each sport.
Make a table that shows Cindy’s affordable combinations of hours playing golf
and tennis. If Cindy increases her expenditure to $100, describe how her
consumption possibilities change.

2
The table showing Cindy’s affordable combinations of hours playing Hours Hours
golf and tennis is to the right. If Cindy increases her expenditure, playing playing
golf tennis
then for each entry of tennis hours in the table, her hours of playing
7 0
golf increase by 3 hours. Alternatively, for each entry of golf hours in 6 2
the table her hours of playing tennis increase by 6. In terms of a 5 4
diagram, Cindy’s budget line shifts to the right and its slope does not 4 6
change. 3 8
2 10
1 12
0 14
18. a. How many hours of golf and how many hours of tennis
does she play to maximize her utility?
Cindy plays golf for 5 hours and tennis for 4 hours to maximize her utility. This
combination allocates (spends) all her income and sets the marginal utility per dollar
from golf equal to the marginal utility per dollar from tennis.

c. Compared to part (a), if Cindy spent a dollar less on golf and a dollar more on
tennis, by how much would her total utility change?
If Cindy spends an hour less playing golf, she saves $10 and loses 20 units of utility
(the marginal utility from the 5th hour), which is 2.0 unit of utility per dollar. So if she
spends a dollar less on golf, her utility from golf decreases by 2.0. If she spends an
hour more playing tennis, she spends $5 and gains 5 units of utility (the marginal
utility from the 5th hour of tennis), which is 1.0 unit of utility per dollar. So if she
spends a dollar more on tennis, she gains 1.0 units of utility. Overall, spending a
dollar less on golf and a dollar more on tennis lowers Cindy’s total utility by 1.0 unit
of utility.

Cindy’s tennis club raises its price of an hour of tennis from $5 to $10, other things
remaining the same.
20. a. List the combinations of hours spent playing golf and tennis that Cindy can now
afford and her marginal utility per dollar from golf and from tennis.
The lists of affordable Hours Marginal Hours Marginal utility
combinations are in the first playing utility per playing per dollar from
golf dollar from tennis tennis
and third columns in the table
golf
to the right. 7 0.6 0
6 1.0 1 4.0
5 2.0 2 3.6
4 3.0 3 3.0
3 4.0 4 1.0
2 6.0 5 0.5
1 8.0 6 0.2
0 3 7 0.1
The lists of the marginal utilities per dollar are in the second and fourth columns in the table.

b. How many hours does Cindy now spend playing golf and how many hours does she
spend playing tennis?
Cindy now plays golf for 4 hours and plays tennis for 3 hours. This combination allocates
(spends) all her income and sets the marginal utility per dollar from golf equal to the marginal
utility per dollar from tennis.