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Exam 5: Elasticity

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Question 1

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What does it mean for a good to have a perfectly inelastic demand? Draw a demand curve of this type. Explain why it has the shape that it does.

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If a product has a perfectly inelastic d...

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Question 2

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"The recent availability of satellite television has reduced the price of cable television subscriptions." Based on this statement, what may be concluded about price, cross-price, or income elasticity of demand?

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The availability of a substitute will li...

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Question 3

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What is the "midpoint formula" and why is it used?

The demand for tobacco is price inelastic. Suppose there is a drought that destroys a large portion of the tobacco crop. What will happen in the market for tobacco? Will the equilibrium price and quantity change? If so, how? What will happen to the total revenue earned by tobacco farmers?

When Frank's income rises from $29,000 to $34,000 per year, he increases his purchases of tomatoes from 20 pounds to 28 pounds per year. What is Frank's income elasticity of demand for tomatoes? (Use the midpoint formula.) According to Frank, are tomatoes an inferior or normal good?

Suppose that the quantity of staplers demanded falls from 10,000 per week to 8500. Use the midpoint formula to calculate the percentage change in quantity demanded.

The university you attend needs to increase total revenue. The president suggests that by raising tuition by 5%, total revenue will increase. However, after the tuition increase, total revenue actually fell. What can you infer about the price elasticity of demand for an education at your university? Why is this likely to be true? What did your university president assume to be true about the price elasticity of demand for an education at your university?

In the face of gasoline prices approaching $4.00 automobile dealerships are heavily marketing their compact cars and hybrid vehicles. However, an interesting development is that many of these dealerships are offering their economy cars at MSRP (manufacturers suggested retail price) without offering discounts. What do you suppose these dealerships believe about the price elasticity of demand for these economy cars?

If a good is income inelastic what does this imply would happen to consumption of this good if you were to win the lottery?

What does it mean for a good to have a perfectly elastic demand? Draw a demand curve of this type. Explain why it has the shape that it does.

Define price elasticity of demand. What does it measure?

What is the midpoint formula for calculating a percentage change?

Explain with the use of a graph how total revenue changes along a linear downward-sloping demand curve.

Refer to the information provided in Scenario 1 below to answer the following questions. SCENARIO 1: The following diagram represents the U.S. market for oil. -Refer to Scenario 1. Use the total revenue test (on all oil sold) to determine elasticity of demand with a price drop from $18 to $16.

Refer to the information provided in Scenario 1 below to answer the following questions. SCENARIO 1: The following diagram represents the U.S. market for oil. -Refer to Scenario 1. Use the midpoint formula to calculate the price elasticity of demand between $18 and $16.

In the 1970s a typical college student's consumption might be represented by the following items: a small used car, black and white television set, macaroni and cheese and generic brand beer. As many of these students graduated from college what do you expect happened to the composition and quantity of the goods mentioned? Explain.

Refer to the information provided in Scenario 5 below to answer the following questions. SCENARIO 5: In 1999 Disk Monger sold 1,100 digital video disks (DVD) at a price of $15 each. Across the street, Audio Haven sold 700 DVD players at a price of $500 each. In 2000, Audio Haven reduced the price of DVD players to $250 each and sold 3,000 players. In the same year, Disk Monger sold 1,300 DVDs at a constant price of $15 each. -Refer to Scenario 5. Calculate the price elasticity of demand for DVD players. Is demand for players elastic, inelastic, or unitary?

Explain how the availability of substitutes affects demand elasticity.

Comment on the following statement: "Elasticity is constant along a straight-line demand curve".

What does elasticity measure?