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PROBLEMS
1.
The following is a demand schedule for shoes:
Price (Per Pair)
Quantity Demanded
LO: 1
AACSB: Analytic
a.
$100 $80
8
15
$60
$40
$20
25
28
30
BT: Application
Illustrate the demand curve on a graph.
See below; curve D1
b.
How much will consumers spend on shoes at the price (i) $80 and (ii)
$60? As the price drops from $80 to $60 a pair, is demand elastic or
inelastic?
(i)
$1,200, which is 15 pairs x $80 per pair.
(ii)
$1,500, which is 25 pairs x $60 per pair.
The quantity demand increases from 15 to 25, a change of 50% (using the
midpoint formula), as the price drops from $80 to $60, a change of
28.571%. This gives an elasticity of .5 / .28571 = 1.75. (Remember, price
elasticity = % change in quantity demanded / % change in price.) The
demand is slightly elastic as the price changes over this range. We also
know that demand for shoes is considered to be elastic, because as price
falls, total revenue increases.
c.
If advertisers convinced people that to be stylish they needed more shoes,
how would the demand curve be altered? Illustrate this change.
If advertisers successfully convinced people that they needed more shoes,
the demand curve would shift to the right and may also become less
elastic. This is illustrated on the graph above and is labeled D2.
d.
If incomes decline, how will shoe demand be affected? Illustrate on this
same graph.
If incomes decline, the demand curve would shift to the left, assuming
that shoes are necessities. This is illustrated on the graph above and is
labeled D3.
Demand for Shoes (Ch. 4, Problem 1)
120
PRICE (Per Pair)
100
80
60
D2
40
D1
20
D3
0
1
2
3
4
5
QUANTITY (Pairs of Shoes)
2.
According to the elasticity computation on p. 96, by how much would popcorn
sales fall if the price increased by 10 percent? By 30 percent?
LO: 1
AACSB: Analytic
BT: Application
If the price elasticity of demand for popcorn is 0.50, and price increased by 10%,
then:
percentage change in quantity demanded X
 0.50 , thus X = 5 percent.

10
percentage change in price
If the price elasticity of demand for popcorn is 0.50, and price increased
by 30%, then:
percentage change in quantity demanded X
 0.50 , thus X = 15% percent

30
percentage change in price
3.
According to Table 4.1, by how much will unit sales of (a) coffee, (b) shoes, and
(c) airline travel decline when price goes up by 20 percent? What will happen to
total revenue in each case?
LO: 3
AACSB: Analytic
BT: Application
a.
The quantity demanded of coffee will decline by 6% and total revenue
will increase.
b.
The quantity demanded of shoes will decline by 18% and total revenue
stay about the same.
c.
The quantity demanded of airline travel will decline by 48% and total
revenue will decrease.
4.
According to the Headline on p. 64, what is the price elasticity of demand for
alcohol among college students?
LO: 5
AACSB: Analytic
BT: Application
The article states that the quantity demanded will decrease by 33% when price
goes up $1.00. You calculate the percentage change in price by taking the
change in price, $1.00, and dividing it by $2.67 (the average of the starting and
ending prices). This is equal to 37%. The price elasticity is 33% divided by 37%,
which results in an elasticity of 0.89. This is slightly inelastic.
5.
According to Table 4.1, by how much would coffee sales decline if the price of
coffee doubled? If Starbucks doubled its coffee prices, what would happen to
Starbucks' sales? How do you explain these responses?
LO: 2
AACSB: Analytic
BT: Application
According to table 4.1, coffee has a price elasticity of demand of 0.30. As
a result, if the price of coffee doubled (a 100 percent increase in price) the
quantity demanded would change by 0.30 times that amount or a
decline of 30 percent.
X
percentage change in quantity demanded
 0.30 , thus X = 30 percent.

percentage change in price
100
If Starbucks doubled its price, while all other firms kept their price the
same, their sales would fall by much more than 30 percent. The
response would be much larger in this case because there are many
substitutes to Starbucks’ coffee. If only Starbucks changed its price,
people would switch to substitutes and sales for Starbucks would fall
substantially. If all firms doubled their prices, the relative prices would
remain unchanged and there would be little incentive to switch product
names. Nonetheless, consumers would respond by consuming less coffee
in total.
6.
In 1998, President Clinton proposed an additional $1.10 per pack tax that would
have increased cigarette prices roughly 60 percent. According to the Headline on
p. 97, by how much would teen smoking have dropped in response to such a tax?
LO: 3
AACSB: Analytic
BT: Application
Elasticity of demand = 0.7 = % Qd / 0.60
= 0.60 x 0.7 = 0.42
The quantity demanded of cigarettes by teens would decrease by 42
percent given a $1.10 per pack tax on cigarettes.
7.
Suppose the following table reflects the total satisfaction (utility) derived from
eating pizza:
Quantity (slice) 1
2
3
4
5
6
7
Total Utility
47 92 122 135 137 120 70
LO: 4
a.
b.
What is the marginal utility of each pizza?
What causes the marginal utility to diminish?
AACSB: Analytic
BT: Application
a.
first slice , MU = 47
second slice, MU = 45 (92-47)
third slice, MU = 30 (122-92)
fourth slice, MU = 13 (135-122)
fifth slice, MU = 2 (137-135)
sixth slice, MU = -17 (120-137)
seventh slice, MU = -50 (70-120)
b.
Economists have found that after some point, the more you have of
something, the less valuable each additional unit. After the first slice of
pizza, the initial good feeling decreases. While the second slice is still
very enjoyable, it is not as good as the first slice. The same pattern
continues until we get to the sixth slice, which actually makes you feel
stuffed and uncomfortable, resulting in a decrease of additional
satisfaction. The situation worsens with the seventh slice.
7.
What was the price elasticity of demand for iPhones in September 2007
(Headline, p. 75)?
LO: 4
AACSB: Analytic
BT: Application
The price decrease was 33% and the percentage increase in quantity demanded
was 200%, therefore the price elasticity was 2.00/0.33 = 6.
8.
Economists estimate price elasticities more precisely by using average price and
quantity to compute percentage changes. Thus,
Q1  Q2
Q1  Q2
2
E 
P1  P2
P1  P2
2
Using this formula,
a.
Compute E for a popcorn price increase from 20 cents to 40 cents per
ounce (Figure 4.5)
b.
Compute E for New York City cigarettes (see Headline, p. 100 and text)
LO: 4
AACSB: Analytic
BT: Application
a.
16  4
12
16  4
1.2
2
E
 10 
 1.8 and |E| = 1.8
0.20  0.40
 0.20  0.666
0.20  0.40
0.30
2
b.
1563  2922
1563  2933
 .61
2
E

 2.9 and |E| = 2.9
7.50  6.08
.21
7.50  6.08
2