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ID: A
CH5 short answer for students
Essay
1. When does a decrease in supply raise the price more: When demand is elastic or when demand is inelastic?
When OPEC decreases the supply of oil, the price of gasoline skyrockets. Hence is the demand for gasoline
elastic or inelastic?
2. What factors determine the size of the price elasticity of demand?
3. Which is larger: The price elasticity of demand for food or the price elasticity of demand for oranges? Why?
4. Studies have shown that the price elasticity of demand for necessities, such as food, are higher in developing
countries and lower in developed countries. What is the reason for this difference in elasticity?
5. What effect does a price hike have on the total revenue of the producers?
6. Anna owns the Sweet Alps Chocolate store. She charges $10 per pound for her hand made chocolate. You,
the economist, have calculated the elasticity of demand for chocolate in her town to be 2.5. If she wants to
increase her total revenue, what advice will you give her?
7.
The table above gives the demand schedule for a good. Using the midpoint method, find the price elasticity of
demand between points A and B, between B and C, between C and D, and between D and E.
8. The price elasticity of demand is always positive, as is the price elasticity of supply. Is the cross elasticity of
demand always positive? Explain your answer.
9. Consider two goods: peanut butter and jelly. If the price of jelly increases from $2 a jar to $3 per jar and the
quantity demanded of peanut butter decreases from 50 jars to 45 jars, what is the cross elasticity of demand?
Are the goods substitutes or complements?
10. The income elasticity of demand for movies in the United States is 3.41. If people's incomes decrease by 1
percent, what is the decrease in the quantity of movies demanded?
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ID: A
CH5 short answer for students
Answer Section
ESSAY
1. ANS:
A decrease in supply raises the price more when demand is inelastic. The skyrocketing price of gasoline
indicates that the demand for gasoline is inelastic.
PTS: 1
DIF: Level 2: Using definitions
OBJ: Checkpoint 5.1
TOP: Price elasticity of demand
2. ANS:
The factors that determine the size of the elasticity of demand can be classified into the availability of
substitutes for the good and the proportion of income spent on the good. The more substitutes for a good, the
more elastic its demand. Luxuries have more substitutes than necessities, and so the elasticity of demand for
luxuries exceeds that for necessities; narrowly defined goods have more substitutes than broadly defined
goods, and so the elasticity of demand for narrowly defined goods exceeds that for broadly defined goods;
and, the more time that has elapsed since a price change, the more substitutes consumers can find, and so the
elasticity of demand is larger the more time passes. Income also plays a role because the larger the proportion
of consumers' incomes spent on a good, the larger is its elasticity of demand.
PTS: 1
DIF: Level 2: Using definitions
OBJ: Checkpoint 5.1
TOP: Factors that influence the price elasticity of demand
3. ANS:
The price elasticity of demand for oranges is larger than the price elasticity of demand for food. The elasticity
of demand for oranges is larger because there are many more substitutes for oranges (apples, grapefruit,
lemons, and so forth) than there are substitutes for food.
PTS: 1
DIF: Level 2: Using definitions
OBJ: Checkpoint 5.1
TOP: Elasticity | substitutes
4. ANS:
One of the determinants of elasticity is the proportion of income spent on a good or service. The higher the
proportion of income spent on a good, the larger the price elasticity of demand for that good. People in
developing countries have low incomes and therefore spend a large part of it on food. For example, in
Tanzania 62 percent of income is spent on food. On the other hand, in United States only 12 percent of
income is spent on food. The price elasticity of demand for food therefore will be larger in developing
countries as compared to developed countries.
PTS: 1
DIF: Level 4: Applying models
TOP: Elasticity | fraction of income
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OBJ: Checkpoint 5.1
ID: A
5. ANS:
The effect of a price hike on total revenue depends on the elasticity of demand. If the demand is elastic, then
total revenue will decrease because the decrease in the quantity demanded will outweigh the effect of the
higher price. If the demand is inelastic, then total revenue will increase. In this case, the decrease in the
quantity demanded is proportionally less than the increase in price and so the higher price leads to increased
total revenue. Finally, if the demand is unit elastic, then the higher price does not change the total revenue.
The percentage decrease in the quantity demanded just equals the percentage increase in the price and so the
two effects just offset each other. The total revenue does not change.
PTS: 1
DIF: Level 2: Using definitions
OBJ: Checkpoint 5.1
TOP: Elasticity and total revenue
6. ANS:
You should tell her to lower her price. Because demand is elastic, lowering the price will increase the total
revenue.
PTS: 1
DIF: Level 2: Using definitions
OBJ: Checkpoint 5.1
TOP: Elasticity and total revenue
7. ANS:
The price elasticity of demand between points A and B is 1.80. Between points B and C, the elasticity of
demand is 1.00. Between points C and D, the elasticity of demand is 0.56. And, between points D and E, the
elasticity of demand is 0.27.
PTS: 1
DIF: Level 3: Using models
OBJ: Checkpoint 5.1
TOP: Elasticity formula
8. ANS:
No, the cross elasticity of demand is not always positive. The cross elasticity of demand is positive for goods
that are substitutes and negative for goods that are complements. Hence the sign of the cross elasticity of
demand indicates whether the goods are substitutes or complements.
PTS: 1
DIF: Level 2: Using definitions
OBJ: Checkpoint 5.3
TOP: Cross elasticity of demand
9. ANS:
The cross elasticity of demand equals -0.275. The value is negative so the goods are complements.
PTS: 1
DIF: Level 3: Using models
OBJ: Checkpoint 5.3
TOP: Cross elasticity of demand | formula
10. ANS:
The income elasticity of demand = (percentage change in quantity demanded) ÷ (percentage change in
income). Using the numbers in the problem gives 3.41 = (percentage change in quantity demanded) ÷ (1
percent). Rearranging the formula shows (percentage change in quantity demanded) = (1 percent) × 3.41 =
3.41 percent. Therefore the quantity of movies demanded decreases by 3.41 percent.
PTS: 1
DIF: Level 3: Using models
TOP: Income elasticity of demand | formula
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OBJ: Checkpoint 5.3