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Chapter 6 – 120 points
Pp. 227-231
Decrease, decrease
Increase, decrease
Decrease, stay the same
Unit elastic
|E| = |(60/-200)*(100/60)| = |-1/2| -or- |(-30/100)*(100/60)| = |-1/2|
|E| = |100/(100-300)| = |-1/2|
Yes, yes
|E| = |400/(400-700)| = |-4/3|
You almost have to use the |P/(P-a)| approach because you do not know the quantity (you
could try to guess, but why bother?)
Q = 250,000 – 500P – 1.50M – 240PR
a. Q = 250,000 – 500*200 – 1.50*60,000 – 240*100 = 36,000
b. |Ed| = |-500 *200/36,000|= 2.78 – demand is elastic which means an increase in price would
decrease total revenue (%change in quantity demanded would be bigger than the % change in
c. EM = -1.50*60,000/36,000 = - 2.5. The good is an inferior good due to the negative coefficient
on income. A 4% increase in income would decrease demand (it is shifting the demand curve)
by 10% (-10%/4% = -2.5).
d. EXR = -240*100/36,000 = -0.67. The two goods are complements due to the negative coefficient.
A 5% decrease in the price of good R will lead to a 3.33% increase in demand (again a shift) for
good X.
Pp. 232-3
a. True – this is an issue of the Law of Demand not elasticity.
b. False – the definition of Price elasticity of Demand is percentage change quantity demanded
over percentage change price. For the absolute value of this ratio to be less than one, the
numerator must be smaller in absolute terms than the denominator.
c. False – see (a.) – but they do not affect them much.
d. False – the opposite is true.
e. True – Expenditures, here, refer to total revenue. An increase in quantity requires a decrease in
price. The price effect will overwhelm the quantity effect when calculating the impact on total
f. True – Change in total revenue divided by change in quantity will be negative for the same
reason as (e.).
If |%ΔQd/%ΔP| = |-.20| and %ΔP = +20 then imported whiskey sales will fall by 4%
a. At a price of $15 per haircut, the demand for haircuts is elastic |(15/(15-20)| =|-3.0|). An
increase in price will decrease total revenue. Terry should not raise prices.
b. Now, at a price of $15 demand is inelastic (|15/(15-40)| = |- 3/5|). A price increase will increase
total revenue.