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PROBLEMS
1.
The following is a demand schedule for shoes:
Price (Per Pair)
$100
$80
$60
$40
$20
10
14
18
22
26
Quantity Demanded
a.
Illustrate the demand curve on a graph.
Demand for Shoes
120
Price - per shoe
100
80
60
40
20
D2
D1
0
0
5
10
15
20
25
30
35
Quantityof Shoes (pairs per year)
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)
(ii)
$1,120, which is 14 pairs x $80 per pair.
$1,080, which is 18 pairs x $60 per pair.
The quantity demand increases from 14 to 18, a change of 25% (using the
midpoint formula), as the price drops from $80 to $60, a change of
28.5%. This gives an elasticity of .25 / .285 = .88. (Remember, price
elasticity = % change in quantity demanded / % change in price.) The
demand is slightly inelastic as the price changes over this range. We
also know that demand for shoes is considered to be inelastic, because as
price falls, total revenue decreases.
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.
2.
According to the elasticity computation on p. 96, by how much would popcorn
sales fall if the price increased by 20 percent? By 50 percent?
If the price elasticity of demand for popcorn is 0.50, and price increased by 20%,
then :
percentage change in quantity demanded X
 0.50 , thus X = 10 percent.

percentage change in price
20
If the price elasticity of demand for popcorn is 0.50, and price increased
by 50%, then:
percentage change in quantity demanded X
 0.50 , thus X = 25% percent

50
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 10 percent? What
will happen to total revenue in each case?
(a) The quantity demanded of coffee will decline by 3% and total revenue will
increase.
(b) The quantity demanded of shoes will decline by 9% and total revenue stay
about the same.
(c) The quantity demanded of airline travel will decline by 24% and total revenue
will decrease.
4.
According to the Headline on p. 62 (in Chapter 3), what is the price elasticity of
demand for alcohol among college students?
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?
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.
percentage change in quantity demanded
X
 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?
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)
Total Utility
1 2 3
4
5
6
7
47 92 122 135 137 120 70
a.
b.
What is the marginal utility of each pizza?
What causes the marginal utility to diminish?
(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.
8.
Economists estimate price elasticities 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)
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