Download chapter 5 - elasticities

CHAPTER 5 - ELASTICITY
ANSWERS TO EVEN-NUMBERED PROBLEMS
2.
Long-run elasticity of demand for cigarettes is larger than the short-run elasticity and this
is what we would expect. In general, our demand for goods becomes more elastic over
time and cigarettes are no exception. In the short-run, when the price of cigarettes rises,
smokers may decrease their cigarette consumption only slightly because smoking is
addictive. But over time, they could transition to smoking significantly fewer cigarettes
per day or even quit smoking altogether.
4.
For the poor, expenditure on Kellogg’s cornflakes is likely a higher share of their budget,
than for the rich. When spending on a good makes up a larger proportion of families’
budgets, the demand tends to be more elastic, so the poor would have elasticity of 4.05
and the rich 2.93.
6.
a. Apple believed the demand for downloaded shows was elastic – a lower price
would increase revenues.
b. The networks believed demand for downloaded shows was inelastic – a lower
price would decrease revenues.
8.
The statement is true with endpoint substituted for starting point. Remember that the price
elasticity of demand is the same for any movement along the demand curve regardless of the
direction in which we move. (Calculating percentages with the midpoint rule ensures this.) So
elasticity is the same whether we move from the shared starting point “A” to some second
point, or from that second point to the shared point “A.” Therefore, in Figure 5, if demand is
more elastic moving from A to E than from A to B, then demand must also be more elastic
when moving from E to A than from B to A.
Alternatively, you can apply the reasoning in the dangerous box itself: With the same ending
point and the same price change, quantity will change by more (in both units and percentage)
along the flatter curve. With %∆P the same and %∆QD greater, elasticity will be greater for the
move along the flatter curve.
Finally, you can confirm that demand is more elastic for the move along the flatter curve in
Figure 5 by actually calculating the elasticity for each price move (B to A vs. E to A).
10.
a. The demand for pork is more elastic than the demand for cigarettes because the estimated
elasticity for pork is greater than the highest estimated elasticity for cigarettes, i.e. 0.78 >
0.7. This is because there are more substitutes for pork (e.g., beef, chicken) than there are
for cigarettes.
b. If the price of milk rises by 5 percent, then the quantity of milk demanded will fall by 2.7
percent (5 × 0.54).
Chapter 5 Elasticities
12.
a. They should increase their price to $30/hour. Given that the price elasticity of demand for
their service is 0.5 (i.e. it is inelastic), their revenue will increase when they increase their
price to $30/hour because the increase in their price will be larger (in percentage terms)
than the decrease in their demand. (Also note: They will be doing less moving at a higher
price, so their other costs will go down as well, and they will enjoy more leisure.)
b. Demand is likely to become more elastic. The availability of substitutes is one of the
primary determinants of price elasticity of demand. Increased competition from
companies providing essentially the same service will make demand for “Three Guys”
services more sensitive to changes in price, hence, more elastic.
14.
a. A negative income elasticity indicates that spiral notebooks are inferior goods.
c. A price elasticity less than 1 indicates that demand for spiral notebooks is inelastic.
d. A negative cross price elasticity indicates that spiral notebooks and tablet computers are
substitutes.