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Assessment 4.3 Problem
Use the formula to calculate the elasticity of demand in the following examples. Then tell if, in each case,
demand is elastic, inelastic or unitary elastic.
100 people in an urban area and 100 people in a urban area were asked if they were willing to
pay $10, $20, or $30 for several services. The number willing to pay each price is listed below.
Service
Urban
Suburban and Rural
$10
$20
$30
$10
$20
$30
Lawn mowing
15
8
2
82
71
42
Taxi ride
84
78
37
10
8
1
haircut
92
61
18
88
57
19
1.
How many urban residents would take a taxi ride that costs $20.00
78
2. List two outside factors that may be used to help interpret this table.
Varies: general knowledge of what determines demand- urban v suburban and rural
change in price due to substitution effect and income effect .
3. Which service has equally low demand in both regions at $30?
haircut
4.
Compare lawn mowing and taxi rides. What reason could there be for such different demands in
different regions?
Urban residents may have a low demand for lawn mowing because urban homes have either small
lawns or none at all. There may be a low demand for taxi rides in suburban and rural areas because
destinations are spread out, taxi cab rides are expensive. Jacksonville to Springfield.
5. Which service has inelastic demand in both urban and suburban areas?
haircuts
Complete each of the following statement
a.normal good
b.income effect
c.inelastic
1.
2.
3.
4.
5.
6.
7.




d.inferior good
e.unitary elastic
f.elasticity of demand
g.compliments
h.demand curve
I.law of demand
j.elastic
You would refer to a(n) demand schedule to find the quantity that a person would purchase at
each price that could be offered in a market.
for a(n) normal good, a consumer's demand will increase as his or her income increases.
The income affect occurs when an increase in price decreases a consumer's real income.
Demand for goods that are necessities is usually inelastic.
If the elasticity of demand of a good is equal to 1, it described as unitary elastic.
According to the law of demand, when prices increase, demand will decrease.
Tow goods that are bought and used together are complements.
8. List and describe three causes for shifts in the demand curve.
changes in income
change in consumer expectation
change in population
change in consumer taste and advertising.
9. Why do economists use percentage change to calculate elasticity of demand?
Percentage change provides comparable numbers for change in demand and change in price.




10. What are four factors that affect elasticity?
availability of of substitutes
relative importance
whether the good is a necessity or a luxury
price change over time – Long term v Short term
11. As a business owner, you are always concerned about how much of your good or service is
demanded. If there is an increase in your production costs, what options do you have to keep your
product in demand?
If Elastic Demand - raise price thus reducing total revenue
Price is
lowered
Or
Total revenue
rises
Price is raised
Total
revenue is
reduced
Inelastic Demand – raise price thus increase total revenue
As price is
lowered
Total
revenue falls
As Price is
raised
Total
revenue rises
12. Do you agree or disagree with the following statement? An increase in income will shift the
demand curve for a normal good to the left. Explain your answer.
Disagree – When a rise in income leads a consumer to increase consumption of a good, that good is a
normal good. If higher income leads to lower consumption of a good, it is an inferior good
Other factors that can affect demand are changes in population, tastes, and the price of other goods.
13. Will there always be a demand for inferior goods? How could demand for an inferior good
decrease?
Demand of an inferior good is determined by a consumer's income. If income drops, it is likely that
the consumer will demand generic products. If the consumer's income increases, his demand for
inferior goods will decrease because of his ability to purchase “normal goods.”
14. If the quantity demanded changes from 5 to 10 units as the price changes from $14 to $9, the
elasticity is ___1.8________ and is called ____elastic___________.
15. If the quantity demanded changes from 25 to 22 units as the price changes from $3 to $10, the
elasticity is ____.05______ and is called ____inelastic____________.
16. if the quantity demanded changes from 2 to 4 units as the price changes from $6 to $3, the
elasticity is __2______ and is called ______elastic_________.
17. Please complete the following table.
Item
Elastic or Inelastic
Reason
Gasoline in the short
run
Inelastic
Short term – no other alternative
Hamburgers
Elastic
Choose other fast food
Heart disease medicine
inelastic
Unless you are signing your death warrant
Fur coat
Elastic
If you see this as a luxury item – a necessity - Inelastic
May choose squirrel
Deodorant
Elastic
Substitute
Folgers coffee
Elastic
substitute
Cola
Elastic
Unless you are truly a coca-cola junky then it is inelastic
Pepsi
Elastic
same
Salt
Inelastic in short term
Long run – find substitute
18. Demonstrate the relationship between elasticity and total revenue.
See problem 11
19. What happens to the elasticity of demand if there are many substitutes for a good? Is it elastic or
inelastic?
Elasticity will be greater than 1. Elastic
20. Calculate the elasticity of demand when the price changes from$9 to $10 and the quantity
demanded changes from 150 to 110 respectively.
Qnew – Qbase / Qbase = (110-150) /150
Pnew – Pbase / Pbase
(10-9)/ 9
= -.27 = 2.45 > 1 Elastic
.11
with an 11% increase in price there is a 27% decrease in quantity demanded
Section 4.1 assessment
1
Define and give an example of the income affect?
The income effect occurs when a consumer responds to a price increase by spending more on that
good. If you always buy a particular brand of fruit juice and the price goes up, you may still buy it,
but you may also cut down on your consumption because your money doesn’t not go as far.
2
What are three characteristics of a demand curve?
a) Demand curve shows the relationship between the price of the good and the quantity a person will
purchase.
b) The curve assumes that other factors remain constant.
c) The curve slopes downward to the right.
Applying Economic Concepts
3
Explain whether or not you demand the following goods.
a) orange juice, b) internet service, c) a helicopter, d) frozen dinners, e) vitamins.
Your answer should reflect your own consumption interest.
4
Create an individual demand schedule like the one above for your demand for CD's. Fill in six
different prices for CDs. Assume that you have a part-time job that pays $80 a week. How many CDs
would you buy at each of the six different price? Compare your demand schedule with those in your group/
peers. Plot your individual demand schedule labeling the axis.
Individual demand Schedule
Price of a CD
Quantity demanded
per week
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
5
Some economists believe that there are goods that do not obey the law of demand, because the
demand for them would actually drop if their price fell. One example is top-of the line luxury car. Why do
you think prospective buyers might feel differently about these goods?
Consumers may consider these items as luxuries and might suspect that such an item was inferior if
it were not expensive. Another reason might be that the status value of being able to afford a very
expensive item would increase if it were more expensive. On the other hand, if the item would decline
in value if it were cheaper
6
Use the market demand schedule below to draw a demand curve for miniature golf.
Label your graph
Cost to play a
game
Games played per
month
$1.50
350
$2.00
250
$3.00
140
$4.00
80
price
Quantity
Chapter 4.2 Assessment
1
What is an example of something you consider an inferior good?
Examples will vary but should include goods you buy less of, or not at all, if their incomes increased,
such as macaroni and cheese or generic brands of breakfast cereal.
2
What is one good that can be considered to be a compliment good?
Examples may include in-line skates and safety gear, or peanut butter and jelly.
3
What are two goods that are considered substitute goods?
Examples may include in-line skates and roller skates, or a car and a motorcycle.
4
How does the “ceteris paribus” assumption affect a demand curve?
Ceteris paribus allows the demand curve to exits as a constant without variables other than price
affecting it.
6
What is the difference between a shift along a demand curve and a shift of a demand curve?
A shift along a demand curve always reflects only a change in price, while a shift of a demand curve
indicates that an outside factor has changed the entire relationship between price and quantities
demanded.
7
Decide whether each of these events would cause a change in demand or only a change in the
quantity demanded of the good in a parenthesis, and explain why?
a) A computer manufacturer lowers its prices (computers).
Change in quantity demanded
b) A volleyball maker convinces high schools to fund varsity volleyball teams (volleyballs).
Change in demand
c) A freeze ruins the orange crop, and orange juice prices rise (apple juice).
Change in quantity demanded
8
Use the following demand schedule to draw a demand curve. Then find and label a combination
of output and price that could result from: The curve should reflect the data.
a) an increase in the quantity demanded
Any point along the normal demand curve will show an increase in quantity demanded
b) an increase in demand
Any point to the right of the curve will show an increase in demand.
c) a decrease in demand
Any point to the left of the curve will show a decrease in demand
Price
Quantity
demanded
$1.00
250
$2.00
200
$3.00
150
$4.00
100
$5.00
50