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ELASTICITY
3. U.S. winter wheat production increased dramatically in 1999 after a
bumper harvest. The supply curve shifted rightward; as a result, the price
decreased and the quantity demanded increased (a movement along the
demand curve). The accompanying table describes what happened to
prices and the quantity demanded of wheat.
a. Using the midpoint method, calculate the price elasticity of demand for
winter wheat.
b. What is the total revenue for U.S. wheat farmers in 1998 and 1999?
c. Did the bumper harvest increase or decrease the total revenue of
American wheat farmers?
How could you have predicted this from your answer to part a?
11. Use an elasticity concept to explain each of the following observations.
a. During economic boom times, the number of new personal care
businesses, such as gyms and tanning salons, is proportionately greater
than the number of other new businesses, such as grocery stores.
b. Cement is the primary building material in Mexico. After new technology
makes cement cheaper to produce, the supply curve for the Mexican
cement industry becomes relatively flatter.
c. Some goods that were once considered luxuries, like a telephone, are
now considered virtual necessities. As a result, the demand curve for
telephone services has become steeper over time.
d. Consumers in a less developed country like Guatemala spend
proportionately more of their income on equipment for producing things at
home, like sewing machines, than consumers in a more developed country
like Canada.
Chapter 6 / CONSUMER and PRODUCER SURPLUS
4. There are six potential consumers of computer games, each willing to
buy only one game. Consumer 1 is willing to pay $40 for a computer game,
consumer 2 is willing to pay $35, consumer 3 is willing to pay $30,
consumer 4 is willing pay $25, consumer 5 is willing to pay $20, and
consumer 6 is willing to pay $15.
a. Suppose the market price is $29. What is the total consumer surplus?
b. Now the market price decreases to $19. What is the total consumer
surplus now?
c. When the price fell from $29 to $19, how much did each consumer’s
individual consumer surplus change?
6. On Thursday nights, a local restaurant has a pasta special. Ari likes the
restaurant’s pasta, and his willingness to pay for each serving is shown in
the accompanying table.
a. If the price of a serving of pasta is $4, how many servings will Ari buy?)
How much consumer surplus does he receive?
b. The following week, Ari is back at the restaurant again, but now the price
of a serving of pasta is $6. By how much does his consumer surplus
decrease compared to the previous week?
c. One week later, he goes to the restaurant again. He discovers that the
restaurant is offering an “all you can eat” (in other words: until you are not
willing to eat anymore) special for $25. How much pasta will Ari eat, and how
much consumer surplus does he receive now?
d. Suppose you own the restaurant and Ari is a “typical” customer. What is
the highest price you can charge for the “all you can eat” special and still
attract customers?