Unit 2, Chapter 6
Mr. Maurer
AP Economics
Name: _______________________________
Date: _____________________
Chapter 6, Problem Set #1 – Price Elasticity of Demand
Below is a table of data for cups of coffee demanded per week at various prices.
Price per cup
Quantity demanded
Price per cup
Quantity demanded
$10
0
$4
120
$9
20
$3
140
$8
40
$2
160
$7
60
$1
180
$6
80
$0
200
$5
100
1. Calculate the price elasticity of demand when price increases from $1 to $2? (These first two
problems you will probably never see on an AP exam. The math is too hard, but I want to show you
an easy way to solve them.)
% Change in quantity = 20/170
% Change in price = 1/1.5
Elasticity of demand = 20/170 x 1.5/1 = 30/170 = 3/17
2. Calculate the price elasticity of demand when price increases from $7 to $8?
% Change in quantity = 20/50
% Change in price = 1/7.5
Elasticity of demand = 20/50 x 7.5/1 = 150/50 = 3
3. More likely, you will see a question like: What is the price elasticity of demand when price
changes from $7 to $9?
ΔQ = 40/40 = 100%
ΔP = 2/8 = 25%
Ed = 100%/25% = 4
4. Or… What is the price elasticity of demand when price changes from $3 to $5?
ΔQ = 40/120 = 1/3 (33.3%)
ΔP = 2/4 = 50%
Ed = 33.3%/50% = .67
or you could solve it: 1/3 x 4/2 = 4/6 = 2/3
5. Or, more likely still, they won’t ask you to actually come up with a number for the elasticity
coefficient, they would probably ask you: When price changes from $6 to $8, is demand for this
product price elastic, unit elastic, price inelastic? Explain.
It is elastic because total revenue decreases for $480 to $320 when the price increases.
Or you could actually calculate the elasticity coefficient and find that it was greater than 1.
6. Or… When price changes from $3 to $1, is demand for this product elastic, inelastic, or unit
elastic? It is inelastic because total revenue decreases $420 to $360 when price decreases.
Or you could actually calculate the elasticity coefficient and find that it was less than 1.
7. But more likely still, they will ask… What will happen to total revenue if price increases from $5
to $7? It will decrease.
8. Or… What will happen to total revenue if price decreases from $6 to $4?
It will stay the same.
Unit 2, Chapter 6
Price per doughnut
$5
$4
$3
$2
$1
$0
Quantity demanded
0
40
80
120
160
200
OK, now you do some on your own. Here is a
table of price and quantity demanded data for
doughnuts.
8. What is the price elasticity of demand when price changes from $1 to $0? Is demand elastic,
inelastic, or unit elastic over this range?
Demand is inelastic because when price decreases, total revenue decreases from $160 to $0
If you want to calculate Ed, 40/180 x .5/1 = 20/180 = 1/9 (very inelastic)
9. What is the price elasticity of demand when price changes from $3 to $5? Is demand elastic,
inelastic, or unit elastic over this range?
ΔQ = 80/40 (200%) ΔP = 2/4 (50%)
200%/50% = 4. Demand is elastic.
Or you could use fractions and do: 80/40 x 4/2 = 320/80 = 4.
10. What will happen to total revenue if price changes from $1 to $3? Why?
It will increase from $160 to $240 because demand is inelastic over this range.
11. What will happen to total revenue if price changes from $4 to $3? Why?
It will increase from $160 to $240 because demand is elastic over this range.
12. What will happen to total revenue if price changes from $2 to $3? Why?
It will not change ($240 for both prices) because demand is unit elastic in this range.
13. What will happen to total revenue if price changes from $3 to $2? Why?
It will not change ($240 for both prices) because demand is unit elastic in this range.
14. OK, this is sort of a trick question. Let’s call it a “supergenius question.” Over what range of
prices is demand for doughnuts unit elastic?
Any range of prices for which the midpoint is $2.50
15. Over what range of prices is demand for doughnuts inelastic?
Any range of prices for which the midpoint is less than $2.50
16. Over what range of prices is demand for doughnuts elastic?
Any range of prices for which the midpoint is greater than $2.50
Unit 2, Chapter 6
17. If demand for a good is relatively inelastic, what will happen to total revenue if price is
increased? It will increase.
18. The price of peas increased by 20% last week, and the quantity purchased decreased by 10%.
What was the elasticity coefficient of demand for peas? Was the demand for peas at that price
elastic, inelastic, or unit elastic? What happened to total revenue as a result of this price change?
10%/20% = .5
Demand was inelastic. Total revenue increased.
19. If demand for a good is price elastic, what will happen to total revenue when price is decreased?
Total revenue will increase.
20. When the price of coffee was raised from $3 per pound to $5 per pound last year, the quantity
purchased per week decreased from 50 tons to 30 tons. What was the price elasticity of demand
for coffee at that time for that price change? Was demand for coffee elastic, inelastic, or unit elastic?
Did total revenue for coffee sellers increase, decrease, or stay the same?
Ed = 20/40 x 4/2 = 80/80 = 1. Demand is unit elastic. Total revenue stayed the same.
21. When the price of beans was decreased from $3 per pound to $1 per pound last year, the
quantity purchased per week increased from 80 tons to 120 tons. What was the price elasticity of
demand for beans at that time for that price change? Was demand for beans elastic, inelastic, or
unit elastic? Did total revenue for bean sellers increase, decrease, or stay the same?
Ed = 40/100 x 2/2 = 80/200 = .4. Demand is inelastic. Total revenue decreased.
22. Explain why you would guess demand for each of these items is price elastic or price inelastic.
Be sure to reference at least one (but as many as are appropriate) of the four determinants of
elasticity of demand on page 362.
You can do these last two without solutions. Ask in class tomorrow if you’re confused.
a. gasoline
b. salt
c. Maroon 5 tickets
d. underwear
e. Fruit of the Loom underwear
23. Why do governments tend to put excise taxes on products like cigarettes, liquor, tobacco, and
gasoline rather than say, macaroni and cheese or fish sticks? (p. 142)