Elasticity
Part 1: Relationship to Total Revenue
In the boxes below, if the quantity changes by a larger percentage than the price changed, in the box
above the Q, draw an arrow that is larger than the price arrow (and in the opposite direction). If the
quantity changes by a smaller percentage than the price changed, draw an arrow that is smaller than the
price arrow (and in the opposite direction). If the quantity changes by the same percentage that the price
changed, draw an arrow that is the same size as the price arrow (and in the opposite direction). Then
determine whether total revenue will increase, decrease, or stay the same. If total revenue will increase,
draw an upward arrow in the box above the TR. If total revenue will decrease, draw a downward arrow.
If total revenue will remain the same, write “no change” in the box.
I. a. Suppose the price of a product increases and the quantity demanded decreases by a larger
percentage than the price increased.
*
P
*
=
Q
=
TR
b. Suppose the price of a product increases and the quantity demanded decreases by a smaller
percentage than the price increased.
*
P
*
=
Q
=
TR
c. Suppose the price of a product increases and the quantity demanded decreases by the same
percentage than the price increased.
*
P
*
=
Q
=
TR
d. Suppose the price of a product decreases and the quantity demanded increases by a larger
percentage than the price decreased.
*
P
*
=
Q
=
TR
e. Suppose the price of a product decreases and the quantity demanded increases by a smaller
percentage than the price decreased.
*
P
*
=
Q
=
TR
f. Suppose the price of a product decreases and the quantity demanded increases by the same
percentage than the price decreased.
*
P
*
=
Q
=
TR
II. Suppose that the demand for Dave’s Desks is elastic.
a. If Dave increases the price of his desks, the percentage decrease in the quantity demanded will
be _________________ (larger than, smaller than, the same as) the percentage increase in the
price. The total revenue will ________________________ (increase, decrease, remain the
same).
b. If Dave decreases the price of his desks, the percentage increase in quantity demanded will be
_________________ (larger than, smaller than, the same as) the percentage decrease in the
price. The total revenue will ________________________ (increase, decrease, remain the
same).
III. Suppose that the demand for Tammy’s Tax Service is inelastic.
a. If Tammy increases her price of completing a 1040 form, the percentage decrease in the quantity
demanded will be _________________ (larger than, smaller than, the same as) the percentage
increase in the price. The total revenue will ________________________ (increase, decrease,
remain the same).
b. If Tammy decreases her price of completing a 1040 form, the percentage increase in the quantity
demanded will be _________________ (larger than, smaller than, the same as) the percentage
decrease in the price. The total revenue will ________________________ (increase, decrease,
remain the same).
IV. Suppose that the demand for Stanley’s Steaks is unit elastic.
a. If Stanley increases the price of his steaks, the percentage decrease in the quantity demanded
will be _________________ (larger than, smaller than, the same as) the percentage increase in
the price. The total revenue will ________________________ (increase, decrease, remain the
same).
b. If Stanley decreases the price of his steaks, the percentage increase in the quantity demanded
will be _________________ (larger than, smaller than, the same as) the percentage decrease in
the price. The total revenue will ________________________ (increase, decrease, remain the
same).
Elasticity
Part 2 – Calculation, Categorization, & Interpretation
1. Suppose the price of a particular good increases from $95 to $105. As a consequence, you
decrease your purchases of the good from 21 units to 19 units.
a. What is the price elasticity of demand for this good?
b. Is demand for this good elastic, inelastic, or unit elastic? ___________________________
c. Interpretation of the elasticity: A one percent increase in the price of the good would be
expected to result in a __________ percent decrease in the quantity demanded of the good.
d. What is the total expenditure on this good before the price change and after the price change?
e. Did total expenditure on the good increase, decrease, or remain the same? _______________
2. Suppose the price of a particular good increases from $95 to $105. As a result, your
purchases of the good decrease from 41 units to 39 units.
a. What is the price elasticity of demand for this good?
b. Is demand for this good elastic, inelastic, or unit elastic? ___________________________
c. A one percent increase in the price of the good would be expected to result in a __________
percent decrease in the quantity demanded of the good.
3. Suppose the price of a particular good decreases from $105 to $95. You then increase your
purchases of the good from 14 to 18.
a. What is the price elasticity of demand for this good?
b. Is demand for this good elastic, inelastic, or unit elastic? ___________________________
c. A one percent increase in the price of the good would be expected to result in a __________
percent decrease in the quantity demanded of the good. (Or equivalently, a one percent
decrease in the price of the good would be expected to result in a __________ percent
increase in the quantity demanded of the good.)
4. Suppose the price of a particular good increases from $95 to $105. A firm then increases its
product of the good from 45 to 55.
a. What is the price elasticity of supply for this good?
b. Is the supply of this good elastic, inelastic, or unit elastic? ___________________________
c. A one percent increase in the price of the good would be expected to result in a __________
percent increase in the quantity supplied of the good.
5. Suppose the price of good A increases from $95 to $105. As a consequence, you increase
your purchases of good B from 39 units to 41 units.
a. What is the cross elasticity of demand?
b. Are these goods substitutes or complements? ___________________________
c. A one percent increase in the price of good A would be expected to result in a __________
percent ______________ (increase, decrease) in the quantity demanded of good B.
6. Suppose the price of good A increases from $95 to $105. As a consequence, you decrease
your purchases of good B from 81 units to 79 units.
a. What is the cross elasticity of demand?
b. Are these goods substitutes or complements? ___________________________
c. A one percent increase in the price of good A would be expected to result in a __________
percent ______________ (increase, decrease) in the quantity demanded of good B.
7. Suppose your income increases from $95 to $105. As a result, you increase your purchases of
a particular good from 39 units to 41 units.
a. What is the income elasticity of demand for this good?
b. Is this good a normal good or an inferior good? ___________________________
c. A one percent increase in income would be expected to result in a __________ percent
______________ (increase, decrease) in the quantity demanded of the good.
8. Suppose your income increases from $95 to $105. You then decrease your purchases of a
particular good from 18 to 14.
a. What is the income elasticity of demand for this good?
b. Is this good a normal good or an inferior good? ___________________________
c. A one percent increase in income would be expected to result in a __________ percent
______________ (increase, decrease) in the quantity demanded of the good.