Problem Set 2 Answer Key
1)
= [ (600-500) / 500 ] / [ (7,5 - 8,5) / 8,5 ] = - 1,7
2) a) TRUE.
In order to be able to calculate the elasticity, we need to know the initial level of quantity demanded.
b) FALSE. When the elasticity is 2,5, the percentage decrease in price necessary to increase quantity
demanded by 30 percent should be 1/2,5 times 30 percent. 30 * (1/2,5) makes “12”. So the answer is not
10,5 percent but 12 percent.
c) TRUE. When the elasticity is above 1, the percentage change (decrease) in quantity will be higher than the
percentage change (increase) in price, therefore will lead to a decrease in total revenue.
d) FALSE.
Price Elasticity of Supply = (% Change in Quantity Supplied) / (% Change in Price)
= [ (12000-8000) / 8000 ] / [ (200 - 100) / 100 ] = 0,5 (not 0,6)
e) TRUE.
Tennis rackets and tennis balls are complementary goods because you need to have both in order to play
tennis. Complementary goods have negative cross elasticity of demand, which means that an increase in the
price of one good decreases the demand for the other. If tennis rackets get more expensive, less people will
tend to buy tennis balls.
f) TRUE.
The more vertical (steeper) the curve, the more inelastic the supply.
The more horizontal the curve, the more elastic the supply.
The demand shifts in both charts are identical. Upon examining the graphs, we find that the decrease in
quantity purchased is smaller in the second graph than in the first. Strawberry Market 2 includes a less
elastic (more inelastic) supply curve and this means a leftward shift in the demand curve is expected to cause
a smaller decrease in the equilibrium quantity when the supply curve is steeper and vice versa.
3. Calculating elasticity requires dividing a percentage change by another percentage change. Therefore, it
has four components:




the amount of the change in price (unit change)
the amount of the change in quantity (unit change)
the starting point of price (initial price)
the starting point of quantity (initial quantity)
When the slope of the curve is constant (linear
demand curve), we know that the amounts of the
changes in both price and quantity are identical
while calculating elasticity, because they always
change by 5 along the curve. Whereas, the initial
price and the initial quantity are never constant,
they are different on every point of the curve. At the
higher end of the curve (point A) price is relatively
high yet quantity is relatively low; at the bottom end
of the curve (point B) price is relatively low and
quantity is relatively high.
Let’s take point A. A percentage change in price would be quite small here because the initial price (45) is
quite high in relation to the unit change in price (5). A percentage change in quantity would be quite large
because the initial quantity (10) is not so high in relation to the unit change in quantity (10). So at point A
represent a highly elastic demand ( Elasticity = [ % Change in Quantity ] / [ % Change in Price ] ).
Let’s take point B. A percentage change in price would be quite large here because the initial price (10) is not
so high in relation to the unit change in price (5). A percentage change in quantity would be quite small
because the initial quantity (80) is very high in relation to the unit change in quantity (10). Point B represents
a relatively inelastic demand .
This briefly explains why the elasticity of a straight line demand curve varies from one part of the curve to
another. From a basic point of view, one could conclude that in a given market, demand tends to become
more elastic when prices are high and less elastic when prices are low, ceteris paribus. “Slope” is always
constant on a straight line demand curve, but elasticity always varies along it.