Homework Quiz 5

Quiz 5
1. At a price of $5, consumers buy 150 candy bars. At a price of $15, consumers buy 50 candy bars. Find price
elasticity of demand using midpoint formula.
2. Philoburger eats 1000 Big Macs a year at a price of $2 per each. (Of course, Philo has severe high blood
pressure from all the cholesterol!) When the price of a Big Mac increases to $3, his consumption of Big Macs
falls to 800 a year.
a. Calculate his price elasticity of demand for Big Macs and determine whether his demand is elastic, unit
elastic or inelastic.
b. Because of his Big-Mac induced high blood pressure, Philo drops dead one day. The only remaining
consumers have a price elasticity of demand of 2.0. Will McDonald’s revenues from Big Macs increase or
decrease when price rise from $2 to $3?
3. Suppose the supply of land on Staten Island is perfectly inelastic. Using a supply and demand diagram show
how an increase in demand for land affects equilibrium price and quantity of land sold.
4. A 10% rise in price of causes a 20% decline in quantity demanded. Find the price elasticity of demand.
Should the store raise or lower the price to increase its sales revenues?
5. Gigantic State University raises tuition for the purpose of increasing its revenue. GSU is assuming that the
demand for education at GSU is elastic or inelastic?
6. The price of MP3 players falls and the revenues of companies that produce MP3 players increase. Is the
demand for MP3 players elastic or inelastic?
7. If consumers become more sensitive to changes in the price of gasoline, the gasoline market
a. demand curve becomes flatter.
c. supply curve becomes flatter.
b. demand curve becomes steeper.
d. supply curve becomes steeper.
8. The cross-price elasticity of demand is negative for :
a. digital cameras and memory cards
b. tickets to baseball games and tickets to football games
c. home meals and restaurant meals
d. pick-ups and SUVs
e. diapers and alcohol
9. If incomes of Randy and Brad went down by 10%, they would go to clubs 5% less. Find income elasticity of
demand. Are night clubs for Randy and Brad a luxury or a necessity?
10. (bonus) Explain briefly why the government most often imposes taxes on goods with inelastic demand
(gasoline, alcohol, cigarettes) and not on goods with elastic demand (doughnuts, Christmas sweaters)?