Westerhold
Econ 330
Name:_____________________________________
HW# 4: Price Elasticity of Demand, Income Elasticity, and Cross-Price Elasticity due Monday, October
18th (15% late penalty per week day; 15% penalty for unstapled assignments).
Questions 1-4 use the following table: Assume that you are a regional manager for USAir. You have
recently undertaken a survey of the Chicago-Charlotte route. Your staff has collected the following
information on USAir as well as your competitor Delta Airlines. We have data on the prices charged by
each of these airlines, the quantity of seats filled, and income in each of these markets. Assume that all
other factors that may influence consumers decisions are held constant (such as the time of day of
flights, the size of the plane, the number of flights, the time of year, etc).
US=USAir; D=Delta Airlines
Month
USAir
Price
Delta
Price
Income
US Air
Quantity
Delta
Quantity
May
$320
$326
$28,500
5080
4620
June
$320
$326
$31,500
5560
4740
July
$338
$340
$31,500
4000
4500
August
$310
$320
$28,500
5180
4380
September
$320
$320
$28,500
4840
4860
HINTS BEFORE BEGINNING THIS EXERCISE:
(1) Remember, in calculating a given type of elasticity only the factors in those formulas are allowed to
change--all else must be held constant to calculate accurately the effect of a change in one variable on
another! Otherwise, you have multiple changes occurring at once and you cannot accurately pinpoint
the effect of one variable on another. Therefore, for each question there are only two months that are
appropriate for the calculation. They do not have to be consecutive months!
(2) You may end up using all the months over the course of the assignment, or you may not. Some
months may end up being used more than once and others may not be used at all. Just make sure you
are choosing the appropriate two months for each question.
(3) For the point elasticity exercises when you have to input a number for the price or the quantity,
please use the most recent month (i.e., calculating between April and August use August numbers for
the P, Q).
1a) Calculate the price elasticity of demand (Ed) for USAir seats? Use the point elasticity formulation.
Show your work. Write in which two months you have chosen for your analysis_________________.
Categorize your estimate.
1b) Using your Ed estimate from 1a, what is the predicted percentage change in sales of USAir tickets if
the price increases by 2.75%? Do you expect revenue to increase or decrease with the price change?
Briefly explain.
2a) Calculate the price elasticity of demand (Ed) for Delta seats? Use the arc elasticity formulation (even
though the point formula would be more appropriate here) Show your work. First, write in which two
months you have chosen in your analysis_______________________________________. Categorize
your estimate.
2b) Using your Ed estimate from 2a, what is the predicted impact on the percentage of Delta’s ticket
sales if the price is decreased by 3.5%? Do you expect revenue to increase or decrease with this price
change? Briefly explain.
3a) Use point elasticity formula. Calculate the Income elasticity (EI) Delta tickets. Are Delta seats a
normal or inferior good in this region? Show your work and explain why they are “normal” or “inferior”.
Are airline seats considered luxury goods or necessity goods based on your calculation? Write in which
two months you chose for your analysis__________________________________________.
3b. Use point elasticity formula. Calculate the income elasticity of USAir tickets. Are USAir tickets normal
or inferior? Can they be classified as a necessity or luxury? If so, which are they according to your
estimate? Write in the two months you have chosen for your analysis____________________________.
3c. Using the income elasticity estimate for Delta (3a), if the current financial crisis results in US income
levels decreasing by an additional 4.75%, what is the estimated percentage impact on sales of Delta
tickets? Estimate Delta ticket sales resulting from this income change.
4a. Use Point Elasticity Formula. Calculate Cross Price Elasticity between Delta and USAir in this region.
Show your work and explain. (Please use prices for Delta in your calculations). Write in which two
months you have chosen for your analysis________________________________. What is the
relationship between Delta tickets and US Air tickets according to your estimate?
4b. Estimate USAir ticket sales if Delta decreases its price by 4%.
5. Below is the demand equation for memory sticks (Qms) based on the price of memory sticks (Pms),
income (m), and the price of digital cameras (Pc):
Qms = 500 -2.6Pms – 1.5Pc + 0.025m
Assume the current parameter values are: Pc=$400 and m=$22,000.
A. Derive the simplified demand equation for memory sticks:
B. Estimate sales of memory sticks and elasticity of demand (Ed) for memory sticks when Pms= $30.
C. Given the current price of memory sticks as Pms=$30, Pc=$400 and income of $22,000, calculate the
income elasticity (EI) of memory sticks and categorize your number.
6. At a large institution of higher learning, the demand for football tickets at each game is 100,000 6,000p. If the capacity of the stadium at that university is 60,000 seats, what is the revenue maximizing
price for football tickets? How much revenue will be generated?
7. The demand for tickets to a rock concert is given by D(p) = 200,000 - 10,000p, where p is the price of
tickets. If the price of tickets is $17, calculate the price elasticity of demand for tickets and categorize
your number.
8. When the price of bananas is 50 cents a pound, the total demand is 100 pounds. If the price elasticity
of demand for bananas is -2, what quantity would be demanded if the price rose to 60 cents a pound?
9. Jen, Eric, and Kurt are all buyers of chain saws. Jen’s demand function is Qj = 520 - 13P, Eric’s demand
function is Qe = 40 - P, and Kurt’s demand function is Qk = 200 -5P. Together, these three constitute the
entire demand for chainsaws. What is the revenue maximizing price for chain saws?
10. The demand curve for a good is given by p = 160 - 6q, where p is the price and q is the quantity of
the good. Suppose that the number of consumers in the economy doubles; a “clone” of each consumer,
who has exactly the same demand curve as the original consumer, appears. Determine the demand
curve for the doubled economy and the resulting price elasticity of demand when P= $10.
11. At the price of $100, tourists demand 237 airplane tickets. At the same price, business travelers
demand 247. At the price $110, tourists demand 127 tickets and business travelers demand 127.
Assuming that the demand curves of business travelers and tourists are both linear over this price range,
what is the price elasticity of demand at the price $100?
End of Assignment.