CHAPTER 5
ELASTICITY
EVEN NUMBER ANSWERS, SOLUTIONS, AND EXERCISES
ANSWERS TO ONLINE REVIEW QUESTIONS
2. a.
b. By taking an average of new and old (i.e., the midpoint between the new and old values), we get
the same value for elasticity whether we’re moving up or down along any given segment of a
demand curve.
c. A price elasticity of 0.4 means that, for every 1% change in price, quantity demanded declines by
0.4%. Equivalently, a 10% price increase should lead to a 4% decline in quantity demanded,
assuming the elasticity remains at around 0.4 over the entire range being examined.
4. Examples of goods with almost perfectly inelastic demand include such things as insulin to a
diabetic (an absolute necessity for a patient with that condition, and a drug for which virtually no
substitutes are available). Very broadly defined necessities, like housing or food, would also have
near-perfectly inelastic demand over some range of prices.
Very narrowly defined products, or goods for which close or exact substitutes exist, are candidates
for perfectly elastic demand curves. A particular farmer’s wheat, for example, is usually
indistinguishable from wheat grown on another farm. Many raw materials share this characteristic.
For example, the demand for a particular producer’s crude oil (of a particular grade) is likely to be
very elastic—oil is oil, and one producer’s is as good as another’s.
6. Short-run elasticities are generally smaller (in absolute value) than long-run elasticities because,
over a longer time horizon, consumers have greater ability to adjust their behavior and find
substitutes for a good.
8. a. Canned spaghetti: inferior good—as incomes rise people could afford ingredients for
homemade spaghetti.
b. Vacuum cleaners: normal good. (Most individual households would have an income elasticity of
zero—they would buy just one vacuum cleaner once their income reaches a certain level, and then
buy no more as income rises. However, classifying goods as normal or inferior depends on market
income elasticities. As average income in a market rises, more households will decide to own
vacuum cleaners or to replace old ones, so we expect a positive income elasticity.)
c. Used books: inferior good—as incomes rise people buy new books instead.
d. Computer software: normal good—as incomes rise people tend to buy more computer software
programs.
10. a. Negative; high. These two goods are clearly complements. A rise in the price of one should
lead to a significant decline in quantity demanded of the other.
b. Positive; low to moderate. In fact, antibiotics are used to treat infections, while decongestants are
used to treat symptoms of viral infections (colds, flu). But much of the public erroneously believes
that antibiotics—which require a doctor’s prescription in the United States—can help cure the flu.
Therefore, a rise in the price of antibiotics might make people less likely to visit the doctor when they
have the flu, and more likely to buy over-the-counter decongestants.
c. Negative; low to moderate. The relationship between gasoline and auto repairs is derived from the
relation between gas and cars, and cars and auto repairs. An increase in gas prices could be expected
to reduce demand for cars (or at least certain kinds of cars), which would, in turn, reduce demand for
auto repairs.
PROBLEM SET
2. For the demand curve to be unit elastic, there would have to be no change in revenue as a result of
a price change. In the initial situation, 110 units are sold at a price of $9 per unit, so revenue is $9 x
110 = $990. If demand is unit elastic, and the price rises to $11 per unit, a constant revenue implies
that the new quantity demanded would have to be $990/$11 = 90 units.
Now we know two points on the demand curves. To find other points, try to come up with price
quantity combinations such that p x q = $990. Once you’ve found one or two more, plot them and
connect them to find that the demand curve must be curved.
4. a. This is a straight line demand curve since for every $0.50 increase in price, the quantity of
bottles demanded falls by the same amount (100 units).
b. Demand is inelastic for this price change.
c. Demand is elastic for this price change.
d. As we slide down the demand curve, the price elasticity of demand changes from 3.66 to 0.55, that
is, demand becomes less elastic.
e. P
Qd
Total Revenue
1.00
500
500
1.50
400
600
2.00
300
600
2.50
200
500
3.00
100
300
f. From the table in part e, we can confirm that an increase in price in the inelastic range (from $1 to
$1.50) led to an increase in total revenue from $500 to $600, while an increase in price in the elastic
range (from $2.50 to $3.00) led to a decrease in total revenue (from $500 to $300).
6. For the poor, expenditure on Kellogg’s cornflakes is likely a higher share of their budget, than for
the rich. When spending on a good makes up a larger proportion of families’ budgets, the demand
tends to be more elastic, so the poor would have elasticity of 4.05 and the rich 2.93.
8. We would use income elasticity to determine if “tooth extraction” is an inferior good. If income
elasticity of “tooth extraction” is negative, then we would conclude that it is an inferior good.
Alternatively, if it is positive, we would conclude that it is a normal good.
10. Long-run elasticity of demand for cigarettes is larger than the short-run elasticity and this is what
we would expect. In general, our demand for goods becomes more elastic over time and cigarettes
are no exception. In the short-run, when the price of cigarettes rises, smokers may decrease their
cigarette consumption only slightly because smoking is addictive. But over time, they could
transition to smoking significantly fewer cigarettes per day or even quit smoking altogether.
12. a. When the price of gasoline rises from $2 per gallon to $3 per gallon, the price elasticity of
demand for gasoline over 1 month is 0.26.
b. When the price of gasoline rises from $2 per gallon to $3 per gallon, the price elasticity of demand
for gasoline over 1 month is 0.40.
c. When the price of gasoline rises from $2 per gallon to $3 per gallon, the price elasticity of demand
for gasoline over 1 month is 0.56.