Chapter 5, Question set 1
1. For each of the following pairs of goods, which good would you expect to have more
elastic demand and why?
a. Required textbooks or mystery novels?
b. Beethoven recordings or classical music records in general
c. Subway rides during the next 6 months or subway rides during the next 5 years
d. Root beer or water?
2. Suppose that business travelers and vacationers have the following demand for airline
tickets from New York to Boston:
Price
Quantity Demanded (Business)
Quantity Demanded (Vacation)
$150
2,100 Tickets
1,000 Tickets
$200
2,000
800
$250
1,900
600
$300
1,800
400
a. As the price of tickets rises from $200 to $250, what is the price elasticity of
demand for (i) business travelers and (ii) vacationers? Use the midpoint method
in your calculations.
b. Why might vacationers have a different elasticity from business travelers?
3. Suppose the price elasticity of demand for heating oil is .2 in the short run and .7 in the
long run.
a. If the price of heating oil rises from $1.80 to $2.20 per gallon, what happens to
the quantity of heating oil demanded in the short run? In the long run?
b. Why might this elasticity depend on the time horizon?
4. A price change causes the quantity demanded of a good to decrease by 30%, while the
total revenue of that good increases by 15%. Is the demand curve elastic or inelastic?
Explain.
5. The equilibrium price of coffee mugs rose sharply last month, but the equilibrium
quantity was the same as ever. Three people tried to explain the situation. Which
explanations could be right? Explain your logic.
BILLY: Demand increased, but supply was totally inelastic.
MARIAN: Supply increased, but so did demand.
VALERIE: Supply decreased, but demand was totally inelastic.
Answer Key
1. More Elastic:
a. Mystery Novel, they are a luxury, not a necessity
b. Beethoven, it is a more narrowly defined market
c. Over the next 5 year, markets get more elastic over time.
d. Root Beer, it is a luxury, not a need, and there are more substitutes.
2.
a.
i. Final Answer = .23
ii. Final Answer = 1.3
b. Vacationers are using the flights as a luxury; the business people are using it as a
necessity.
3.
a. The quantity demanded drops in the short term, and drops even more in the long
term.
b. Everything is more elastic in the long term, because people can make bigger
changes to their lives over the long term.
4. In elastic, price and total revenue go in the same direction when the curve is inelastic.
5. Billy is right, the Supply Curve is vertical, meaning it has an elasticity of 0, so a change
in demand only changes the price, not the quantity.