Chapter 5: Elasticity
Supplemental Instruction
Iowa State University
Leader:
Course:
Instructor:
Date:
Veronica
Econ 101
Kreider
10-14-14
1. Income Elasticity =
2. Cross-price Elasticity of Demand =
3. If household income increases by 5% and demand of pretzels increases by 10% while the
price stayed consistent.
a. What is the Income elasticity?
b. What if instead household income decreased 8% and demand increase by 5%?
4. If the price of pickles increases by 30%, causing a decrease of 10% of quantity demanded
for hamburgers.
a. What is the Cross-Price elasticity?
b. What if it was instead a price increase of 40% and a quantity demanded decrease
of 10%?
5. The price elasticity of demand for Kellogg’s Corn Flakes ranges from -2.93 to -4.05. It
turns out one end of the range is observed for low-income households, while the other is
observed for high-income households. Identify which end of the range most likely
corresponds with to which type of household, and explain briefly.
6. Each of the following tells us something specific about the nature of spiral notebooks: in
each case, state the relevant conclusion about spiral notebooks.
a. The price elasticity of demand for spiral notebooks is -0.5. Is it elastic or
inelastic? What if it was -2.3? -1? - 0.85?
b. The income elasticity of demand for spiral notebooks is -1.5. Is the good inferior
or normal? What if it was -0.5? .05? 1?
c. The cross-price elasticity of demand for spiral notebooks with tablet computers is
0.8. are the goods compliments or substitutes? What if it was -1? -0.23? 5?
7. Fill in the Blank:
a. Income elasticity is ________ for normal goods, but ________ for inferior goods.
b. A positive cross-price elasticity of demand means the two goods are
_________________and a negative cross-price elasticity of demand means the
two goods are ________________.
8. Review from Tuesday: Suppose New York City raised subway and bus fares from $2.25
to $2.70, a 20% increase. The short run elasticity for mass transit in New York City is 0.35. Using this elasticity, each 1% increase in fares would cause a .35% decrease in
ridership over the short run. New Yorkers take about 2 billion trips each year. Calculate:
a. The decrease in ridership.
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b. Total revenue, before and after the price increase.
c. Does total revenue increase or decrease?
9. 0.25 to 0.70 is the short-run elasticity of demand for cigarettes. The long-run
elasticity of demand for cigarettes ranges from 1.0 to 2.5.
a. Which is more elastic, short-run or long-run elasticity?
b. Is this what we would expect?
c. What adjustments might smokers be able to make in the long run that they
cannot make in the short run that can explain the difference between shortrun and long-run elasticities?