Problems for learning and discovery Elasticity Problems for learning and discovery

Question 1 For each of the following pairs of goods, which good would you expect to have more elastic demand and why? Required textbooks or mystery novels Beethoven recordings or classical music recordings in general Heating oil during the next six months or heating oil during the next five years Root beer or water

Question 2 Maria has decided always to spend one-third of her income on clothing. What is her income elasticity of clothing demand? What is her price elasticity of clothing demand? If Maria’s tastes change and she decides to spend only one-fourth of her income on clothing, how does her demand curve change? What are her income elasticity and price elasticity now?

If Maria always spends one-third of her income on clothing, then her income elasticity of demand is one, because maintaining her clothing expenditures as a constant fraction of her income means the percentage change in her quantity of clothing must equal her percentage change in income.

Maria's price elasticity of clothing demand is also one, because every percentage point increase in the price of clothing would lead her to reduce her quantity purchased by the same percentage.

Because Maria spends a smaller proportion of her income on clothing, then for any given price, her quantity demanded will be lower. Thus, her demand curve has shifted to the left. Because she will again spend a constant fraction of her income on clothing, her income and price elasticities of demand remain one.

Question 3

….. If your income is $10,000, your price elasticity of demand as the price of compact discs rises from $8 to $10 is [(40 - 32)/36]/[(10 - 8)/9] =0.22/0.22 = 1. If your income is $12,000, the elasticity is [(50 - 45)/47.5]/[(10 - 8)/9] = 0.11/0.22 = 0.5 … If the price is $12, your income elasticity of demand as your income increases from $10,000 to $12,000 is [(30 - 24)/27] / [(12,000 - 10,000)/11,000] = 0.22/0.18 =1.22. If the price is $16, your income elasticity of demand as your income increases from $10,000 to $12,000 is [(12 - 8)/10] / [(12,000 - 10,000)/11,000] =0.40/0.18 = 2.2.

Question 4 Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes currently costs $2 and the government wants to reduce smoking by 20 percent, by how much should it increase the price? If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking one year from now or five years from now? Studies also find that teenagers have a higher price elasticity than do adults. Why might this be true?

0.4 = 20%/x .20/.4 = .50  x = 50% $2 * 50% = $1 +2$ = $3 If the government wants to reduce smoking they would need to increase prices by 50%. In this case, from $2 to $3. 5 year from now, since people will have more time to adjust to the price and change their lifestyle. Income, taste, etc.

Question 5 Explain why the following might be true: A drought around the world raises the total revenue that farmers receive from the sale of grain, but a drought only in Kansas reduces the total revenue that Kansas farmers receive.

The demand for the world grain is relatively inelastic, while the demand for the Kansas grain is relatively more elastic. As a worldwide drought reduces the supply of the world grain, the world price of grain rises significantly and the quantity of grain falls insignificantly. Therefore, total revenue that world farmers receive rises. On the other hand, as a drought only in Kansas reduces the supply of Kansas grain, the price of grain rises insignificantly and the quantity falls significantly. Therefore, total revenue that Kansas farmers receive falls.