Ch 5 : Problems and Applications 1. More Elastic? : A. Mystery novels or required text Mystery novels Have more close substitutes May be considered a luxury B. Beethoven or Classical Music Beethoven - more narrowly defined market – can find more close substitutes

C. Heating Oil (over 5 years or 6 months) Over 5 years – can adjust habits / find substitutes D. Root Beer or Water Root beer – may be considered luxury / can find more close substitutes

2. A. P up from $200 to $250 Business travelers 1900 – 2000 / % $250 - $200 / % PED =.2 = Inelastic Vacationers / % $250 - $200 / % PED = 1 = unit elastic

B. Vacationers PED is more elastic than business travelers because….. Luxury vs. necessity 3. at income of $10,000 P of CD up from $8 to $ / 40 =.2 20% $10-$8/$8 =.25 25% = PED =.8 Inelastic

When income is $12, /50 =.10 10% $10-$8 / $8 =.25 25% = PED.4 inelastic B.IED : Income up $10 k - $12 k when P = $ /24 = 25% $12k - $10k / $10k = 20% = IED Elastic, Normal

IED Income up $10k to $12 k when P $ /8 50% $12k - $10k / $10k 20% IED = Elastic, Normal

4. A. Emily always spends 1/3 of income on clothing If she always spends 1/3 of income …then any change in her income would result in an equal % change in her D…so IED….. = 1 B. PED? For every 1% increase in P, then would be 1% change in D to maintain her 1/3 spending of income PED = 1

If change taste and now spends ¼ of income.....how does D curve change D curve shifts left…at every P, D is now less What is IED and PED now??? Still 1

5. million fewer riders in Dec… a 4.3% decline After P increased 25 cents to $1.50 A. PED? 4.3% $1.50-$1.25 / $1.25 = 20% = PED.215 = inelastic B. What happens to revenue? If PED is inelastic and P increases = TR increases

C. Why might PED estimate be unreliable ? It has only been 1 month after P increase As time passes, people may find alternatives and therefore it becomes More Elastic

6. Before looking at Price, Tom says I’d like 10 gallons of gas. Toms PED = ? 0 Perfectly Inelastic…explain He will buy same Q (10 gal) no matter what the price Jerry says I’d like $10 worth of gas Jerry’s PED = ? 1 unit elastic…explain He will spend $10 no matter what the P is…if the P has risen, QD will fall at same ratio

7. spending on restaurant meals declines more during economic downturns than does spending on food to be eaten at home. Explain – Econ downturns = decrease in income Expect a decrease in income to result in a larger decrease in D for restaurants than a decrease in food at home = Luxury vs. necessity

Cross Price Elasticity Examples P of X increases from $8-$10. D of Y decreased from 20 to 18 units. Calculate the Cross Price Elasticity for good Y. What type of goods are X and Y? 18-20/ % $10-$8/$8 25% = XPED -.4 inelastic (complimentary goods)

P of Z increases from $10 to $11. D of Y increased from 25 units to 30 units. Calculate the Cross Price Elasticity for good Y. What type of goods are Z and Y ? Y: 30-25/25 20% X: $11-10/10 10% = XPED +2 elastic (substitutes)