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Chapter 5 /Elasticity and Its Application ? 293

2.

You own a small town movie theatre. You currently charge $5 per ticket for everyone who comes to your

movies. Your friend who took an economics course in college tells you that there may be a way to increase your total revenue. Given the demand curves shown, answer the following questions. 10987654321102030405060708090100QuantityPriceAdult Demand

10987654321510152025303540455055606570QuantityPriceChild Demanda. b. c. d. e. f.

What is your current total revenue for both groups?

The elasticity of demand is more elastic in which market? Which market has the more inelastic demand?

What is the elasticity of demand between the prices of $5 and $2 in the adult market? Is this elastic or inelastic?

What is the elasticity of demand between $5 and $2 in the children's market? Is this elastic or inelastic?

Given the graphs and what your friend knows about economics, he recommends you increase the price of adult tickets to $8 each and lower the price of a child's ticket to $3. How much could you increase total revenue if you take his advice?

ANS:

a. Total revenue from children's tickets is $100 and from adult tickets is $250. Total revenue from all

sales would be $350.

b. The demand for children's tickets is more elastic.

c. The adult ticket market has the more inelastic demand.

d. The elasticity of demand between $5 and $2 is 0.26, which is inelastic. e. The elasticity of demand between $5 and $2 is 1.0, which is unit elastic.

f. Total revenue in the adult market would be $320. Total revenue in the children’s market would

be $120, so total revenue for both groups would be $440. $440 - $350 is an increase in total revenue of $90.

DIF: 2 REF: 5-1 NAT: Analytic TOP: Price elasticity of demand | Total revenue LOC: Elasticity

MSC: Applicative

294 ? Chapter 5 /Elasticity and Its Application

3.

Use the graph shown to answer the following questions. Put the correct letter(s) in the blank.

APriceBDemandCQuantity

a.

b. c. d.

The elastic section of the graph is represented by section from _______. The inelastic section of the graph is represented by section from _______. The unit elastic section of the graph is represented by section _______.

The portion of the graph in which a decrease in price would cause total revenue to fall would be from _________.

e. The portion of the graph in which a decrease in price would cause total revenue to rise would be

from _________.

f. The portion of the graph in which a decrease in price would not cause a change in total revenue

would be _________.

g. The section of the graph in which total revenue would be at a maximum would be _______. h. The section of the graph in which elasticity is greater than 1 is _______. i. The section of the graph in which elasticity is equal to 1 is ______. j. The section of the graph in which elasticity is less than 1 is _______.

A to B B to C B B to C A to B B B A to B B B to C

LOC: Elasticity MSC: Applicative

ANS:

a. b. c. d. e. f. g. h. i. j.

DIF: 2 REF: 5-1 NAT: Analytic TOP: Price elasticity of demand | Total revenue

Chapter 5 /Elasticity and Its Application ? 295

4.

Using the midpoint method, compute the elasticity of demand between points A and B. Is demand along this

portion of the curve elastic or inelastic? Interpret your answer with regard to price and quantity demanded. Now compute the elasticity of demand between points B and C. Is demand along this portion of the curve elastic or inelastic?

Price222018161412108642CBADemand100200300400500600700800900QuantityANS:

In the section of the demand curve from A to B, the elasticity of demand would be 2.5. This would be an elastic portion of the curve. This would mean that for every 1 percent change in price, quantity demanded would change by 2.5 percent.

In the section of the demand curve from B to C, the elasticity of demand would be .75. This would be an inelastic portion of the curve. This would mean that for every 1 percent change in price, quantity demanded would change by 0.75 percent.

DIF: 2 REF: 5-1 TOP: Price elasticity of demand 5.

NAT: Analytic MSC: Applicative

LOC: Elasticity

When the Shaffers had a monthly income of $4,000, they usually ate out 8 times a month. Now that the couple makes $4,500 a month, they eat out 10 times a month. Compute the couple's income elasticity of demand using the midpoint method. Explain your answer. (Is a restaurant meal a normal or inferior good to the couple?)ANS:

The income elasticity of demand for the Shaffers is 1.89. Since the income elasticity of demand is positive, eating out would be interpreted as a normal good.

DIF: 2 REF: 5-1 TOP: Income elasticity of demand 6.

NAT: Analytic MSC: Applicative

LOC: Elasticity

Recently, in Smalltown, the price of Twinkies fell from $0.80 to $0.70. As a result, the quantity demanded of Ho-Ho's decreased from 120 to 100. What would be the appropriate elasticity to compute? Using the midpoint method, compute this elasticity. What does your answer tell you?ANS:

The appropriate elasticity to compute would be cross-price elasticity. The cross-price elasticity for this example would be 1.36. The two goods are substitutes because the cross-price elasticity is positive.

DIF: 2 REF: 5-1 TOP: Cross-price elasticity of demand NAT: Analytic MSC: Applicative

LOC: Elasticity

296 ? Chapter 5 /Elasticity and Its Application

Sec00 - Elasticity and Its Application

MULTIPLE CHOICE1.

In general, elasticity is a measure of

a. the extent to which advances in technology are adopted by producers. b. the extent to which a market is competitive.

c. how firms’ profits respond to changes in market prices.

d. how much buyers and sellers respond to changes in market conditions.

DIF: 1

LOC: Elasticity

REF: 5-0

TOP: Elasticity

MSC: Definitional

ANS: D

NAT: Analytic 2.

Elasticity is

a. a measure of how much buyers and sellers respond to changes in market conditions. b. the study of how the allocation of resources affects economic well-being. c. the maximum amount that a buyer will pay for a good.

d. the value of everything a seller must give up to produce a good.

DIF: 1

LOC: Elasticity

REF: 5-0

TOP: Elasticity

MSC: Definitional

ANS: A

NAT: Analytic 3.

When studying how some event or policy affects a market, elasticity provides information on the a. equity effects on the market by identifying the winners and losers. b. magnitude of the effect on the market.

c. speed of adjustment of the market in response to the event or policy.

d. number of market participants who are directly affected by the event or policy.

DIF: 2

LOC: Elasticity

REF: 5-0

TOP: Elasticity

MSC: Interpretive

ANS: B

NAT: Analytic 4.

How does the concept of elasticity allow us to improve upon our understanding of supply and demand? a. Elasticity allows us to analyze supply and demand with greater precision than would be the case in

the absence of the elasticity concept.

b. Elasticity provides us with a better rationale for statements such as “an increase in x will lead to a

decrease in y” than we would have in the absence of the elasticity concept.

c. Without elasticity, we would not be able to address the direction in which price is likely to move in

response to a surplus or a shortage.

d. Without elasticity, it is very difficult to assess the degree of competition within a market.

DIF: 2

LOC: Elasticity

REF: 5-0

TOP: Elasticity

MSC: Interpretive

ANS: A

NAT: Analytic 5.

When consumers face rising gasoline prices, they typically

a. reduce their quantity demanded more in the long run than in the short run. b. reduce their quantity demanded more in the short run than in the long run. c. do not reduce their quantity demanded in the short run or the long run.

d. increase their quantity demanded in the short run but reduce their quantity demanded in the long

run.

DIF: 2

LOC: Elasticity

REF: 5-0

TOP: Elasticity

MSC: Applicative

ANS: A

NAT: Analytic 6.

A 10 percent increase in gasoline prices reduces gasoline consumption by about a. 6 percent after one year and 2.5 percent after five years. b. 2.5 percent after one year and 6 percent after five years. c. 10 percent after one year and 20 percent after five years. d. 0 percent after one year and 1 percent after five years.

DIF: 2

LOC: Elasticity

REF: 5-0

TOP: Elasticity

MSC: Applicative

ANS: B

NAT: Analytic

Chapter 5 /Elasticity and Its Application ? 297

7.

Which of the following statements about the consumers’ responses to rising gasoline prices is correct?

a. About 10 percent of the long-run reduction in quantity demanded arises because people drive less

and about 90 percent arises because they switch to more fuel-efficient cars.

b. About 90 percent of the long-run reduction in quantity demanded arises because people drive less

and about 10 percent arises because they switch to more fuel-efficient cars.

c. About half of the long-run reduction in quantity demanded arises because people drive less and

about half arises because they switch to more fuel-efficient cars.

d. Because gasoline is a necessity, consumers do not decrease their quantity demanded in either the

short run or the long run.

DIF: 2

LOC: Elasticity

REF: 5-0

TOP: Elasticity

MSC: Applicative

ANS: C

NAT: Analytic

Sec01 - Elasticity and Its Application - The Elasticity of Demand

MULTIPLE CHOICE1.

The price elasticity of demand measures how much a. quantity demanded responds to a change in price. b. quantity demanded responds to a change in income. c. price responds to a change in demand. d. demand responds to a change in supply.

DIF: 1

LOC: Elasticity

ANS: A

NAT: Analytic MSC: Definitional2.

REF: 5-1

TOP: Price elasticity of demand

The price elasticity of demand measures

a. buyers’ responsiveness to a change in the price of a good.

b. the extent to which demand increases as additional buyers enter the market. c. how much more of a good consumers will demand when incomes rise. d. the movement along a supply curve when there is a change in demand.

DIF: 1

LOC: Elasticity

ANS: A

NAT: Analytic MSC: Definitional3.

REF: 5-1

TOP: Price elasticity of demand

The price elasticity of demand for a good measures the willingness of a. consumers to buy less of the good as price rises.

b. consumers to avoid monopolistic markets in favor of competitive markets. c. firms to produce more of a good as price rises. d. firms to cater to the tastes of consumers.

DIF: 1

LOC: Elasticity

ANS: A

NAT: Analytic MSC: Interpretive4.

REF: 5-1

TOP: Price elasticity of demand

Which of the following statements about the price elasticity of demand is correct?

a. The price elasticity of demand for a good measures the willingness of buyers of the good to buy

less of the good as its price increases.

b. Price elasticity of demand reflects the many economic, psychological, and social forces that shape

consumer tastes.

c. Other things equal, if good x has close substitutes and good y does not have close substitutes, then

the demand for good x will be more elastic than the demand for good y. d. All of the above are correct.

DIF: 2

LOC: Elasticity

ANS: D

NAT: Analytic MSC: Interpretive

REF: 5-1

TOP: Price elasticity of demand