MICROECONOMICS’ PROBLEM SET 3

Chapter 3: Elasticities and its Application

1. Calculate the price elasticity of demand of T-shirt, giving the information as follow:
With the price 129.600VND, the seller can sell 197.500 T-shirt. When the price reduces and
equals 3.200, the amount of T-shirt sold increases 5000.
2. You have been asked to analyze the market for steel. From public sources, you are able to
find that last year’s price for steel was $20 per ton. At this price, 100 million tons were
sold on the world market. From trade association data you are able to obtain estimates for
the own price elasticities of demand and supply on the world markets as −0.25 for demand
and 0.5 for supply. Assume that steel has linear demand and supply curves throughout.
a. Solve for the equations of demand and supply in this market and sketch the demand and
supply curves.
b. Suppose that you discover that the current price of steel is $15 per ton and the current level
of worldwide sales of steel is 150 million tons. The most recent elasticity estimates from the
trade association this year are −0.125 for demand and 0.25 for supply. Describe the change in
the supply and demand curves over the past year using your diagram from part (a). What sort
of event(s) might explain the change?
3. The supply and demand function of a market are given as follows:
Qd = - 2P + 100; Qs = 2P – 20
a. Calculate the equilibrium price and quantity, consumer surplus, producer surplus and total
surplus.
b. Calculate the price elasticity of demand and supply at equilibrium.
c. Suppose a price ceiling is established by the government at a price of 25, calculate the
shortage and the deadweight loss.
d. If the government imposes a tax = 5 per product. Calculate the new equilibrium price and
quantity; the tax incurred by buyer and seller, the tax revenue of government and the
deadweight loss.
4. The supply and demand function of a market are given as follows:
𝑄d = − 2𝑃 + 100; 𝑄s = 2𝑃 – 20
a. Calculate the equilibrium price and quantity, consumer surplus, producer surplus and
total surplus.

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 b. Calculate the price elasticity of demand and supply at equilibrium.
c. Suppose a price ceiling is established by the government at a price of 25, calculate the
shortage and the deadweight loss.
d. If the government imposes a tax = 5 per product. Calculate the new equilibrium price
and quantity; the tax incurred by buyer and seller, the tax revenue of government and the
deadweight loss.
5. A vegetable fiber is traded in a competitive world market, and the world price is $9 per
pound. Unlimited quantities are available for import into the United States at this price.
The U.S. domestic supply and demand for various price levels are shown as follows:
Price US Supply (millions) US Demand (millions)
3 2 34
6 4 28
9 6 22
12 8 16
15 10 10
18 12 4
a. What is the equation for demand? What is the equation for supply?
b. At a price of $9, what is the price elasticity of demand? What is it at a price of $12?
c. What is the price elasticity of supply at $9? At $12?
d. In a free market, what will be the U.S. price and level of fiber imports?
6. In 2010, Americans smoked 315 billion cigarettes, or 15.75 billion packs of cigarettes.
The average retail price (including taxes) was about $5.00 per pack. Statistical studies
have shown that the price elasticity of demand is −0.4, and the price elasticity of supply is
0.5.
a. Using this information, derive linear demand and supply curves for the cigarette market.
b. In 1998, Americans smoked 23.5 billion packs of cigarettes, and the retail price was about
$2.00 per pack. The decline in cigarette consumption from 1998 to 2010 was due in part to
greater public awareness of the health hazards from smoking, but was also due in part to the
increase in price. Suppose that the entire decline was due to the increase in price. What could
you deduce from that about the price elasticity of demand?
7. The rent control agency of New York City has found that aggregate demand is
Q D=160−8 P. Quantity is measured in tens of thousands of apartments. Price, the average
monthly rental rate, is measured in hundreds of dollars. The agency also noted that the

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increase in Q at lower P results from more three-person families coming into the city from
Long Island and demanding apartments. The city’s board of realtors acknowledges that this is
a good demand estimate and has shown that supply is QS =70+7 P.
a. If both the agency and the board are right about demand and supply, what is the free-
market price? What is the change in city population if the agency sets a maximum average
monthly rent of $300 and all those who cannot find an apartment leave the city?
b. Suppose the agency bows to the wishes of the board and sets a rental of $900 per month on
all apartments to allow landlords a “fair” rate of return. If 50 percent of any long-run
increases in apartment offerings comes from new construction, how many apartments are
constructed?

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 Multiple Choices
1. In general terms, what does elasticity measure
A) how price is determined between buyers and sellers in a market
B) how much government intervention is prevalent in a market
C) how competitive a market is
D) how much buyers and sellers respond to changes in market conditions
2. When studying how some event or policy affects a market, on what does elasticity provide
information
A) the direction and the efficiency of the effect on the market
B) the direction and the magnitude of the effect on the market
C) the magnitude and the efficiency of the effect on the market
D) the efficiency and the equity of the effect on the market
3. What is the concept of elasticity used for
A) to analyze how much the economy can produce
B) to determine the level of government intervention in the economy
C) to analyze supply and demand with changes in market condition
D) to calculate consumer credit purchases
4. What does the price elasticity of demand measure
A) how responsive buyers are to a change in income
B) how responsive sellers are to a change in price
C) how responsive buyers are to a change in price
D) how responsive sellers are to a change in buyers' incomes
5. What does the elasticity of demand for luxuries tend to be
A) greater than 1
B) less than 1
C) equal to 1
D) equal to 0
6. When would demand for a good tend to be more elastic
A) when there are fewer options in the market
B) when the time period considered is shorter
C) when the good is considered more of a necessity
D) when the good has more substitutes
7. Why would vanilla cupcakes tend to have very elastic demand
A) because it has many complements
B) because the market is broadly defined
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C) because there are few substitutes
D) because other flavours of cupcakes are almost perfect substitutes
8. Holding all other forces constant,when the price of gasoline rises,why would the number
of litres of gasoline demanded fall substantially over a 10-year period
A) Buyers tend to be much less sensitive to a change in price when given more time to react.
B) Buyers will have substantially more income over a ten-year period.
C) Buyers tend to be much more sensitive to a change in price when given more time to react.
D) Gasoline has no substitutes.
9. If a 5 percent increase in price causes a 15 percent decrease in quantity demanded, what
might be said about this product
A) It has no close substitute.
B) It might be a luxury.
C) It might be part of a broadly defined market.
D) It might be in a short time horizon.
10. How do economists compute the price elasticity of demand
A) the percentage change in the price divided by the percentage change in quantity demanded
B) the percentage change in income divided by the percentage change in the quantity
demanded
C) the percentage change in the quantity demanded divided by the percentage change in price
D) the percentage change in the quantity demanded divided by the percentage change in
income
11. Suppose there is a 3 percent increase in the price of good X and a resulting 6 percent
decrease in the quantity of X demanded. What is the price elasticity of demand for X
A) 0
B) 2
C) 6
D) infinite
12. If the price elasticity of demand for a good is 3.0,what would result from a 10 percent
increase in price
A) a 3 percent decrease in the quantity demanded
B) a 10 percent decrease in the quantity demanded
C) a 30 percent decrease in the quantity demanded
D) a 300 percent decrease in the quantity demanded
13. Babar's Bakery made $200 last month selling 100 loaves of bread. This month it made
$350 selling 70 loaves of bread. What is the price elasticity of demand for Babar's bread
A) 0.266
B) 0.583

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C) 0.776
D) 1.110
14. What would be the absolute value of the elasticity if demand is elastic
A) less than 1
B) equal to 1
C) equal to 0
D) greater than 1
15. Refer to Figure 5-2.As price falls from PA to PB, which demand curve is most elastic
A) D₁
B) D₂
C) D₃
D) D₄
16. Refer to Figure 5-2.As price falls from PA to PB, which demand curve is least elastic
A) D₁
B) D₂
C) D₃
D) D₄

17. Elasticity of demand is closely related to the slope of the demand curve.What is the slope
when demand elasticity is greater
A) steeper
B) further to the right
C) flatter
D) closer to the vertical axis
18. If a change in the price of a product results in no change in total revenue,what must be the
case
A) The demand for the product must be elastic.
B) The demand for the product must be inelastic.
C) The demand for the product must be unit elastic.

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D) The demand for the product must be revenue inelastic.
19. Suppose a producer is able to separate customers into two groups, one having a price
inelastic demand and the other having a price elastic demand. If the producer's objective is
to increase total revenue, what should she do
A) Increase the price charged to customers with the price elastic demand and decrease the
price charged to customers with the price inelastic demand.
B) Decrease the price charged to customers with the price elastic demand and increase the
price charged to customers with the price inelastic demand.
C) Decrease the price to both groups of customers.
D) Increase the price for both groups of customers.
20. Suppose that when the price of corn is $2 per bushel, farmers can sell 12 million bushels.
When the price of corn is $3 per bushel, farmers can sell 10 million bushels. Which of the
following statements describes what will happen and why
A) The demand for corn is income inelastic, and so an increase in the price of corn will
increase the income of corn farmers.
B) The demand for corn is income elastic, and so an increase in the price of corn will increase
the income of corn farmers.
C) The demand for corn is price inelastic, and so an increase in the price of corn will increase
the income of corn farmers.
D) The demand for corn is price elastic, and so an increase in the price of corn will increase
the income of corn farmers.
21. As elasticity of demand increases, what happens to the demand curve
A) It gets flatter and the price elasticity of demand will eventually be less than 1.
B) It gets steeper and the price elasticity of demand will eventually be greater than 1.
C) It gets flatter and the price elasticity of demand will eventually be greater than 1.
D) It gets steeper and the price elasticity of demand will eventually be less than 1.
22. Refer to Figure 5-4.If price falls in the A range of the demand curve, what can we expect
total revenue to do as one moves down the curve
A) increase
B) decrease
C) stay the same
D) decrease, then increase

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23. Refer to Figure 5-6.If price decreases from $15 to $10,what will happen to total revenue,
and what does this tell us about demand
A) It will decrease by $5, so demand must be inelastic.
B) It will decrease by $20, so demand must be inelastic.
C) It will increase by $10, so demand must be elastic.
D) It will increase by $20, so demand must be elastic.

24. If a 8 percent increase in income results in a 10 percent increase in the quantity demanded
of lattes, what is the income elasticity of demand for lattes, and what type of good is lattes
A) negative, and therefore lattes is an normal good
B) negative, and therefore lattes is an inferior good
C) positive, and therefore lattes is an inferior good
D) positive, and therefore lattes is a normal good
25. Suppose that good X has a negative income elasticity of demand. What does this imply
about the good
A) It is a normal good.
B) It is a necessity.
C) It is an inferior good.
D) It is a luxury.

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26. Assume that a three percent increase in income results in a four percent decrease in the
quantity demanded of a good. What is the income elasticity of demand for the good, and
what type of good is it
A) negative, and therefore the good is an inferior good
B) negative, and therefore the good is a normal good
C) positive, and therefore the good is an inferior good
D) positive, and therefore the good is a normal good
27. If the cross-price elasticity of demand of two goods is negative, what are those two goods
called
A) substitutes
B) complements
C) normal goods
D) inferior goods
28. When a tax is levied on a good, how will the quantity sold and price of the good change
A) The quantity of the good sold will decrease but the price of the good sold will not change.
B) The price of the good sold will increase but the quantity of the good sold will not change.
C) The quantity of the good sold will decrease but the price of the good sold will increase.
D) The price of the good sold will decrease but the quantity of the good sold will increase.
29. What effect does a tax levied on the buyers of a product have
A) It shifts the supply curve upward (or to the left).
B) It shifts the supply curve downward (or to the right).
C) It shifts the demand curve downward (or to the left).
D) It shifts the demand curve upward (or to the right).
30. A tax is imposed on a market with an inelastic demand and an elastic supply. How is the
burden of the tax divided
A) sellers pay the majority of the tax
B) buyers pay the majority of the tax
C) the tax burden is equally divided between buyers and sellers
D) the tax burden is divided, but it cannot be determined how
31. Who bears the burden of a tax imposed on lawn fertilizer
A) Buyers bear the entire burden of the tax.
B) Sellers bear the entire burden of the tax.
C) Buyers and sellers share the burden of the tax.
D) The government bears the entire burden of the tax.
32. When a tax is levied on a good, what happens to the market price and why
A) The market price falls because quantity demanded falls.
B) The market price falls because quantity supplied falls.

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C) The market price rises because both quantity demanded and quantity supplied falls.
D) The market price rises because both quantity demanded and quantity supplied rises.
33. When a tax is imposed on a product, what happens to quantity demanded and quantity
supplied
A) Quantity demanded will increase and quantity supplied will decrease.
B) Quantity demanded will decrease and quantity supplied will increase.
C) Quantity demanded and quantity supplied will both increase.
D) Quantity demanded and quantity supplied will both decrease.
34. When evaluating the size of the deadweight loss due to a tax, what do we know
A) the greater the elasticities of supply and demand, the greater the deadweight loss
B) the smaller the elasticities of supply and demand, the greater the deadweight loss
C) the smaller the decrease in both quantity demanded and quantity supplied, the greater the
deadweight loss
D) the greater the elasticities of supply and demand, the smaller the deadweight loss
35. Refer to Figure 8-2.What is the equilibrium price and quantity before the tax
A) P₁ and Q₁
B) P₂ and Q₂
C) P₂ and Q₁
D) P₃ and Q₂

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