Chapter 4

Elasticity
Part one: Multiple choice questions:
1. The price elasticity of demand measures
A) how often the price of a good changes.
B) the slope of a budget curve.
C) how sensitive the quantity demanded is to changes in demand.
D) the responsiveness of the quantity demanded to changes in price.
Answer: D
2. The elasticity of supply measures the sensitivity of
A) supply to changes in costs.
B) quantity supplied to quantity demanded.
C) quantity supplied to a change in price.
D) price to changes in supply.
Answer: C

3. Toothpaste and toothbrushes are complements, so the elasticity of demand is

.
A) cross; positive
B) income; negative
C) cross; negative
D) income; positive
Answer: C

4. When the price of a movie ticket increases from $5 to $7, the quantity of tickets demanded
decreases from 600 to 400 a day. What is the price elasticity of demand for movie tickets?
A) 0.83
B) 1.20
C) 1.00
D) 2.32
Answer: B

5. The price elasticity of supply is calculated as the

A) quantity supplied divided by the per unit cost of production.
B) quantity supplied divided by the percentage change in quantity demanded.
C) percentage change in quantity supplied divided by the percentage change in price.
D) percentage change in price divided by the percentage change in quantity demanded.
Answer: C
 Price Quantity demanded
(dollars per bushel) (bushels)
A 10 0
B 8 4
C 6 8
D 4 12
E 2 16
6.The table above gives the demand schedule for peas. Between point C and point D, the price
elasticity of demand is
A) elastic.
B) unit elastic.
C) 0.75.
D) 3.00.
Answer: B

7. If the price elasticity is between 0 and 1, demand is

A) elastic.
B) inelastic.
C) unit elastic.
D) perfectly elastic.
Answer: B

8. The demand curve in the figure above illustrates a product whose demand has a price elasticity
of demand equal to
A) zero at all prices.
B) infinity.
C) one at all prices.
D) a different amount at different prices.
Answer: B

9. The income elasticity of demand is

A) always positive.
B) always negative.
C) negative for a normal good and positive for an inferior good.
D) positive for a normal good and negative for an inferior good.
Answer: D

10. Supply is elastic if

A) a 1 percent change in price leads to a larger percentage change in quantity supplied.
B) a 1 percent change in price leads to a smaller percentage change in quantity supplied.
C) the slope of the supply curve is positive.
D) the good in question is a normal good.
Answer: A

11. If a 1 percent decrease in the price of a pound of oranges results in a smaller percentage
decrease in the quantity supplied,
A) demand is elastic.
B) demand is inelastic.
C) supply is elastic.
D) supply is inelastic.
Answer: D

Part two: Read each of the following statements, if the statement is true, write
(T) and if it is False, write (F) and justify your answer:
1. Dan sells newspapers. Dan says that a 4 percent increase in the price of a newspaper will
decrease the quantity of newspapers demanded by 8 percent. According to Dan, the demand
for newspapers is inelastic.
Answer: False
PED= -8% / 4% = -2 “Elastic”
2. A straight-line demand curve along which the price elasticity of demand equals 0 is one that
forms a 45-degree angle with the vertical axis.
Answer: False “90 degrees with the horizontal axis”
3. Demand is price inelastic if a relatively large price increase leads to a relatively small
increase in the quantity demanded.
Answer: False “decrease”
 4. If goods are complements, definitely their income elasticities are negative.
Answer: False “Cross”
5. If a product has very few substitutes, demand elasticity is likely to be elastic.
Answer: False “Inelastic”

Part three: Answer the following questions.

1. What is the price elasticity of demand in each of the following?
a. A 10 percent increase in the quantity of spinach demanded results from a 20 percent
decline in its price. Comment on your result.
Answer:
The price elasticity of demand = (percentage change in the quantity demanded) ÷ (percentage
change in the price).
The price elasticity of demand= 10% ÷ -20% = -0.5, We ignore the negative sign so that the price
elasticity of demand equals 0.5 “Inelastic”
b. A fall in the price of lemons from $10.50 to $9.50 per bushel increases the quantity
demanded from 19,200 to 20,800 bushels. Comment on your answer and list some factors
affecting price elasticity of demand.
Answer:
 The price elasticity of demand = (percentage change in the quantity demanded) ÷
(percentage change in the price).
percentage change in the quantity demanded = change Q ÷ Average Q
= Q new – Q old = 20,800-19,200
*100 = 8%
(Q new + Q old) (20,800+19,200)
2 2
percentage change in the price= change p ÷ Average Q
= p new – P old = 9.50-10.50
*100 = -10%
(p new + P old) ( 9.50+10.50)
2 2

PED= 8% ÷ -10% = -0.8, We ignore the negative sign so that the price elasticity of demand
equals 0.8 “Inelastic”
 The Factors That Influence the Elasticity of Demand
The elasticity of demand for a good depends on:
 The closeness of substitutes
 The proportion of income spent on the good
 The time elapsed since a price change

2. Deb's income has just risen from $950 per week to $1,050 per week. As a result, she decides
to increase the number of movies she attends each month by 5 percent. Calculate income
elasticity and comment on your results.
Answer:

 Income elasticity of demand = (percentage change in the quantity demanded) ÷

(percentage change in the income).
percentage change in the income = change income ÷ average income

= Income new - Income old = 1,050 – 950

*100 = 10%
(Income new + Income old) 1,050 + 950
2 2
Income elasticity of demand = 5% ÷ 10% = 0.5
The income elasticity of demand is 0.5. Income inelastic (normal good) as its less than 1 but
greater than zero.

3.
Calculate:

A. The price elasticity of demand for each of Product A, B and C.

B. Cross Elasticity of Product A with respect to price of Product B.

C. Cross Elasticity of Product A with respect to price of Product C.

Answer:
a.
 price elasticity of demand for product A= (percentage change in the quantity demanded)
÷ (percentage change in the price).
percentage change in the quantity demanded = change Q ÷ Average Q

= Q –Q 4 – 12
new old
= *100 = -100%
Q new + Q old 4 + 12
2 2

percentage change in the price = change p ÷ Average p

= 8–4
P new – P old =
*100 = 66.6%
P new + P old 8+ 4

2 2

price elasticity of demand for product A= 100% / 66.6% = -1.5

PED= -1.5, We ignore the negative sign so that the price elasticity of demand equals 1.5
“elastic”
  price elasticity of demand for product B = (percentage change in the quantity demanded)
÷ (percentage change in the price).
percentage change in the quantity demanded =

Q new – Q old 16 – 14
= *100 = 13.3%
Q new + Q old 16 + 14

2 2

percentage change in the price= P new – P old 8 – 10

= *100 = -22.22%
P new + P old 8+ 10
2 2

price elasticity of demand for product B = 13.3% / -22.22% = - 0.6

PED= -0.6, We ignore the negative sign so that the price elasticity of demand equals 0.6
“inelastic”
 price elasticity of demand for product c = (percentage change in the quantity demanded)
÷ (percentage change in the price).
percentage change in the quantity demanded =

Q new – Q old 80 – 100

= *100 = - 22.2%
Q new + Q old 80 + 100
2 2

P new – P old 12 – 5
percentage change in the price= = *100 = 82.35%
P new + P old 12+ 5

2 2
price elasticity of demand for product c = -22.2% / 82.35% = - 0.26

PED= -0.26, We ignore the negative sign so that the price elasticity of demand equals 0.26
“inelastic”

b.
  Cross Elasticity of Product A with respect to price of Product B = percentage change in
the quantity demanded product A ÷ percentage change in the price product B.

4 – 12
percentage change in the quantity demanded product A = *100 = -100%
4 + 12
2
8 – 10
percentage change in the price product B. = *100 = -22.22%
8+ 10
2

Cross Elasticity of Product A with respect to price of Product B = -100%/-22.22% = 4.5%

The value is positive so the goods are substitutes.

c. Cross Elasticity of Product A with respect to price of Product C= percentage change in

the quantity demanded product A ÷ percentage change in the price product C.
percentage change in the quantity demanded product A = 4 – 12 *100 = -100%
4 + 12
2
percentage change in the price product C = 12 – 5 *100 = 82.3%

12+ 5
2

Cross Elasticity of Product A with respect to price of Product C = -100% / 82.3% = -1.21
The value is negative so the goods are complements.