ELASTICITY 65

5. WHY ONLY THE PRICE ELASTICITY OF 9. As more time passes after a price change, the price
DEMAND USES THE MAGNITUDE OF THE elasticity of demand becomes smaller.
PERCENTAGE
CHANGES: The price elasticity of demand uses the 10. Your local Domino’s Pizza outlet estimates that the
absolute value of the percentage change in quantity price elasticity of demand for its pizzas is 4.00, so if it
demanded divided by the percentage change in price. raises the price it charges for its pizza, its total revenue
will increase.
However, neither the income elasticity nor the cross
elasticity takes the absolute value. Why the difference? More Elasticities of Demand
Because the sign of the last two elasticities is important. 11. The cross elasticity of demand between hot dogs and
The price elasticity of demand is always negative. The hot dog buns is negative.
income elasticity, however, can be either negative or 12. A product has an elastic demand if its income elasticity
positive. A negative income elasticity indicates that the of demand exceeds 1.0.
product is an inferior good and a positive income
13. An inferior good has an income elasticity that is
elasticity signifies that the product is a normal good. negative; a normal good has an income elasticity
The sign of the cross elasticity is also important. A that is positive.
negative cross elasticity indicates that the two goods are
Elasticity of Supply
complements and a positive cross elasticity means that
the two goods are substitutes. Because the signs of the 14. The elasticity of supply equals the change in the
income elasticity and cross elasticity convey quantity supplied divided by the change in price.
information, we retain the sign rather than discard it. 15. If a good has a vertical supply curve, its elasticity of
supply equals 0.

Questions
Multiple Choice Questions

True/False and Explain Price Elasticity of Demand

1. Suppose that a 10 percent hike in the price of a textbook
Price Elasticity of Demand
decreases the quantity demanded by 2 percent. Then the
1. The price elasticity of demand is the same as the price elasticity of demand for textbooks is
slope of the demand curve.
a. 0.2.
2. The price elasticity of demand ranges from 0 to ∞. b. 2.0.
c. 5.0.
3. The more demanders respond to a price change, the d. 10.0.
larger the price elasticity of demand.

4. If the price elasticity of demand is positive, the TABLE 4.1

demand is elastic. Multiple Choice Question 2
5. Exxon brand gasoline is likely to have an elastic
demand. Price per volleyball
(dollars) Quantity demanded
6. Moving along a linear demand curve to lower prices 19 55
and increased quantities, the price elasticity of
demand does not change. 21 45

7. People spend more on rent than on soap, so the price 2. Two points on the demand curve for volleyballs are
elasticity of demand for housing is likely to be larger shown in Table 4.1. What is the price elasticity of
than the price elasticity of demand for soap. demand between these two points?
a. 2.5.
8. The price elasticity of demand for food is largest in b. 2.0.
poor nations. c. 0.5.
d. 0.4.
66 CHAPTER 4

3. The quantity of new cars increases by 5 percent. If the 9. Moving up along a linear demand curve, as the price rises
price elasticity of demand for new cars is 1.25, the and the quantity demanded decreases, the price elasticity
price of a new car will of demand
a. fall by 4 percent. a. falls.
b. fall by 5 percent. b. does not change.
c. fall by 6.25 percent. c. rises.
d. fall by 1.25 percent. d. first rises and then falls.

4. Along a perfectly vertical demand curve, the price 10. If the price elasticity of demand equals 1.0, then as the
elasticity of demand price falls the
a. equals 0. a. quantity demanded decreases.
b. is greater than 0 but less than 1.0. b. total revenue falls.
c. equals 1.0. c. quantity demanded does not change.
d. is negative. d. total revenue does not change.

5. Perfectly elastic demand is represented by a demand 11. A rise in the price of a good increases the total revenue
curve that from the good if the
a. is vertical. a. income elasticity of demand exceeds 1.
b. is horizontal. b. good is an inferior product.
c. has a 45° slope. c. good has an inelastic demand.
d. is a rectangular hyperbola. d. good has an elastic demand.

6. The demand for a good is more price inelastic if 12. By reviewing its sales records, Dell economists
a. its price is higher. discover that when it lowers the price of its personal
b. the percentage of income spent on it is larger. computers, the total revenue Dell obtains from the sale
c. it is a luxury good. of its personal computers rises. Hence
d. it has no close substitutes.
a. supply of Dell personal computers is elastic.
7. Which of the following is likely to have the largest b. demand for Dell personal computers is elastic.
price elasticity of demand? c. supply of Dell personal computers is inelastic.
a. An automobile d. demand for Dell personal computers is inelastic.
b. A new automobile
c. A new Ford automobile 13. If a 4 percent rise in the price of peanut butter causes
d. A new Ford Mustang total revenue from sales of peanut butter to fall by 8
percent, then peanut butter has a(n)
8. Business people often speak about price elasticity a. elastic demand.
without actually using the term. Which statement b. inelastic demand.
describes a good with an elastic demand? c. unit elastic demand.
a. “A price cut won’t help me. It won’t increase my d. There is not enough information given to deter-mine
whether the demand for peanut butter is elastic, unit
sales, and I’ll just get less money for each unit.”
elastic, or inelastic.
b. “I don’t think a price cut will help my bottom line
any. Sure, I’ll sell a bit more, but I’ll more than 14. When the price of a hot dog rises 10 percent, your
lose because the price will be lower.” expenditure on hot dogs increases. Hence, it is cer-tain
c. “My customers are real shoppers. After I cut my that
prices just a few cents below those my competi-tors a. hot dogs are a normal good for you.
charge, customers have been flocking to my store b. hot dogs are an inferior good for you.
and sales are booming.” c. your demand for hot dogs is elastic.
d. “The economic expansion has done wonders for my d. your demand for hot dogs is inelastic.
sales. With more people back at work, my sales are
taking off!”
ELASTICITY 67

More Elasticities of Demand 20. A 10 percent hike in income increases the demand for
15. For which of the following pairs of goods is the cross coffee by 3 percent. Then the income elasticity of
elasticity of demand positive? demand for coffee is
a. Tennis balls and tennis rackets a. –0.3.
b. Videotapes and laundry detergent b. 3.3.
c. Airline trips and textbooks c. 0.3.
d. Beef and chicken d. 10.0

21. All normal goods have

16. A 10 percent increase in the price of a Pepsi in-creases
the demand for a Coca Cola by 50 percent. Thus the a. income elasticities of demand greater than 1.0.
cross elasticity of demand between Pepsi and Coca b. price elasticities of demand greater than 1.0.
Cola is c. negative price elasticities of demand.
a. 50.0. d. positive income elasticities of demand.
b. 10.0.
c. 5.0. Elasticity of Supply
d. 0.2. 22. Suppose that the price elasticity of supply for oil is
0.1. Then, if the price of oil rises by 20 percent, the
17. A fall in the price of a paperback book from $6 to $4 quantity of oil supplied will increase
causes a decrease in the quantity of magazines a. by 200 percent.
demanded from 1,100 to 900. What is the cross b. by 20 percent.
elasticity of demand between paperback books and c. by 2 percent.
magazines? d. by 0.2 percent.
a. 0.5
b. –0.5
c. 2.0 23. When the price of a CD is $13 per CD, 39,000,000 CDs
d. Without information about what was the change in per year are supplied. When the price is $15 per CD,
income, it is not possible to calculate the cross 41,000,000 CDs per year are supplied. What is the
elasticity of demand. elasticity of supply for CDs?
a. 2.86
18. Suppose that the income elasticity of demand for b. 0.35
apartments is –0.2. This value indicates that c. 0.14
a. the demand for apartments is price inelastic. d. 0.05
b. the demand for apartments is unit elastic.
c. a rise in the rent for apartments lowers the total 24. If the long-run supply of rice is perfectly elastic, then
revenue from renting apartments. a. as people’s incomes rise, the quantity of rice sup-
d. apartments are an inferior good. plied decreases.
b. as the price of corn falls, the quantity of rice de-
19. Beans are an inferior good; chicken is a normal good. manded decreases.
When people’s incomes rise, the demand for beans c. in the long run, a large rise in the price of rice causes
____ and the demand for chicken ____. no change in the quantity of rice supplied.
a. increases; increases d. in the long run, an increase in the demand for rice
b. increases; decreases leaves the price of rice unchanged.
c. decreases; increases
d. decreases; decreases 25. The elasticity of supply does NOT depend on
a. resource substitution possibilities.
b. the fraction of income spent on the product.
c. the time elapsed since the price change.
d. None of the above because all of the factors listed
affect the elasticity of supply.
68 CHAPTER 4

Short Answer Problems

1. Assume that the price elasticity of demand for oil is 0.2

in the short run and 0.8 in the long run. To raise the
price of oil by 10 percent in the short run, what must be
the decrease in the quantity of oil? In the long run, to
have a 10 percent rise in the price of oil, what must be
the decrease?

does the price of a tape rise? Draw a figure to il-

lustrate this situation.
c. Based on your answers to parts (a) and (b), when
will an increase in costs raise the price of a product
the most: When demand is elastic or when it is
inelastic? When will it decrease the quantity the
most? When demand is elastic or inelastic? Is there
any situation under which the price does not
2. In Figure 4.1 which demand is more elastic be- change?
tween prices $10 and $8?
3. Why is the price elasticity of demand for food lar-ger TABLE 4.2
in poor nations than in rich nations? The Demand for Burritos
4. Explain what perfectly elastic demand means. Sketch
an example of a demand curve for a good with Price Total revenue
perfectly elastic demand. When will perfectly elastic (dollars per Quantity demanded per week
burrito) (burritos per week) (dollars)
demand occur? Be sure to use the notion of substitutes
in your answer. $8 30 _____
5. The supply curve for audio tapes is illustrated in 7 40 _____
Figure 4.2. Perhaps because of a rise in wages, the 6 50 _____
supply of tapes decreases so that for every possible 5 60 _____
quantity, the new supply curve lies above the old
4 70 _____
supply curve by $1.
3 80 _____
a. Suppose the demand for tapes is perfectly elastic
and is such that the initial equilibrium price is $2 for 2 90 _____
a tape. After the decrease in supply, by how much 1 100 _____
does the price of a tape rise? Draw a figure to
illustrate your answer. 6. Table 4.2 gives eight points on a demand curve for
b. Suppose the demand for tapes is perfectly in-elastic burritos.
and is such that the initial equilibrium price of a a. Graph this demand curve.
tape is $2. In this case, by how much
ELASTICITY 69

b. Calculate the price elasticity of demand between $1 your total revenue rises. What conclusion can you draw
and $2; $2 and $3; $3 and $4; $4 and $5; $5 and $6; about the demand for your restaurant’s meals?
$6 and $7; and $7 and $8. 9. Why does the elasticity of supply of automobiles
c. In Table 4.2, complete the last column. generally increase as more time passes after a price
d. Based on your answer to part (b), how does the price change?
elasticity of demand change for a move-ment 10. The demand for a product permanently increases.
downward along this demand curve? How does this Suppose that the long-run supply is more elastic than
change relate to your answers in part the short-run supply. When will the price of the
(c) for total revenue at the different prices? product rise the most? Immediately after the demand
change or in the long run? When will the quantity
increase the most? Draw a graph to illus-trate your
TABLE 4.3
answers.
The Demand For Pizza

Price Quantity demanded Total revenue You’re the Teacher

(dollars per slice (slices of pizza per week
of pizza) 1. “How can I use the price elasticity of demand for-mula
per week) (dollars) to calculate the price elasticity of demand? Also how
$8 12.5 _____ can I determine how much a decrease in quantity boosts
the price or how much a price change affects the
7 14.3 _____ quantity demanded?” Your classmate is having trouble
6 16.7 _____ with some algebra. Once more, help out your friend by
5 20.0 _____ demonstrating how to use the formula for price elasticity
4 25.0 _____ to answer the questions.

3 33.3 _____ 2. “The whole idea of ‘elasticity’ is unnecessarily com-

2 50.0 _____ plicated! Take the price elasticity of demand; it tries to
measure how strongly demanders respond to a price
1 100.0 _____
change. But the slope of the demand curve shows us
that. The flatter the demand curve, the more consumers
7. Table 4.3 gives eight points on a demand curve for react to a price change. Clearly, economists should just
slices of pizza.
use the slope of the demand curve as their measure of
a. Graph the demand curve.
‘elasticity’. I don’t know why they bother to use
b. Calculate the price elasticity of demand between $1 percentages except to make this idea hard!” Economists
and $2; $2 and $3; $3 and $4; $4 and $5; $5 and $6;
enjoy simple things as much as anyone, so they surely
$6 and $7; and $7 and $8.
do not use percent-ages to make elasticity difficult to
c. Complete the last column in Table 4.3.
understand. Thus the speaker is making an error; correct
d. Based on your answers to parts (b) and (c), how does the error in the analysis.
the total revenue per week relate to the price
elasticity of demand at the different prices?
8. You are the manager of a local restaurant. You no-tice
that when you lower the price of your meals,