Chapter 6 DESCRIBING SUPPLY AND DEMAND: ELASTICITIES 69 ? PROBLEMS AND APPLICATI
ID: 1153609 • Letter: C
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Chapter 6 DESCRIBING SUPPLY AND DEMAND: ELASTICITIES 69 ? PROBLEMS AND APPLICATIONS 1. Assume the price elasticity of demand fora Suppose that in deciding what price to set for the video Shrek II, Disney decided to either charge $12.95 or $15.9S. It estimated the demand to be quite elastic. What price did it most likely charge and why? 3. good is 0.5 (after we take the absolute value- drop the negative sign). If there is a 10% decrease in the price, what would happen to the percentage change in the quantity de- manded? What if the price were to rise by 15%? Calculate the price elasticity of the following products. State whether elasticity of supply is elastic, unit elastic, or inelastic. 4. Calculate the price elasticity for each of the following. State whether price elasticity of demand is elastic, unit elastic, or inelastic. Will revenue rise, decline, or stay the same with the given change in price? 2. a. Cocoa Puffs: The price of a 14-oz. box of Cocoa Puffs rises 4 percent while quantity supplied rises 15 percent The price of pens rises 596; the quantity demanded falls 10%. a. Toyota Prius: The price of the Prius rises from $25,000 to $30,000. Its quantity supplied rises from 5,000,000 to 5,300,000 per year h The price of a ticket to a Boston Red Sox baseball game rises from $10 to $12a game. The quantity of tickets sold falls from 160,000 tickets to 144,000. h Jansport backpacks: The price of Jansport backpacks falls from $30 a pack to $25 a pack. The quantity supplied falls from 1 50,000 to 125,000 per week. e. The price of an economics textbook declines from $50 to $47.50. Quantity demanded rises from 1,000 to 1,075. c. The price of water beds rises from $500 to $600. Quantity demanded falls from 100,000 to 80,000. dExplanation / Answer
Price elasticity of demand (PED)= % change in quantity demanded /% change in price of the good.
Price elasticity of demand (given) = 0.5
% change in price of the good=10% (Decrease)
Let % change in quantity demanded be X
X /-10=0.5
X=0.5*10=5
The percentage change in quantity demanded is 5%.
If the percentage change in price is 15%
X/15=0.5
X= 15 x 0.5=7.5%
The percentage change in quantity demanded is 5%.
2a)
Price elasticity of demand (PED) for pens= % change in quantity demanded /% change in price of the good.
% change in quantity demanded=10% (Decrease)
% change in price of the good=5% (Increase)
PED=10/5=2
Since PED is >1, it is elastic.
When demand is elastic, price and total revenue move in the opposite direction. Therefore, revenue will fall.
2b)
Percentage increase in price
New Price= $12; Old price =$10
% change in price = ((New price-old price)/old price)) x 100
=((12-10) /10)) x100
= (2/10) x 100
= 20%
New Quantity =144,000
Old Quantity = 160,000
% change in quantity demanded = ((New quantity-old quantity)/old quantity)) x 100
% change in quantity demanded= ((144,000-160,000)/160,000)) x100
=(-16,000/160,000 ) x100
= -10%
PED=-10%/20%=0.5
Elasticity is an absolute number, sign does not matter.
Since PED is <1, it is inelastic, revenue will increase. If the demand is inelastic, then total revenue and price will move in the same direction.
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