## Elasticity: A Measure of Response

Read this chapter to learn about the concept of elasticity. Be sure to read Sections 5.1-5.4 following the introduction.

### Review and Practice

#### Concept Problems

1. Explain why the price elasticity of demand is generally a negative number, except in the cases where the demand curve is perfectly elastic or perfectly inelastic. What would be implied by a positive price elasticity of demand?
2. Explain why the sign (positive or negative) of the cross price elasticity of demand is important.
3. Explain why the sign (positive or negative) of the income elasticity of demand is important.
4. Economists Dale Heien and Cathy Roheim Wessells found that the price elasticity of demand for fresh milk is ?0.63 and the price elasticity of demand for cottage cheese is ?1.1.Dale M. Heien and Cathy Roheim Wessels, "The Demand for Dairy Products: Structure, Prediction, and Decomposition," American Journal of Agricultural Economics 70:2 (May 1988): 219–228. Why do you think the elasticity estimates differ?
5. The price elasticity of demand for health care has been estimated to be ?0.2. Characterize this demand as price elastic, unit price elastic, or price inelastic. The text argues that the greater the importance of an item in consumer budgets, the greater its elasticity. Health-care costs account for a relatively large share of household budgets. How could the price elasticity of demand for health care be such a small number?
6. Suppose you are able to organize an alliance that includes all farmers. They agree to follow the group's instructions with respect to the quantity of agricultural products they produce. What might the group seek to do? Why?
7. Suppose you are the chief executive officer of a firm, and you have been planning to reduce your prices. Your marketing manager reports that the price elasticity of demand for your product is ?0.65. How will this news affect your plans?
8. Suppose the income elasticity of the demand for beans is ?0.8. Interpret this number.
9. Transportation economists generally agree that the cross price elasticity of demand for automobile use with respect to the price of bus fares is about 0. Explain what this number means.
10. Suppose the price elasticity of supply of tomatoes as measured on a given day in July is 0. Interpret this number.
11. The price elasticity of supply for child-care workers has been estimated to be quite high, about 2. What will happen to the wages of child-care workers as demand for them increases, compared to what would happen if the measured price elasticity of supply were lower?
12. Studies suggest that a higher tax on cigarettes would reduce teen smoking and premature deaths. Should cigarette taxes therefore be raised?