## 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

#### Numerical Problems

1. Economist David Romer found that in introductory economics classes a 10% increase in class attendance is associated with a 4% increase in course grade. David Romer, "Do Students Go to Class? Should They?" Journal of Economic Perspectives 7:3 (Summer 1993): 167–174. What is the elasticity of course grade with respect to class attendance?
2. Refer to Figure 5.2 "Price Elasticities of Demand for a Linear Demand Curve" and

1. Using the arc elasticity of demand formula, compute the price elasticity of demand between points B and C.
2. Using the arc elasticity of demand formula, compute the price elasticity of demand between points D and E.
3. How do the values of price elasticity of demand compare? Why are they the same or different?
4. Compute the slope of the demand curve between points B and C.
5. Computer the slope of the demand curve between points D and E.
6. How do the slopes compare? Why are they the same or different?
3. Consider the following quote from The Wall Street Journal: "A bumper crop of oranges in Florida last year drove down orange prices. As juice marketers' costs fell, they cut prices by as much as 15%. That was enough to tempt some value-oriented customers: unit volume of frozen juices actually rose about 6% during the quarter".

1. Given these numbers, and assuming there were no changes in demand shifters for frozen orange juice, what was the price elasticity of demand for frozen orange juice?
2. What do you think happened to total spending on frozen orange juice? Why?
4. Suppose you are the manager of a restaurant that serves an average of 400 meals per day at an average price per meal of $20. On the basis of a survey, you have determined that reducing the price of an average meal to$18 would increase the quantity demanded to 450 per day.

1. Compute the price elasticity of demand between these two points.
2. Would you expect total revenues to rise or fall? Explain.
3. Suppose you have reduced the average price of a meal to $18 and are considering a further reduction to$16. Another survey shows that the quantity demanded of meals will increase from 450 to 500 per day. Compute the price elasticity of demand between these two points.
4. Would you expect total revenue to rise or fall as a result of this second price reduction? Explain.
5. Compute total revenue at the three meal prices. Do these totals confirm your answers in (b) and (d) above?
5. The text notes that, for any linear demand curve, demand is price elastic in the upper half and price inelastic in the lower half. Consider the following demand curves:

Demand curve D1 [Panel (a)] Demand curve D2 [Panel (b)]
Price Quantity Price Quantity
A 80 2 E 8 20
B 70 3 F 7 30
C 30 7 G 3 70
D 20 8 H 2 80

1. Compute the price elasticity of demand between points A and B and between points C and D on demand curve D1 in Panel (a). Are your results consistent with the notion that a linear demand curve is price elastic in its upper half and price inelastic in its lower half?
2. Compute the price elasticity of demand between points E and F and between points G and H on demand curve D2 in Panel (b). Are your results consistent with the notion that a linear demand curve is price elastic in its upper half and price inelastic in its lower half?
3. Compare total spending at points A and B on D1 in Panel (a). Is your result consistent with your finding about the price elasticity of demand between those two points?
4. Compare total spending at points C and D on D1 in Panel (a). Is your result consistent with your finding about the price elasticity of demand between those two points?
5. Compare total spending at points E and F on D2 in Panel (b). Is your result consistent with your finding about the price elasticity of demand between those two points?
6. Compare total spending at points G and H on D2 in Panel (b). Is your result consistent with your finding about the price elasticity of demand between those two points?
6. Suppose Janice buys the following amounts of various food items depending on her weekly income:

Weekly Income Hamburgers Pizza Ice Cream Sundaes
$500 3 3 2$750 4 2 2

1. Compute Janice's income elasticity of demand for hamburgers.
2. Compute Janice's income elasticity of demand for pizza.
3. Compute Janice's income elasticity of demand for ice cream sundaes.
4. Classify each good as normal or inferior.
7. Suppose the following table describes Jocelyn's weekly snack purchases, which vary depending on the price of a bag of chips:

Price of bag of chips Bags of chips Containers of salsa Bags of pretzels Cans of soda
$1.00 2 3 1 4$1.50 1 2 2 4

1. Compute the cross price elasticity of salsa with respect to the price of a bag of chips.
2. Compute the cross price elasticity of pretzels with respect to the price of a bag of chips.
3. Compute the cross price elasticity of soda with respect to the price of a bag of chips.
4. Are chips and salsa substitutes or complements? How do you know?
5. Are chips and pretzels substitutes or complements? How do you know?
6. Are chips and soda substitutes or complements? How do you know?
8. The table below describes the supply curve for light bulbs:

Price per light bulb Quantity supplied per day
$1.00 500 1.50 3,000 2.00 4,000 2.50 4,500 3.00 4,500 Compute the price elasticity of supply and determine whether supply is price elastic, price inelastic, perfectly elastic, perfectly inelastic, or unit elastic: 1. when the price of a light bulb increases from$1.00 to $1.50. 2. when the price of a light bulb increases from$1.50 to $2.00. 3. when the price of a light bulb increases from$2.00 to $2.50. 4. when the price of a light bulb increases from$2.50 to \$3.00.