Chapter 6 DESCRIBING SUPPLY AND DEMAND ELASTICITIES 69 PROBL

Chapter 6 DESCRIBING SUPPLY AND DEMAND, ELASTICITIES 69 PROBLEMS AND APPLICATIONS Suppose that in deciding what price to set for the video Shrek I1, Disney decided to either charge $12.95 or $15.95. Itestimated 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 I 5%? 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 5%; 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 baseball game rises from $10 to $12 a game. The quantity of tickets sold falls from 160,000tickets to 144,000 Jansport backpacks: The price of Jansport backpacks falls from $30 a pack to $25 a pack. The quantity supplied falls from 150,000 to 125,000 per week c. 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 fromm 100,000 to 80,000. d

Solution

1. Elasticity of demand = % change in quantity demanded / % change in price

- 0.5 = % change in quantity demanded / - 10

% change in quantity demanded = - 0.5 x - 10 = 5

When there is 10% decrease in price then quantity demanded increases by 5%.

- 0.5 = % change in quantity demanded / 10

% change in quantity demanded = - 0.5 x 15 = - 7.5

When price rises by 10% then quantity demanded falls by 7.5%.