Elasticity

 

Department of Economics                                                        Professor Andrew J. Buck

Temple University                                                                    Economics 201 

Name

 

A.  Fountain Pens

 

            Thurberís General Store sells Walter Mitty disposable fountain pens.   The demand function for this product is as follows:

 

                                                      Q = 15 - (3/5)P.

 

Q is the number of pens sold per week and P is the price per pen. 

 

1.   Solve for P as a function of Q.         P =   +

 

2.   Compute the point price elasticity of demand (PED) when

 

                  Q = 12                 Q = 6       

                                                                             

      Be sure to report your elasticities as positive numbers.

 

3.   Compute the point PED when   

 

                   P = 5/3               P = 6     

 

4.   Write the equation showing Thurberís pen total revenue (TR) as a function of Q.

 

              TR = + Q + Q

 

5.   Total revenue is concave, convex,  neither.

 

6.   Write the equation for the associated marginal revenue (MR) curve.

 

                 MR = + Q                                       

 

7.  What is marginal revenue when Point Elasticity of Demand = 1?   

 

B.  Bakery Products

 

            Each of the following statements provides information about an individualís demand for some bakery product when its price changes.  Use this information to decide whether the individualís demand is elastic, inelastic, unitary elastic, or indeterminate.  Fill in each blank with the appropriate letter.  Remember that an individual's total expenditure on a product (= PQ) is the same as the total revenue s/he generates for the industry producing the product.

 

8.  When the price of Christmas pies went up 20%, Jack Horner purchased 50%

       fewer than he had the year before. Elastic Inelastic Unitary Indeterminate

                                                                                                                      

 9.  Tommy Tucker bought more white bread when the price fell. 
                   Elastic Inelastic Unitary  Indeterminate  

 

10.  When the price of cakes declined by 15%, Marie Antoinette's total expenditure on

        them stayed the same. Elastic  Inelastic Unitary  Indeterminate

                                                                                                           

 11.  The pieman lowered his price by $1.50 so Simple Simon bought six more pies than

       he originally planned. Elastic  Inelastic  Unitary  Indeterminate

                                                                                                                       

12.   The Queen of Hearts spent less money on tarts when the price rose.
                                           Elastic  Inelastic  Unitary   Indeterminate  

 

13.  A certain king enjoys blackbird pies.   When pie prices doubled, he cut his

       consumption by only 25%.  Elastic  Inelastic  Unitary   Indeterminate

                                                                                                                       

 14.  Amory Blaine was observed buying fewer bacon buns but spending more on them.

                               Elastic   Inelastic  Unitary   Indeterminate

 

C.  Miscellaneous

 

15.  The New York Times reported on May 19, 1977 that U.S. per capita coffee

       consumption was 3.0 pounds in the first quarter of the year as compared to 3.6

       pounds in the first quarter of 1976.  It also reported that retail coffee prices were 

       81% higher in 1977 than they were in 1976.    Use the arc elasticity formula or the

       general elasticity formula to compute the PED for coffee. 

                                                                                                                   

 16.  To travel around Gotham City, some people take the subway and others ride 

       buses.  Still others use the Batmobile.  Suppose the PED for subway trips by

       Gothamites is 1.4, the income elasticity of demand for subway trips is 0.6, and

       the cross PED for subway trips with respect to the price of bus trips is 0.8.  Subway

       fares rise by 10%.   How much will bus fares have to rise to offset the effect of the

       subway fare increase on the quantity of subway trips demanded?

                                                                                                                   

 17.  When lottery tickets cost $2, Shirley Jackson purchases 12 per week.  When they

        cost $3,  she purchases 9 per week.  Compute her arc PED.

 

 

 18.  Montresor Fortunatoís PED for amontillado (a pale dry sherry) is known to be 1.78

       when price is measured in dollars and quantity is measured in bottles (32 oz.).  What

       is his PED for this product if price is measured in cents and quantity in ounces?

 

 

19.  Using the arc elasticity formula, calculate the elasticity of demand for movies in China based on the information provided by the attached article from The New York Times.