Elasticity

Department of Economics Professor Andrew J. Buck

Temple University Economics 201

Name

A. Fountain Pens

Thurber’s 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 = + Q

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 Thurber’s pen total revenue (TR) as a function of Q.

TR = + Q + Q^{2 }

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 individual’s demand for some bakery product when its price changes. Use this information to decide whether the individual’s 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 Fortunato’s 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.