CHAPTER 5
1. (a) –1.2 (b) +10% (c) +15% (d) +12% (e) +.67
2. (a) No. Because demand is elastic, an increase in
price will lead to a larger percentage decrease in quantity demanded; so
revenue (P x Q) will fall if P is
increased.
(b) No. Because demand is inelastic, a decrease in
prices will lead to a smaller percentage increase in quantity; so revenue (P x Q) will fall if P is cut.
3. (a) % change in P = –50.0%; % change in Q = +28.6%
; Elast. = –.57.
(b) %
change in P = +23.7%; % change in Q = –15.4%; Elast. = –.65.
(c) %
change in P = –97.2%; % change in Q = +66.7%; Elast. = –.69.
(d) % change in P
= +28.6%; % change in Q = –28.6%; Elast. = –1.0
4. (a) Between Points A and B: –3.666. Between
Points C and D: –1. Between Points E
and F: –0.273.
(b) Starting at $50, revenues would fall by
$4,000, from $10,000 to $6,000. Starting at $30, revenues would remain constant
at $12,000. Starting at $10, revenues would rise by $4,000, from $6,000 to
$10,000.
(c) When demand is elastic (e.g., between Points A and B), a price increase leads to a revenue decline. When elasticity is
unitary (e.g., between Points C and D), a price increase leaves revenues
unchanged. When demand is inelastic (e.g., between Points E and F), a price
increase increases revenue.
5. (a) Disagree. Buyers will spend more. Since demand is
inelastic, the percent decline in quantity demanded is less (in absolute value) than the percent increase in price. Thus,
total expenditure, P times Q, will rise.
(b) Disagree: They will gain revenues. If demand
for trees is elastic (–1.3), the percent increase in quantity of trees demanded
will be greater than the percent
decrease in price. Thus, total revenues collected by vendors will rise. P times Q will be larger.
(c.) Disagree: If demand has unitary elasticity,
then the percent change in quantity and the percent change in price are exactly
equal. Thus, total revenues, P times Q, will not change if price rises. The
increase due to the higher price will be exactly offset by the decrease in
quantity demanded.
6. (a) Disagree. The top half of the demand curve is
elastic.
(b) Disagree. Price would fall but, firms would
earn more revenue because demand is elastic on the top half of the demand
curve.
7. Total revenue is P x
Q. When price rises (cab fare goes up), quantity demanded
goes down, by an amount that depends upon the elasticity of demand. Cab drivers
who were expecting a 10% increase in revenues were expecting no loss of riders. These cab drivers
expected demand to be perfectly inelastic.
In fact, revenues did increase, but by less than 10%.
Since revenues increased, the percentage increase in price was more than the percentage decrease in
quantity demanded. Therefore, demand was inelastic,
just not perfectly so.
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