ch 5 : problems and applications 1. more elastic? : a. mystery novels or required text mystery...
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Ch 5 : Problems and Applications
• 1. More Elastic? : • A. Mystery novels or required text• Mystery novels• Have more close substitutes• May be considered a luxury • B. Beethoven or Classical Music• Beethoven - more narrowly defined market –
can find more close substitutes
• C. Heating Oil (over 5 years or 6 months) • Over 5 years – can adjust habits / find
substitutes• D. Root Beer or Water • Root beer – may be considered luxury / can
find more close substitutes
• 2. A. P up from $200 to $250 • Business travelers 1900 – 2000 / 2000 .05 5% $250 - $200 / 200 .25 25% PED = .2 = InelasticVacationers600-800 / 800 .25 25%$250 - $200 / 200 .25 25% PED = 1 = unit elastic
• B. Vacationers PED is more elastic than business travelers because…..
• Luxury vs. necessity
• 3. at income of $10,000 P of CD up from $8 to $10
32-40 / 40 = .2 20%$10-$8/$8 = .25 25% = PED = .8 Inelastic
• When income is $12,00045-50/50 = .10 10%$10-$8 / $8 = .25 25%= PED .4 inelastic
B. IED : Income up $10 k - $12 k when P = $1230-24/24 = 25%$12k - $10k / $10k = 20%= IED + 1.25 Elastic, Normal
• IED Income up $10k to $12 k when P $1612-8/8 50%$12k - $10k / $10k 20%IED = + 2.5 Elastic, Normal
• 4. A. Emily always spends 1/3 of income on clothing
• If she always spends 1/3 of income …then any change in her income would result in an equal % change in her D…so IED….. =
• 1• B. PED? • For every 1% increase in P, then would be 1%
change in D to maintain her 1/3 spending of income
• PED = 1
• If change taste and now spends ¼ of income .....how does D curve change
• D curve shifts left…at every P, D is now less• What is IED and PED now???• Still 1
5. million fewer riders in Dec… a 4.3% declineAfter P increased 25 cents to $1.50 A. PED? 4.3%$1.50-$1.25 / $1.25 = 20%= PED .215 = inelastic B. What happens to revenue? If PED is inelastic and P increases = TR increases
• C. Why might PED estimate be unreliable ? • It has only been 1 month after P increase• As time passes, people may find alternatives
and therefore it becomes More Elastic
• 6. Before looking at Price, Tom says I’d like 10 gallons of gas.
• Toms PED = ?• 0 Perfectly Inelastic…explain • He will buy same Q (10 gal) no matter what the
price• Jerry says I’d like $10 worth of gas• Jerry’s PED = ? • 1 unit elastic…explain • He will spend $10 no matter what the P is…if the P
has risen, QD will fall at same ratio
• 7. spending on restaurant meals declines more during economic downturns than does spending on food to be eaten at home. Explain –
• Econ downturns = decrease in income• Expect a decrease in income to result in a
larger decrease in D for restaurants than a decrease in food at home
• = Luxury vs. necessity
Cross Price Elasticity Examples
• P of X increases from $8-$10. • D of Y decreased from 20 to 18 units. • Calculate the Cross Price Elasticity for good Y. • What type of goods are X and Y? 18-20/20 - 10%$10-$8/$8 25%= XPED -.4 inelastic (complimentary goods)
P of Z increases from $10 to $11. D of Y increased from 25 units to 30 units.Calculate the Cross Price Elasticity for good Y. What type of goods are Z and Y ?
Y: 30-25/25 20%X: $11-10/10 10%= XPED +2 elastic (substitutes)