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  1. Chapter Four: Elasticity of Demand and Supply

Chapter Four: Elasticity of Demand and Supply

1
Question 1

The world price of wheat rose by 15% between two successive months in 2007 and the quantity bought and sold over the same time interlude decreased by 3%. Which of the following alone could explain this?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is d) The price elasticity of demand for wheat is -0.2 and there was a poor wheat harvest in Australia owing to a severe drought and this adversely affected the supply in world markets.Your answer has been saved.
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2
Question 2

The price of coffee beans rose by 10% last year and the quantity purchased decreased by 2%.

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is d) The price elasticity of demand for coffee beans is -0.2 and there was a poor harvest in a major coffee producing country that reduced the supply of coffee coming onto the market.Your answer has been saved.
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3
Question 3

If a 12% fall in price leads to a 3% increase in quantity demanded:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is c) Elasticity of demand is equal to -0.25.Your answer has been saved.
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4
Question 4

An high-definition flat screen TV sold 500,000 units at £1000 each last year. It is known that its price elasticity of demand is -2.0 (calculated at the current price and quantity). What would sales be this year if there are no other changes affecting demand and the price per unit is lowered to £950?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is d) 550,000Your answer has been saved.
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5
Question 5

Brand X sold 500,000 items at £100 each last year. It is known that its price elasticity of demand is -0.5 (calculated at the current price and quantity). What would sales be this year if there are no other changes affecting demand and the price per unit is raised to £110?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is c) 475,000Your answer has been saved.
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6
Question 6

Brand X sold 400,000 items at £100 each last year. It is known that its price elasticity of demand is -0.6 (calculated at the current price and quantity). What would sales be this year if there are no other changes affecting demand and the price per unit is raised to £110?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is c) 376,000Your answer has been saved.
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7
Question 7

Tube travel, which is a normal good, fell this year compared to last from 4 million journeys per day to 3.6 million journeys per day. At the same time the price per journey rose from £1 to £1.1 and there was no significant change in consumer incomes. Which one of the following is consistent with this information:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is a) Elasticity of demand is equal to -1.Your answer has been saved.
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8
Question 8

The price of a product rises from £100 to £110 and the quantity demanded falls from 100 to 99. Which one of the following is a true statement about the value of demand elasticity (as measured at the initial price and quantity):

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is b) Elasticity is -0.1Your answer has been saved.
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9
Question 9

If the price of a well known economics textbook rises from £25 to £30 and sales fall from 10,000 copies per year to 9,000, calculating elasticity at the initial price and quantity:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is e) Elasticity of demand is equal to -0.5.Your answer has been saved.
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10
Question 10

Brand X sold 200,000 items at £10 each last year. It is known that its price elasticity of demand is -0.8 (calculated at the current price and quantity). What would sales be this year if there are no other changes affecting demand and the price per unit is raised to £11?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is d) 184,000Your answer has been saved.
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11
Question 11

If a 20% fall in price leads to a 5% increase in quantity demanded:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is c) Elasticity of demand is equal to -0.25.Your answer has been saved.
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12
Question 12

An MP3 music player sold 500,000 items at £100 each last year. It is known that its price elasticity of demand is -1.5 (calculated at the current price and quantity). What would sales be this year if there are no other changes affecting demand and the price per unit is lowered to £95?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is c) 537,500Your answer has been saved.
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13
Question 13

You observe that the price of a product has risen by 20% and its sales have risen by 5%. Which one of the following can have caused this:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is e) Consumer income has risen, this is a normal good, and supply is fairly inelastic.Your answer has been saved.
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14
Question 14

You observe that the price of a product has risen by 10% and its sales have fallen by 10%. Which one of the following on its own could have caused this:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is d) Wages costs of suppliers have risen so the supply curve has shifted to the left and demand elasticity is close to -1.Your answer has been saved.
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15
Question 15

Why are the results from elasticity calculations presented as a number without any specific units?

Hint: re-read 'Measuring the responsiveness of demand to price' p65 (see footnote 1).Hint

16
Question 16

Assume that the demand curve for a commodity is Qd = 10-P. Using the table below: (or download a word document to complete parts a-c)

(a) Fill in column two, which identifies quantity demanded associated with each price. For example, when price equals 1, Qd = 10 - 1 = 9.
(b) Now fill in column three which identifies the revenue that the producer will receive at each price. For example if price equals €1, 9 units will be demanded and hence the firm will receive €9. Comment on how total revenue changes as we move up the demand curve (from Price =0).
(c) Using equation (3) on page 70, calculate the price elasticity at each point on the demand curve. Comment on how price elasticity of demand changes as we move up the demand curve (from Price = 0).
(d) If you have a pencil and paper nearby, sketch out the demand curve showing how price elasticity of demand changes as we move along it. Identify the areas on the demand curve for which demand is price elastic, which are price inelastic and the point at which price elasticity = -1.

Price (€) Quantity Demanded Total revenue (PXQ) Price Elasticity of Demand
0      
1 9 €9  
2      
3      
4      
5      
6      
7      
8      
9      
10      

Hint: Re:read the sections entitled 'Elasticity and total spending' 'some complications' and 'A more precise measure' pp67-71. Consider also the bus company example in Box 4.4 'Elasticity matters' on p75.Hint


17
Question 17

Why is it inappropriate to say that the demand for a product will be more inelastic the smaller the proportion of income spent on it?

Hint: re-read section 'what determines elasticity of demand?' including Box 4.3 pp71-72.Hint

18
Question 18

Draw an Engel Curve that depicts:

(a) a commodity whose income elasticity is greater than zero;
(b) a commodity whose income elasticity is less than zero.

Hint: re-read the section 'Income elasticity' (including Figure 4.9) pp73-74.Hint

19
Question 19

Consider two supply curves with the following equations:

Qs = 15 + 1.5P (1)
Qs = -8 + 2P (2)

a) For each of the two supply curves, calculate the quantity supplied at the following prices: 10, 30, 50 and 70.
b) Using equation (1), explain why a price of 2 be seen as 'trivial'.
c) For equation (1), calculate the elasticity of supply using the equation dQs/dP x P/Q for the following prices: 10, 30, 50 and 70.
d) For equation (2), calculate the elasticity of supply using the equation dQs/dP x P/Q for the following prices: 10, 30, 50 and 70.
e) What pattern do you notice for the estimated elasticities at each of the four prices (and quantities) along each supply curve?

Hint: Read the section 'Supply Elasticity' pp75-76.Hintr

20
Question 20

Consider two supply curves with the following equations:

Qs = 15 + 1.5P (1)
Qs = -8 + 2P (2)

a) For each of the two supply curves, calculate the quantity supplied at the following prices: 10, 30, 50 and 70.
b) Using equation (1), explain why a price of 2 be seen as 'trivial'.
c) For equation (1), calculate the elasticity of supply using the equation dQs/dP x P/Q for the following prices: 10, 30, 50 and 70.
d) For equation (2), calculate the elasticity of supply using the equation dQs/dP x P/Q for the following prices: 10, 30, 50 and 70.
e) What pattern do you notice for the estimated elasticities at each of the four prices (and quantities) along each supply curve?

Hint: Read the section 'Supply Elasticity' pp75-76.Hint

21
Question 21

Why will any supply curve that passes through the origin have an elasticity of supply of +1 throughout its entire length, irrespective of its slope?

Hint: Read the section 'Supply Elasticity' pp75-76.Hint

22
Question 22

Why will the supply of houses be relatively more price elastic in the long run than in the short run?

Hint: Read the sections 'Supply Elasticity' pp75-76 and 'Long-run and short-run elasticity of demand' on pages 72-73.Hint

23
Question 23

Why do you think that income and price elasticities of demand for food get smaller as nations become richer?

Hint: Re-read 'Elasticities and economic growth' p80.Hint

24
Question 24

Assume that the manufacturer of a range of skateboards decides to advertise its products through a series of adverts on television and the music press. Assuming that the manufacturer chooses not to change the price of its range of skateboards, what might be the impact of the advertising campaign on the price elasticity of demand for skateboards?

Hint: Re-read 'Other variables' on p80. Think also about the potential impact of the advertising campaign on the demand curve for skateboards.Hint