Reading Homework - Elasticity

pp. 356-369

Read the following statements before you read the assigned pages.

  • Elasticity measures how responsive people are to price changes.
  • Some demand curves reflect large changes in Quantity Demanded because of a price change, while other demand curves reflect small changes in Quantity Demanded because of a price change.
  • There are 3 methods used to determine price elasticity:
  • Elasticity coefficient method (midpoint formula)
  • Total Revenue Method
  • Determinant Method (using intuition and information)
  1. What do we call the demand for a good whose price elasticity coefficient if less than 1? What a consumer be sensitive or insensitive to a price change in the product?

2. Why do we commonly use the midpoint formula to determine the elasticity coefficient?

3.If demand is elastic, how will an increase in price change the total revenue? Explain.

4. List and explain the 4 determinants of Price Elasticity of Demand:

5. Identify some applications of price elasticity of demand.

6. For each of the following pairs of goods, which good would you expect to have more elastic demand and why? (Circle the most elastic)

  1. Required college textbooks or mystery novels
  2. Beethoven recordings or classical music recordings in general
  3. Emergency room services or Dr. 90210 (or any cosmetic surgeon)
  4. Vitamin water or water

7. The New York Times reported that subway ridership declined after a fare increase (Feb. 17, 1996): “There were nearly four million fewer riders in December 1995, the first full month after the price of a token increased 25 cents to $1.50 , than in the previous December, a 4.3% decline.”

  1. Use this data to estimate price elasticity for subway rides.
  2. According to your estimate, what happens when the fare rises?

8. You are the curator of a museum. The museum is running short of funds, so you decide to increase revenue. Should you increase or decrease the price of admission? Explain your answer.