Answers to chapter CHECKPOINT EXERCISES
1a.The price elasticity of demand is (2 percent) (20 percent), which is 0.10. (Recall that when calculating the price elasticity of demand, we use absolute values or magnitudes and ignore the minus sign.) So, the demand for home heating oil is inelastic because the percentage change in quantity demanded is less than the percentage change in price
1b.Because the demand for home heating oil is inelastic, it is likely to be a necessity.
1c.Total revenue increases as the price of home heating oil increases. When the demand for a good is inelastic, price and total revenue change in the same direction.
1d.The cross elasticity of demand for wool sweaters with respect to home heating oil is
1e.Home heating oil and sweaters are substitutes because as the price of home heating oil rises, you can stay warm by using less home heating oil and putting on a sweater. The cross elasticity of demand for a substitute is positive.
2a.The percentage change in the quantity of movie tickets demanded equals which is 100 percent. The percentage change in the price of a movie ticket equals which is 25 percent. So the demand for movie tickets is elastic because the percentage change in the quantity demanded is larger than the percentage change in price.
2b.Because the demand is elastic, the fall in the price of a movie ticket increases the total revenue from the sale of movie tickets. When the price is $9 a ticket, the total revenue is $9 a ticket 100 tickets, which is $900. When the price is $7 a ticket, the total revenue is $7 a ticket 300 tickets, which is $2,100. So the total revenue increases by $1,200.
2c.The price elasticity of demand for movie tickets is the percentage change in the quantity of movie tickets demanded divided by the percentage change in the price of a movie ticket. The percentage change in the quantity of movie tickets demanded equals which is 100 percent. The percentage change in the price of a movie ticket equals which is 25 percent. So the price elasticity of demand for movie tickets is 100 percent 25 percent, which is 4.00.
3.Because the price elasticity of demand for cookies is 1.5, Pete should lower the price of cookies to raise his total revenue. Because demand is elastic a decrease in the price of cookies will bring about a larger percentage increase in the quantity demanded than the percentage fall in price.
4a.Because the total revenue did not change, the percentage change in bananas demanded equals the percentage increase in price. Using the midpoint method, the percentage increase in the price equals ($1.00 $1.50) = 66.67 percent. So the quantity of bananas demanded decreased by 66.67 percent.
4b.The demand for bananas is unit elastic because the percentage increase in the price equals the percentage decrease in the quantity of bananas demanded.
5a.The percentage change in the quantity demanded of plane rides equals the price elasticity of demand for plane rides multiplied by the percentage change in the price of a plane ride, which is (0.5) (10 percent) = 5 percent.
5b.The percentage change in the quantity demanded of train rides equals the cross elasticity of demand for train rides with respect to the price of a plane ride multiplied by the percentage change in the price of a plane ride, which is (0.4) (10 percent) = 4 percent.
5c.The percentage change in the quantity demanded of train rides equals the price elasticity of demand for train rides multiplied by the percentage change in the price of a train ride, which is (0.2) (10 percent) = 2 percent.
5d.From the answer to part (b), when the price of a plane ride rises 10 percent, the quantity of train rides demanded increases 4 percent. The price rise of a train ride necessary to decrease the quantity demanded by 4 percent is 20 percent because a 20 percent increase in the price of train ride decreases the quantity demanded by (0.2) (20 percent) = 4 percent.
5e.In part (d), the change in the price of a plane ride leads to a movement along the demand curve for plane rides and a shift in the demand curve for train rides.
6a.The demand for club memberships increases with income, so club membership is a normal good. Because the percentage change in the quantity of club memberships demanded increased by more than the percentage change in income, the demand for club memberships is income elastic.
6b.The demand for spring water increases with income, so it is a normal good. Because the percentage change in the quantity of spring water demanded increased by less than the percentage change in income, the demand for spring water is income inelastic.
6c.The demand for soft drinks decreases with income, so it is an inferior good.
6d.The demand for club memberships is income elastic and equals 15 percent 10 percent, which is 1.5. The demand for spring water is income inelastic and equals 5 percent 10 percent, which is 0.5.
6e.Club memberships and spring water are normal goods. Soft drinks are an inferior good.
7a.The price elasticity of demand for bus rides is inelastic because the price elasticity of demand is less than 1.0. When the elasticity is less than 1.0, an increase in the price of a bus fare brings about a percentage decrease in the quantity of bus rides demanded that is smaller than the percentage increase in price.
7b.An increase in the price of bus fares increases the bus company’s total revenue. Because the demand is inelastic, an increase in the price of the fare leads to a smaller percentage decrease in the quantity of bus rides demanded than the percentage increase in the fare. As a result, total revenue increases.
7c.Bus rides and gasoline are substitutes. As the price of gasoline increases, it becomes more expensive to drive your car and you might decide to take a bus to work. The cross elasticity of demand between bus rides and gasoline is positive, indicating that the two are substitutes.
7d.The cross elasticity of demand for bus rides with respect to gasoline is 0.2, so bus rides increase by (10 percent) (0.2), which is 2 percent.
7e.The income elasticity of demand is 0.1, so bus rides decrease by (0.1) (5 percent), which is 0.5 percent.
7f.In Pioneer Ville, a bus ride is an inferior good because the income elasticity of demand is negative. As income increases, fewer bus rides are demanded.
7g.In Pioneer Ville, bus rides and gasoline are substitutes because the cross elasticity of demand is positive. As the price of gas increases, the quantity of bus rides demanded increases.
8.Your expenditure on haircuts and food will more than double because the income elasticity of demand for both exceeds 1.0. Only if the income elasticity of demand equals 1.0 will the expenditure on a good or service change proportionally with income.
9a.Rearranging the price elasticity of demand formula shows that the percentage change in the price of wheat equals the percentage change in the quantity demanded divided by the price elasticity of demand. So the percentage change in the price of wheat is (2 percent) (0.5), which is 4 percent.
9b.The estimated price elasticity of demand for pasta is equal to the percentage change in the quantity demanded of pasta divided by the estimated change in the price of pasta. So the estimated price elasticity of demand for pasta is (8 percent) (25 percent), which is 0.32.
9c.The estimated cross elasticity of demand for pasta sauce with respect to the price of pasta is equal to the percentage change in the quantity demanded of pasta sauce divided by the estimated change in the price of pasta. So the estimated cross elasticity of demand for pasta sauce with respect to the price of pasta is (5 percent) (25 percent), which is 0.2.
10.Probably most students would continue to buy about the same number of textbooks if the price of textbooks rose. So, the total expenditure on textbooks would increase. In this case, the student’s demand for textbooks is inelastic.
Critical Thinking
11.The owners of the Houston Galleria likely want a combination of goods in their mall. They do not want all their stores to sell substitute goods because then customers buy from only one store. So the owners do not, for instance, want all the stores to be shoe stores. Similarly, they owners do not want all their stores to sell complementary goods because then only customers who want to buy this chain of goods will shop in the mall. So the owners do not, for instance, want one store to be a hair stylist, another store to sell combs, another store to sell hair coloring, and so forth. The owners can use the cross elasticity of demand to be sure that the goods and services sold by the stores in the mall sell a wide diversity of substitutes and complements.
12.The first part of the statement, that sellers can gouge consumers when the demand is price inelastic, is generally incorrect. Presuming that “gouge” means set-a-higher-price-than-otherwise, the point is that the price is determined by demand and supply. With everything else the same, the greater the demand for the product, the higher the price for the product. And this is the case regardless of whether the demand is inelastic or elastic. The second part of the statement, that the government must set high standards to ensure that consumers get a fair deal, again ignores the fact that demand and supply determine the quantity that is produced, which likely determines whether consumers get a “fair deal.” If the demand increases, the quantity increases, regardless of whether the demand is elastic or inelastic.
13a.If OPEC raises the price of its oil, the effect on OPEC’s total revenue depends on the reaction of the non-OPEC oil-producing nations to the rise in price. The demand for crude oil is inelastic, which means that other things remaining the same, a rise in the price of crude oil leads to an increase in total revenue. But, the OPEC nations can not be guaranteed that all other oil-producing nations will continue to produce at a point such that other things do remain the same. If the other non-OPEC producers increase their supply of oil, the price will rise by less and OPEC’s total revenue would decrease.
13b.The elasticity of non-OPEC supply has a crucial influence on the price of crude oil. OPEC raises the price of oil by decreasing the supply. The more non-OPEC producers increase their supply, the less is the total decrease in supply and so the smaller is the price hike.
14a.The demand for UAW members’ labor services is perfectly inelastic at first and then, as time passes, the demand becomes elastic.
14b.In the short run, the percentage change in the quantity of labor demanded is zero percent, so the elasticity of demand is zero. After a year, the elasticity of demand equals (1.5 percent) (1 percent) = 1.5.
14c.Immediately after a pay increase, the total wage bill increases because the wage rate rises and there is no change in the number of jobs.
14d.After a year, the total wage bill decreases because the demand is elastic.
14e.To make the demand for their members’ labor service less elastic, the UAW needs to make other workers less substitutable for UAW members. So the UAW can try to train their members so that they possess a unique skill. The UAW can also support minimum wage laws to increase the cost of employing substitute labor for union members and make it more difficult for firms to hire non-union labor.
14f.The employers could provide training for non-UAW workers that give them the same skills as UAW labor.
Web Exercises
15a.According to the report, “…studies of the demand for air travel demand should distinguish among markets for: business and leisure travel; long-haul and short-haul travel; and international and North American long-haul travel.” It is necessary to break this service into several parts because the parts represent markets with different demand elasticities. There are, for instance, more substitutes for leisure travel and short-haul travel than for business or international travel and so the demands for leisure and short-haul travel are likely more elastic than the demands for business and international travel.
15b.The demand for long-haul, international business travel is the most inelastic. Its median elasticity estimate is 0.265. (The web site reports the elasticities as negative numbers. To keep with the book’s format, these numbers are changed to be positive in these answers.) This mode of travel has the least elastic demand because there are the fewest number of substitutes available for it.
15c.The demand for short-haul, leisure travel is the most elastic. Its median elasticity estimate is 1.520. This mode of travel has the most elastic demand because there are the largest number of substitutes available for it.
15d.If the price of air travel falls, using the median estimates of the elasticities, the total expenditure on long-haul, international business travel and on short-haul, business travel decreases because their price elasticities of demand are less than one. The total expenditure on long-haul, international leisure travel; on long-haul, domestic business; on long-haul, domestic leisure; and on short-haul leisure increases because their price elasticities of demand are greater than one.
15e.An airline can use these elasticities to estimate the effect on their total revenue from changing the price of a ticket. The airline would, of course, have to keep in mind that tickets on it are more elastic than airline tickets in general. But if there was an airline that was the only, say, international carrier, this airline could use the elasticities to determine whether raising or lowering its ticket prices would increase or decrease its total revenue.
16a.Probably most of the goods produced by McDonald’s have elastic demands because good substitutes, such as Burger King, exist for McDonald’s food. 3M makes a huge variety of products. Probably some of them have elastic demands—such as bandages, for which many other competing brands exist—while others have inelastic demands—such as scotch tape, which probably has an inelastic demand because it does not have many substitutes and its income effect is small.
16b.Even if the demand for a burger is inelastic, if McDonald’s keeps raising the price, the quantity demanded still decreases. And eventually McDonald’s will reach the point on its demand curve where the quantity demanded is zero and so total revenue will be zero.
16c.Even if the demand for Post-it Notes is elastic, 3M cannot control the demand for Post-it Notes. So if the demand for Post-it Notes increases, the price of Post-it Notes will rise.