Problem Set: MathEcon

1. Economists use the concept of price elasticity of demand to measure

a. how much buyers respond to changes in the price of the good.
b. how much sellers respond to changes in the price of the good.
c. how much worse off consumers are when the price of the good rises.
d. how much demand responds to changes in buyers' incomes.

2. If the price elasticity of demand for a good is 0.45, it is most likely that the good
a. has many close substitutes c. is high-priced
b. is a luxury good d. has a demand curve that is price inelastic

3. Orlando`s Bakery reduces the price of wheat bread from 2 to 1 and finds that quantity
demanded increases from 100 to 120 loaves. Cap calculates that the price elasticity of
demand for wheat bread is (approximately)
a. 0.30 b. 5.00 c. 10.5 d. 2.00

4. An economist estimates that 0.67 is the price elasticity of demand for disposable diapers. This suggests
that disposable diaper producers could
a. advertise more to raise the price elasticity of demand
b. encourage more parents to use cloth diapers
c. lower the price of disposable diapers to raise more revenue
d. raise the price of disposable diapers to raise more revenue

5. If the price elasticity of demand for concert tickets is 4.5, then a 10 percent increase in the
price of concert tickets will generate a
a. 4.5 percent decrease in quantity demanded c. 45 percent decrease in quantity demanded
b. 4.5 percent increase in quantity demanded d. 45 percent increase in quantity demanded

6. Suppose the price of product X is reduced from 1.45 to 1.25 and, as a result, the quantity of X
demanded increases from 2,000 to 2,200. Using the midpoint method, the price elasticity of
demand for X in the given price range is
a. 2.00. b. 1.55. c. 1.00. d. 0.64.

7. If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price would
result in a
a. 4.0 percent decrease in the quantity demanded.
b. 10 percent decrease in the quantity demanded.
c. 40 percent decrease in the quantity demanded.
d. 400 percent decrease in the quantity demanded.

8. The main reason for using the midpoint method is that it

a. uses fewer numbers.
b. gives the same answer regardless of the direction of change.
c. rounds prices to the nearest peso.
d. rounds quantities to the nearest whole unit.

Figure 1

For Questions 9-10, refer to Figure 1

9. As price falls from PA to PB, which demand curve is most elastic?
a. D1 b. D2 c. D3 d. All of the above are equally elastic.

10. As price falls from PA to PB, which demand curve is least elastic?
a. D1 b. D2 c. D3 d. All of the above are equally elastic.

11. When demand is inelastic, a decrease in price will cause

a. an increase in total revenue. c. no change in total revenue.
b. a decrease in total revenue. d. There is insufficient information to answer this question.

12. Suppose a producer is able to separate customers into two groups, one having a price inelastic demand
and the other having a price elastic demand. If the producer's objective is to increase total revenue, he should
a. increase the price charged to customers with the price elastic demand and decrease the price
charged to customers with the price inelastic demand.
b. decrease the price charged to customers with the price elastic demand and increase the price
charged to customers with the price inelastic demand.
c. charge the same price to both groups of customers.
d. increase the price for both groups of customers.

13. Nicole runs a small boutique in Guiwan. She tells one of her suppliers that she is willing to pay 1500 for a
wool gown and not a centavo more. On the basis of this information, what can you conclude about her price
elasticity of demand for wool gown?
a. It is elastic b. It is perfectly elastic. c. It is perfectly inelastic. d. The price elasticity coefficient is 0.

145. Arvie is a competitive body builder. He says he has to have his 12-oz package of protein powder to "feed
his muscles" every day. On the basis of this information, what can you conclude about his price elasticity of
demand for protein powder?
a. It is elastic. b. It is perfectly elastic. c. It is perfectly inelastic. d. The price elasticity coefficient is 0.

15. Goods with many close substitutes tend to have

a. more elastic demands. c. price elasticities of demand that are unit elastic.
b. less elastic demands. d. income elasticities of demand that are negative.

The following table shows the demand schedule for a particular good.
Price Quantity
15 0
12 5
9 10
6 15
3 20
0 25

16. Refer to Table. Using the midpoint method, what is the price elasticity of demand when price rises from
9 to 12?
a. 0.43 b. 0.67 c. 1.50 d. 2.33

17. Refer to Table. Using the midpoint method, when price rises from 6 to 9, the price elasticity of demand is
a. 0.43 b. 0.67 c. 1.00 d. 1.5

18. In which of these instances is demand said to be perfectly inelastic?

a. An increase in price of 2% causes a decrease in quantity demanded of 2%.
b. A decrease in price of 2% causes an increase in quantity demanded of 0%.
c. A decrease in price of 2% causes a decrease in total revenue of 0%.
d. The demand curve is horizontal.

19. Total revenue is equal to

a. price elasticity of demand multiplied by quantity c. price of the good divided by quantity
b. price elasticity of demand divided by quantity d. price of the good multiplied by quantity

20. The price elasticity of demand will increase with the length of the period to which the demand curve
pertains because
a. consumers’ incomes will increase.
b. the demand curve will shift outward.
c. all prices will increase over time.
d. firms will be better able to produce the good for less.
e. consumers will be better able to find substitutes.
21. Luxuries are distinguished from necessities by
a. the number of substitutes available for each.
b. the fact that luxuries have high prices and necessities have low ones.
c. the high price elasticity of demand for luxuries and the low price elasticity of demand for necessities.
d. the high income elasticity of demand for luxuries and the low income elasticity of demand for necessities.
e. the absolute slope of the Engel curve.

22. The income elasticity of an inferior good is

a. negative because as people get richer they increase their purchases of the good by smaller and smaller amounts.
b. 1 because the increased income offsets the desire to consume less of the good because it is inferior.
c. greater than 1 because the richer you get, the less you consume of the good.
d. negative because higher income leads to a reduction in the amount consumed of the product.

23. The income elasticity of demand

a. is negative for normal goods.
b. is positive for inferior goods.
c. equals the relative change in demand for a good divided by the relative change in the income of
consumers, all else being equal.
d. is correctly described by all of the above.

24. If a good’s income-elasticity-of-demand estimate equaled

a. 2.46, an economist would call the good a necessity.
b. 0.37, an economist would call the good a luxury.
c. -0.50, an economist would call the good an inferior one.
d. -0.50, an economist would call the good a complementary one.

25. If the income elasticity of demand for a Hany bar is 0.59, then we know that within the relevant price range for
hany bars, it is
a. necessity good b. inferior good c. normal good d. substitute good e. complement good

B. Problem Solving

1. The following table provides information regarding demand elasticities, income elasticities and cross
price
elasticities of demand.
Commodity/Good Demand Income Price change in Cross
Elasticity Elasticity Commodities Elasticity
Electricity (in home) 0.15 0.25 Coal 0.35
Fast food Meals 1.9 2.5 --- ---
Coffee 0.25 --- Milk -0.15
Banana Loaf 0.20 -0.10 --- ---
a. Which commodities are normal? a._________ b.__________
b. Which commodities are inferior? a.) _________
c. Which commodities are complements? a._________ b.__________
d. Which commodities are substitutes? a._________ b.__________
e. Which commodities have elastic demand? a.______
f. Which commodities have inelastic demand? a._________ b.__________ c.__________
g. What will happen to the total revenue of bread if its price increases? (increase, decrease or
unchanged)
h. What will happen to the quantity demanded of coffee if the price of natural gas increases by 1%?
i. What will happen to the quantity demanded of coffee if the price of milk increases by 1%?

2. Suppose two consumers have the following demand for cigarettes (measured in cigarettes per week):

Price Quantity Demanded (Consumer A) Quantity Demanded (Consumer B)

Ph. 2.00 154 210

 2.50 147 175

3.00 140 140

3.50 133 105

a) As the price of cigarettes rises from Ph. 2.50 to Ph. 3.00, what is the price elasticity of demand for:
1. consumer A
2. consumer B?
b) Guidion is 17 years old and is experimenting with cigarettes. He is not addicted yet, but when he
doesn’t have anything better to do, he enjoys getting with friends and smoking. Aling Ruvie has
been smoking for years. She doesn’t really enjoy smoking anymore, but she’s addicted and has
trouble stopping. According to the elasticities you`ve calculated in letter A, which statement is
more likely to be true:
Statement 1: Guidion is Consumer A and Aling Ruvie is Consumer B
Statement 2: Guidion is Consumer B and Aling Ruvie is Consumer A.
Briefly explain your reasoning.

3. You are a market researcher employed by Blackbetty Cell Phone Company:Last year your company
sold 50,875 cell phones. All else equal, the price of cell phones is expected to decrease by 5% this year compared
to last year. In addition, your research department estimates that the corresponding price elasticity of demand for
your cell phones is 0.7. Given this information, how many cell phones do you estimate that your company will sell
this year?

4. Given Qx= 400-8P + 0.05Y, where P = 15 and Y= 12,000 (Y is income and P is the price of good X). Find:
a. the total revenue.
b. the estimated demand of the product, if price is increasing by 5 percent.

3. Suppose a 3 percent increase in the price of corny mooh causes a 6 percent decline in the
quantity demanded. What is the elasticity of demand for corny mooh?

5. Price elasticity of demand for the airline industry is -2.4. How much will the quantity drop %ΔQ if the price
increases on average by 10%?

6. Suppose that the monthly demand for poker cards in Barangay Tong-its is QD = 1000 –2P.
a. Using elasticity, suppose that the initial price is 40 pesos, calculate the price elasticity of demand
between a price of 50 and 40.
b. Suppose that the prevailing price is 40. Would you recommend an increase in the price to 50, why or
why not (Hint: Calculate the total revenue first from the sale of poker cards at a price of 40 and at a
price of 50.)? Explain briefly using the concept of elasticity.