Krugman_SolMan_CH05

# Krugman_SolMan_CH05 - Krugman_SolMan_CH05 4:01 PM Page 47...

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chapter 5 Elasticity 1. a. Using the midpoint method, the percent change in the quantity demanded by Group A is × 100 = × 100 = 6.25% and since the change in price is 10%, the price elasticity of demand for Group A is = 0.625 Using the midpoint method, the percent change in the quantity demanded by Group B is × 100 = × 100 = 12.5% and since the change in price is 10%, the price elasticity of demand for Group B is = 1.25 b. For Group A, since the price elasticity of demand is 0.625 (demand is inelastic), total revenue will decrease as a result of the discount. For Group B, since the price elasticity of demand is 1.25 (demand is elastic), total revenue will increase as a result of the discount. c. If TheNile.com wants to increase total revenue then it should definitely not offer the discount to Group A and it should definitely offer the discount to Group B. 2. a. The price elasticity of demand for Ford SUVs will increase because more substi- tutes are available. The price elasticity of demand for Ford SUVs will decrease because fewer substi- tutes are available. c. The price elasticity of demand for Ford SUVs will decrease because other cars are viewed as less of a substitute. d. The price elasticity of demand for Ford SUVs will increase over time because more substitutes (such as four-wheel-drive cargo vans) become available. 3. a. Using the midpoint method, the percent change in the quantity demanded of U.S. winter wheat is × 100 = × 100 = 8.8% and the percent change in the price of U.S. winter wheat is × 100 = × 100 = 30.5% The price elasticity of demand is therefore = 0.29 The total revenue in 1998 is the price per bushel in 1998 times the quantity of bushels demanded in 1998. That is, total revenue in 1998 is \$3.70 × 1.74 billion = \$6.438 billion. Similarly, total revenue in 1999 is \$2.72 × 1.9 billion = \$5.168 billion. c. The fall in price from 1998 to 1999 reduced U.S. wheat farmers’ total revenue. This could have been predicted by knowing that demand is inelastic: in part a we calculated a price elasticity of demand of 0.29. In this case, the price effect of this price fall (which tends to reduce total revenue) outweighed the quantity effect (which tends to increase total revenue). 8.8% 30.5% \$0.98 \$3.21 \$3.70 \$2.72 (\$3.70 + \$2.72)/2 0.16 billion 1.82 billion 1.9 billion 1.74 billion (1.74 billion + 1.9 billion)/2 12.5% 10% 0.2 million 1.6 million 1.7 million 1.5 million (1.5 million + 1.7 million)/2 6.25% 10% 0.1 million 1.6 million 1.65 million 1.55 million (1.55 million + 1.65 million)/2 47 Krugman_SolMan_CH05 11/11/04 4:01 PM Page 47

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4. a. Using the midpoint method, the percent change in the quantity supplied is × 100 = × 100 = 40% and the percent change in the price is × 100 = × 100 = 20% The price elasticity of supply is therefore = 2 b. The elasticity estimate would be lower. A price change from \$900 to \$1,100 is a 20% price change, just as calculated in part a. Previously, when the quantity sup- plied changed from 8,000 to 12,000, that was a 40% change in the quantity sup- plied. Now that the quantity supplied at each price is higher by 1,000, the same price change would imply a change in the quantity supplied from 9,000 to 13,000, which is a 36% change using the midpoint method. The new price elasticity of demand is 36%/20% = 1.8, which is lower than in part a.
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Krugman_SolMan_CH05 - Krugman_SolMan_CH05 4:01 PM Page 47...

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