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Economics 101300
Winter, 2008
Practice Problems
Problems:
1)
In an attempt to decrease the amount of drinking on college campuses, state
legislators decide to raise the price of beer by 10%.
If beer has a price elasticity of
demand of 2, by what percent will the quantity of beer demanded decrease as a
response to the price increase?
Answer: 20%. Price elasticity of demand is given by the following formula:
Demand elasticity =
Percentage change in quantity demanded
Percentage change in price
Therefore:
2 = Percentage change in quantity demanded
10%
20% = Percentage change in quantity demanded
2) Here is an example of how a topic addressed in the previous question might be
presented as a multiple choice problem: If, as the price of beer increases, you find that
the total expenditure spent on beer in the state has decreased by more than the
percentage increase in the price of beer, then the absolute value of the price elasticity
of demand on beer is:
a)
Smaller than 0
b) Greater than 0 but smaller than 1
c)
Greater than 1
d) Equal to 1
e)
Equal to 0
Answer: Total expenditure = Price * Quantity.
If price increases by 10% and total
expenditure decreases by 20%, then quantity must have fallen by more than 10%.
The
elasticity is bigger than 1.
3)
Suppose Kata consumes only two goods, Ginger Ale and bread. Her income is $24.
The price of a Ginger Ale is $2 a can and the price of a loaf of bread is $4. The
following table indicates Kata’s preferences over the two goods, where MU stands for
marginal utility.
Quantity
1
2
3
4
5
6
7
8
MU of Ginger Ale
28
24
20
16
14
12
4
2
MU of Bread
40
32
24
20
16
12
8
4
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View Full DocumentIf Kata is a utility maximizing consumer, Kata will consume ____ cans of Ginger Ale
and ____loaves of bread, giving her a total utility of____:
a)
2, 5, 188
b) 4, 4, 36
c)
4, 4, 208
d) 6, 3, 40
e)
6, 3, 210
Answer: e
Don’t forget to add up all of the marginal utilities to get the total utility of
each thing consumed.
4) You are the manager of a small city.
You have to find a way to make your city bus
system take in more revenue.
The bus system is in competition with automobiles,
taxis, and the metro.
Your staff recommends raising the bus fare to increase revenue,
but at a community meeting about the issue, bus riders argued that reducing the fare
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 Winter '08
 Gerson
 Microeconomics, Price Elasticity

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