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chap4,5solution

# chap4,5solution - Problem set 2 27.5 total points Chapter 4...

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1 Problem set 2 27.5 total points Chapter 4 3. According to Table 4.1, by how much will unit sales of (a) coffee, (b) shoes, and (c) airline travel decline when price goes up by 10 percent? What will happen to total revenue in each case? a. The quantity demanded of coffee will decline by 3% (0.5 pt) and total revenue will increase (0.5 pt) . b. The quantity demanded of shoes will decline by 9% (0.5 pt) and total revenue stay about the same (0.5 pt) . c. The quantity demanded of airline travel will decline by 24% (0.5 pt) and total revenue will decrease (0.5 pt) .

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2 4. According to the Headline on p. 64, what is the price elasticity of demand for alcohol among college students? The article states that the quantity demanded will decrease by 33% when price goes up \$1.00. You calculate the percentage change in price by taking the change in price, \$1.00, and dividing it by \$2.67 (the average of the starting and ending prices). This is equal to 37%. The price elasticity is 33% divided by 37%, which results in an elasticity of 0.89 (1 pt) . This is slightly inelastic.
3 6. In 1998, President Clinton proposed an additional \$1.10 per pack tax that would have increased cigarette prices roughly 60 percent. According to the Headline on p. 97, by how much would teen smoking have dropped in response to such a tax? Elasticity of demand = 0.7 = % Q d / 0.60 = 0.60 x 0.7 = 0.42 The quantity demanded of cigarettes by teens would decrease by 42 percent (1 pt) given a \$1.10 per pack tax on cigarettes.

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4 7.
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chap4,5solution - Problem set 2 27.5 total points Chapter 4...

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