Principles_HWsolution_ch5

# Principles_HWsolution_ch5 - the same amount on gas no...

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Suggested Answers for Mankiw, Chapter 5, Problem 2, 7, 11 2. a. For business travelers, the price elasticity of demand when the price of tickets rises from \$200 to \$250 is [(2,000 – 1,900)/1,950]/[(250 – 200)/225] = 0.05/0.22 = 0.23. For vacationers, the price elasticity of demand when the price of tickets rises from \$200 to \$250 is [(800 – 600)/700] / [(250 – 200)/225] = 0.29/0.22 = 1.32. b. The price elasticity of demand for vacationers is higher than the elasticity for business travelers because vacationers can choose more easily a different mode of transportation (like driving or taking the train). Business travelers are less likely to do so because time is more important to them and their schedules are less adaptable. 7. Tom's price elasticity of demand is zero, because he wants the same quantity regardless of the price. Jerry's price elasticity of demand is one, because he spends
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Unformatted text preview: the same amount on gas, no matter what the price, which means his percentage change in quantity is equal to the percentage change in price. 11. a. As Figure 3 shows, the increase in demand increases both the equilibrium price and the equilibrium quantity in both markets. b. In the market for beachfront resorts (with inelastic supply), the increase in demand leads to a relatively large increase in the equilibrium price and a small increase in the equilibrium quantity. c. In the market for automobiles (with elastic supply), the increase in demand leads to a relatively large increase in the equilibrium quantity and a small increase in equilibrium price. d. In both markets, total consumer spending rises, because both equilibrium price and equilibrium quantity rise. Figure 3...
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