# Chapter 5 Homework Answer Keys - currently \$2, this would...

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Chapter 5 Homework Answer Keys 6. a. If your income is \$10,000, your price elasticity of demand as the price of compact discs rises from \$8 to \$10 is [(40 – 32)/36]/[(10 – 8)/9] =0.22/0.22 = 1. If your income is \$12,000, the elasticity is [(50 – 45)/47.5]/[(10 – 8)/9] = 0.11/0.22 = 0.5. b. If the price is \$12, your income elasticity of demand as your income increases from \$10,000 to \$12,000 is [(30 – 24)/27]/[(12,000 – 10,000)/11,000] = 0.22/0.18 = 1.22. If the price is \$16, your income elasticity of demand as your income increases from \$10,000 to \$12,000 is [(12 – 8)/10]/[(12,000 – 10,000)/11,000] = 0.40/0.18 = 2.2. 11. a. With a price elasticity of demand of 0.4, reducing the quantity demanded of cigarettes by 20% requires a 50% increase in price, because 20/50 = 0.4. With the price of cigarettes
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Unformatted text preview: currently \$2, this would require an increase in the price to \$3.33 a pack using the midpoint method (note that (\$3.33 – \$2)/\$2.67 = .50). b. The policy will have a larger effect five years from now than it does one year from now. The elasticity is larger in the long run, because it may take some time for people to reduce their cigarette usage. The habit of smoking is hard to break in the short run. c. Because teenagers do not have as much income as adults, they are likely to have a higher price elasticity of demand. Also, adults are more likely to be addicted to cigarettes, making it more difficult to reduce their quantity demanded in response to a higher price....
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## This note was uploaded on 04/26/2011 for the course ECON 201 taught by Professor Joyce during the Spring '07 term at Drexel.

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