1
Econ 110
Selected Questions From Chapter 4 - Elasticity
1
Rain spoils the strawberry crop. As a result, the price rises from $4 to $6 a box and the
quantity demanded decreases from 1,000 to 600 boxes a week. Over this price range,
a.
What is the price elasticity of demand?
The price elasticity of demand is 1.25. The price elasticity of demand equals the
percentage change in the quantity demanded divided by the percentage change in the
price. The price rises from $4 to $6 a box, a rise of $2 a box. The average price is $5 a
box. So the percentage change in the price is $2 divided by $5 and then multiplied by 100,
which equals 40 percent. The quantity decreases from 1,000 to 600 boxes, a decrease of
400 boxes. The average quantity is 800 boxes. So the percentage change in quantity is
400 divided by 800, which equals 50 percent. The price elasticity of demand for
strawberries is 50 percent divided by 40 percent, which equals 1.25. ($2÷$5) × 100
b.
Describe the demand for strawberries.
The price elasticity of demand exceeds 1, so the demand for strawberries is elastic.
2.
If the quantity of dental services demanded increases by 10 percent when the price of dental
services falls by 10 percent, is the demand for dental services inelastic, elastic, or unit
elastic?
The demand for dental services is unit elastic. The price elasticity of demand for dental
services equals the percentage change in the quantity of dental services demanded
divided by the percentage change in the price of dental services. The price elasticity of
demand is 10 percent divided by 10 percent, which equals 1. The demand is unit elastic.
3.
The demand schedule for hotel rooms is given in the table.
a.
What happens to total revenue if the price falls from
$400 to $250 a night?
When the price is $400, the total revenue is equal
to $400 × 50 million rooms, or $20 billion. When
the price is $250, the total revenue is equal to
$250 × 80 million rooms, or $20 billion. So the total
revenue does not change when the price falls from
$400 to $250 a night.
b.
What happens to total revenue if the price falls from
$250 to $200 a night?
When the price is $250, the total revenue is equal
to $250 × 80 million rooms, or $20 billion. When the price is $200, the total revenue is
equal to $200 × 100 million rooms, or $20 billion. So the total revenue does not change
when the price falls from $400 to $250 a night.
Price
(dollars
per night)
Quantity
demanded
(millions of
rooms per night)
200
100
250
80
400
50
500
40
800
25
1,000
20