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Answer guide for ch 4.
1. a. 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 equals
$2 divided by $5, 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 equals 400 divided by 800,
which equals 50 percent.
The price elasticity of demand for strawberries equals 50 divided by 40, which is 1.25.
b.
The price elasticity of demand exceeds 1, so the demand for strawberries is elastic.
2. a. The price elasticity of demand is 2.
When the price of a DVD rental rises from $3 to $5, the quantity demanded of DVDs
decreases from 75 to 25 a day. The price elasticity of demand equals the percentage
change in the quantity demanded divided by the percentage change in the price.
The price increases from $3 to $5, an increase of $2 a DVD. The average price is $4 a
DVD. So the percentage change in the price equals $2 divided by $4, which equals 50
percent.
The quantity decreases from 75 to 25 DVDs, a decrease of 50 DVDs. The average
quantity is 50 DVDs. So the percentage change in quantity equals 50 divided by 50,
which equals 100 percent.
The price elasticity of demand for DVD rentals equals 100 divided by 50, which is 2.
b.
The price elasticity of demand equals 1 at $3 a DVD.
The price elasticity of demand equals 1 at the price halfway between the origin and the
price at which the demand curve hits the yaxis. That price is $3 a DVD.
3.
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 equals 10 divided by 10, which is 1. The
demand is unit elastic.
4.
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 Fall '08
 BRIGHTWELL
 Price Elasticity

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