Solution to Chapter_5

# Solution to Chapter_5 - Problems and Applications(Chapter...

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Problems and Applications (Chapter 5:page 110 – 111)

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Problems and Applications 2. Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston: Price Q D (business) Q D (vacationers) \$150 2,100 tickets 1,000 tickets 200 2,000 800 250 1,900 600 300 1,800 400
Problems and Applications a. As the price of tickets rises from \$200 to \$250, what is the price elasticity of demand for (i) business travelers and (ii) vacationers? (use the midpoint method in your calculations.)

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Problems and Applications a. Answer: 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.
Problems and Applications b. Why might vacationers have a different elasticity from business travelers?

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Problems and Applications b. Answer: 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.
Problems and Applications 3. Suppose the price elasticity of demand for heating oil is 0.2 in the short run and 0.7 in the long run. a) If the price of heating oil rises from \$1.80 to \$2.20 per gallon, what happens to the quantity of heating oil demanded in the short run? In the long run? (use the midpoint method in your calculations.)

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Problems and Applications a. Answer: the percentage change in price is equal to (2.20 – 1.80)/2.00 = 0.2 = 20%. If the price elasticity of demand is 0.2, quantity demanded will fall by 4% in the short run [0.20 × 0.20]. If the price elasticity of demand is 0.7, quantity demanded will fall by 14% in the long run [0.7 × 0.2].
Problems and Applications b. Why might this elasticity depend on the time horizon?

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Problems and Applications b. Answer: over time, consumers can make adjustments to their homes by purchasing alternative heat sources such as natural gas or electric furnaces. Thus, they can respond more easily to the change in the price of heating oil in the long run than in the short run.
Problems and Applications 4. A price change causes the quantity demanded of a good to decrease by 30 percent, while the total revenue of that good increases by 15 percent. Is the demand curve elastic or inelastic?

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Problems and Applications 4. Answer: if quantity demanded fell, price must have risen. If total revenue rose, then the percentage increase in the price must be greater than the percentage decline in quantity demanded. Therefore, demand is inelastic.
Problems and Applications 5. The equilibrium price of coffee mugs rose sharply last month, but the equilibrium quantity was the

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Solution to Chapter_5 - Problems and Applications(Chapter...

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