Answers PE_Chapters1-5.doc.docx

10 opec was unable to maintain a high price through

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10. OPEC was unable to maintain a high price through the 1980s because the elasticity of supply and demand was more elastic in the long run. When the price of oil rose, producers of oil outside of OPEC increased oil exploration and built new extraction capacity. Consumers responded with greater conservation efforts. As a result, supply increased and demand fell, leading to a lower price for oil in the long run. Problems and Applications 1. a. Mystery novels have more elastic demand than required textbooks, because mystery novels have close substitutes and are a luxury good, while required textbooks are a necessity with no close substitutes. If the price of mystery novels were to rise, readers could substitute other types of novels, or buy fewer novels altogether. But if the price of required textbooks were to rise, students would have little choice but to pay the higher price. Thus the quantity demanded of required textbooks is less responsive to price than the quantity demanded of mystery novels. b. Beethoven recordings have more elastic demand than classical music recordings in general. Beethoven recordings are a narrower market than classical music recordings, so it's easy to find close substitutes for them. If the price of Beethoven recordings were to rise, people could substitute other classical recordings, like Mozart. But if the price of all classical recordings were to rise, substitution would be more difficult (a transition from classical music to rap is unlikely!). Thus the quantity demanded of classical recordings is less responsive to price than the quantity demanded of Beethoven recordings. c. Heating oil during the next five years has more elastic demand than heating oil during the next six months. Goods have a more elastic demand over longer time horizons. If the price of heating oil were to rise temporarily, consumers couldn't switch to other sources of fuel without great expense. But if the price of heating oil were to be high for a long time, people would gradually switch to gas or electric heat. As a result, the quantity demanded of heating oil during the next six 40
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months is less responsive to price than the quantity demanded of heating oil during the next five years. d. Root beer has more elastic demand than water. Root beer is a luxury with close substitutes, while water is a necessity with no close substitutes. If the price of water were to rise, consumers have little choice but to pay the higher price. But if the price of root beer were to rise, consumers could easily switch to other sodas. So the quantity demanded of root beer is more responsive to price than the quantity demanded of water. 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 since time is more important to them and their schedules are less adaptable.
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