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BUS 207 Chapter Notes - Chapter 4: Grape, Neurosurgery, Economic EquilibriumExam

Business Administration
Course Code
BUS 207
Bernie Maroney
Study Guide

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Chapter 4: Elasticity
Answers to Study Exercises
Fill-in-the-Blank Questions
Question 1
a) 2; relatively elastic
b) 0.4; relatively inelastic
c) 1; unit elastic
Question 2
a) price; quantity; average
b) negative; absolute value; positive
c) inelastic; more elastic
d) substitutes; elastic
e) increase; reduction
Question 3
a) zero
b) responsiveness
c) quantity supplied; that products’ price
d) elastic
e) elastic
f) greater; price
Question 4
a) 0.1; inelastic

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b) 1.5; elastic
c) zero; rises or increases
d) zero; falls or decreases
e) falls or decreases; negative
f) rises or increases; positive
Review Questions
Question 5
a) The record harvests shifted the supply curve to the right and reduced prices. The disastrous
result for farmers suggests that their incomes have fallen. This would occur if demand for wheat is
b) We conclude that demand for bus travel is inelastic since total expenditure on bus travel
apparently declines as price declines.
c) Demand for cell phones is apparently elastic, since total expenditure on cell phones rises as price
declines (because quantity demanded increases by a larger proportion than the decline in price). The
students should recognize that the clue of “revenues soaring” means that quantity demanded
increased by more than prices declined.
d) The speaker is asserting that he or she has a perfectly inelastic demand for coffee. This is
possible over some, but not all, ranges of price––how about at a price of $1000 per cup? Also,
one person’s perfectly inelastic demand is not sufficient to make market demand perfectly
e) The demand for housing is increasing greatly in Vancouver. Therefore, the demand curve is
shifting to the right. This causes the price to increase (as we move up along an upward-sloping, and
likely very inelastic, supply curve). As price rises, we also move (along) any given demand curve.
But this tells us nothing about the elasticity of demand.
Question 6
The key to this question is to recognize that own-price elasticity of demand is determined mostly
by the availability of substitutes. Notice that the products are listed in order of decreasing
generality. That is, item (e) is a subset of (d), which is a subset of (c), which is a subset of (b),
which is a subset of (a). This means there are fewer substitutes for “food” (option a) than for
“leafy vegetables sold at your local supermarket on Wednesdays” (option e). Thus, we would
expect demand for (a) to be the least elastic and demand for (e) to be the most elastic.
Question 7

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Chapter 4: Elasticity
The demand for the stamps is downward sloping, as shown in the diagram below. The supply is a
vertical line at Q=2. If the stamp dealer sold both stamps, the equilibrium price would be p2 and his
total revenue would be the dark shaded area. If, instead, he chooses to burn one stamp, the supply
(after the fire) will be a vertical line at Q=1. If he now sells the single stamp, the equilibrium price
will be higher at p1 and his total revenue would be the light shaded area. It should be clear from the
diagram that if the demand curve is sufficiently inelastic then p1 will be much higher than p2 and the
total revenue from the single stamp when sold at p1 will exceed the total revenue of the two stamps
when each is sold at p2. In this case the decision to burn the stamp would be wealth maximizing and
perfectly sensible. Remind the students that the question assumes the stamp dealer only cares about
wealth maximizing and not about saving a rare stamp from a collector’s perspective.
Question 8
a) Of the products listed, the ones with the greatest short-run supply elasticity are likely to be
those which firms can easily produce when they choose to do sobecause the technology is
easily available and specific and/or expensive equipment is not necessary. Probably the supplies
of kitchen blenders and doughnuts are most elastic in the short run.
b) Less elastic will likely be the supply of fibre-optic cable and rental apartments, both of which
probably require specific capital and construction. Least elastic of all would likely be the oil
tankers and neurosurgery.
Question 9
The right diagram for analysing this question is Figure 4-9 in the textbook. For both alcohol and
cigarettes, the elasticity of supply is likely far larger than the elasticity of demand. So the
appropriate figure is the left-hand-side of Figure 4-9a relatively steep demand curve and a
relatively flat supply curve.
In the presence of an excise tax on alcohol or cigarettes, the tax leads to a vertical shift of the
supply curve equal to the amount of the tax. With inelastic demand, the consumer price rises by a
lot whereas the seller price falls by only a little. The result is that consumers bear most of the
economic burden of excise taxes for these products. Discuss with your students why this is and
why government would want to tax these goods. Since they are addictive, especially cigarettes,
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