ELASTICITY AND ITS APPLICATION
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 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.
88 89 ✦ Chapter 5/Elasticity and Its Application
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.
3. a. If your income is $10,000, your price elasticity of demand as the price of compact discs
rises from $8 to $10 is [(40 - 32)/36]/[(10 - 8)/9] =0.22/0.22 = 1. If your income is
$12,000, the elasticity is [(50 - 45)/47.5]/[(10 - 8)/9] = 0.11/0.22 = 0.5.
b. If the price is $12, your income elasticity of demand as your income increases from
$10,000 to $12,000 is [(30 - 24)/27] / [(12,000 - 10,000)/11,000] = 0.22/0.18 = 1.22.
If the price is $16, your income elasticity of demand as your income increases from
$10,000 to $12,000 is [(12 - 8)/10] / [(12,000 - 10,000)/11,000] = 0.40/0.18 = 2.2.
4. a. If Emily always spends one-third of her income on clothing, then her income elasticity of
demand is one, since maintaining her clothing expenditures as a constant fraction of her
income means the percentage change in her quantity of clothing must equal her
percentage change in income. For example, suppose the price of clothing is $30, her
income is $9,000, and she purchases 100 clothing items. If her income rose 10 percent
to $9,900, she'd spend a total of $3,300 on clothing, which is 110 clothing items, a 10
b. Emily's price elasticity of clothing demand is also one, since every percentage point
increase in the price of clothing would lead her to reduce her quantity purchased by the
same percentage. Again, suppose the price of clothing is $30, her income is $9,000, and
she purchases 100 clothing items. If the price of clothing rose 1 percent to $30.30, she
would purchase 99 clothing items, a 1 percent reduction. [Note: This part of the
problem can be confusing to students if they have an example with a larger percentage
change and they use the point elasticity. Only for a small percentage change will the
answer work with an elasticity of one. Alternatively, they can get the second part if they
use the midpoint method for any size change.]
c. Since Emily spends a smaller proportion of her income on clothing, then for any given
price, her quantity demanded will be lower. Thus her demand curve has shifted to the
left. But because she'll again spend a constant fraction of her income on clothing, her
income and price elasticities of demand remain one.
5. a. The percent change in quantity demand is (2.92-2.62)/2.77 which is 2.46%. The price
elasticity of demand is 2.47/22 = 0.11.
b. Given that the price elasticity of demand is inelastic (less than one), an increase in the
price of milk will increase total revenue.
c. Recall from Chapter 4 that a movement along a demand curve is called a “change in
quantity demanded”, brought about by a change in the price of the good we are
considering. So, in this article, it states that a price increase leads to a fall in demand
when it should have stated a fall in quantity demanded. A movement up the demand
curve due to the price increase may put you into the elastic range of the demand
elasticity as opposed to the inelastic demand that we calculated. Chapter 5/Elasticity and Its Application ✦ 90
6. Tom's price elasticity of demand is zero, since he wants the same quantity regardless of the
price. Jerry's price elasticity of demand is one, since he spends the same amount on gas, no
matter what the price, which means his percentage change in quantity is equal to the percentage
change in price.
7. The answer depends on the elasticity of demand. If the demand for visits is inelastic, then an
increase in the price of admission would increase total revenue. But if the demand is elastic, then
an increase in price would cause the number of vis