Microeconomics Chapter 6
CHAPTER
6|
Elasticity:
The Responsiveness of Demand and
Supply
SOLUTIONS TO END-OF-CHAPTER EXERCISES
Answers to Thinking Critically Questions
1. Even if the overall demand for gasoline is inelastic, a revenue increase for Joe’s Gas-and-Go will occur only if the percentage increase in price is greater than the percentage decrease in quantity demanded. If
Joe’s price increase is too large and Joe has other competitors who do not raise their prices, then it is possible that the percentage decrease in quantity demanded will result in a decrease in total revenue.
2. If Wal-Mart and Sam’s Club begin selling gasoline at lower prices than the conventional service stations, this will cause the demand curves faced by the conventional service stations to shift left and become more elastic, which will lower the equilibrium price of gasoline at these stations.
6.1
The Price Elasticity of Demand and its Measurement
Learning Objective: Define price elasticity of demand and understand how to measure it.
Review Questions
1.1
Price elasticity of demand = (percentage change in quantity demanded)/(percentage change in price). It isn’t measured by the slope of the demand curve because the slope depends arbitrarily on what units you are using. Slope will change by a factor of 100 if you use cents instead of dollars, for example.
Or, for another example, consider six-packs of soda versus cans of soda: If the price drops by $1.00 per six-pack and this causes quantity demanded to increase by two six-packs, then that is the same thing as quantity demanded going up by 12 cans. So, you could calculate the slope either as −1/2 six-packs, or as
−1/12 cans. In addition, using percentage changes in the elasticity formula allows for meaningful comparisons of demand responsiveness between very different kinds of goods: for example, breakfast cereal versus health care. Because the slope uses physical units of quantities, such comparisons are impossible. 1.2
6|
Elasticity:
The Responsiveness of Demand and
Supply
SOLUTIONS TO END-OF-CHAPTER EXERCISES
Answers to Thinking Critically Questions
1. Even if the overall demand for gasoline is inelastic, a revenue increase for Joe’s Gas-and-Go will occur only if the percentage increase in price is greater than the percentage decrease in quantity demanded. If
Joe’s price increase is too large and Joe has other competitors who do not raise their prices, then it is possible that the percentage decrease in quantity demanded will result in a decrease in total revenue.
2. If Wal-Mart and Sam’s Club begin selling gasoline at lower prices than the conventional service stations, this will cause the demand curves faced by the conventional service stations to shift left and become more elastic, which will lower the equilibrium price of gasoline at these stations.
6.1
The Price Elasticity of Demand and its Measurement
Learning Objective: Define price elasticity of demand and understand how to measure it.
Review Questions
1.1
Price elasticity of demand = (percentage change in quantity demanded)/(percentage change in price). It isn’t measured by the slope of the demand curve because the slope depends arbitrarily on what units you are using. Slope will change by a factor of 100 if you use cents instead of dollars, for example.
Or, for another example, consider six-packs of soda versus cans of soda: If the price drops by $1.00 per six-pack and this causes quantity demanded to increase by two six-packs, then that is the same thing as quantity demanded going up by 12 cans. So, you could calculate the slope either as −1/2 six-packs, or as
−1/12 cans. In addition, using percentage changes in the elasticity formula allows for meaningful comparisons of demand responsiveness between very different kinds of goods: for example, breakfast cereal versus health care. Because the slope uses physical units of quantities, such comparisons are impossible. 1.2