Microeconomics
Problem Set #4
Elasticity
Use the following information to answer questions 1 through 7:
When the local grocery store puts cereal on sale, reducing its price from $4.40 per item to
$3.40 per item, the quantity sold increases from 220 per week to 230 per week.
1. This illustrates the ________________ elasticity of _________________.
2. What formula is used to determine the percentage change in quantity demanded?
3. What is the percentage change in quantity demanded for the cereals described above?
4. What formula is used to determine the percentage change in price?
5. Calculate the percentage change in price for the cereal.
6. Finally, using the whole formula, calculate the value of the price elasticity of demand for
cereal.
7. Explain what this result means in words.
Use the following information to answer questions 8 and 9:
Suppose that a store decreases the price of laundry detergent from $4.10 to $3.50. As a
esult, quantity demanded increases from 210 to 230.
8. Using the mid-point approach, calculate the percentage change in price.
9. Using the mid-point elasticity approach, calculate price elasticity of demand. Your answer
should be expressed in absolute value terms.
Use the following information to answer questions 10 and 11:
Consider the following demand schedule for shoes.
Price Quantity Demanded
$5 385
$10 365
$15 345
$20 325
$25 305
$30 285
$35 265
$40 245
10. Suppose that the store increases the price of shoes from $25 to $30. Using the mid-point
approach, calculate price elasticity of demanded.
11. Suppose that the store increases the price of shoes from $25 to $30. Based on this
information, the demand curve would be classified as (select one):
a. inelastic
. elastic
c. unit elastic
12. Suppose that when the price of laundry detergent decreases from $4.10 to $3.50, quantity
supplied decreases from 260 to 180.
Using the mid-point elasticity approach, calculate price elasticity of supply.
13. Consider the following supply schedule for shoes.
Price Quantity Supplied
$5 425
$10 445
$15 465
$20 485
$25 505
$30 525
$35 545
$40 565
Suppose that the price of shoes increases from $25 to $30. Using the mid-point approach,
calculate price elasticity of supply.
14. Suppose that when income increases from $2900 to $3250, quantity demanded changes from
210 to 270. Using the mid-point elasticity approach, calculate income elasticity.
15. Suppose that the income increases from $2900 to $3250. As a result, quantity demanded
changes from 210 to 270.
Based on this information you can tell that this product is (select one):
a. a complement
. normal
c. a substitute
d. inferio
16. Suppose that the price of one product increases from $11 to $42. As a result, quantity
demanded for another product changes from 260 to 180.
Based on this information you can tell that these two products are (select one):
a. complements
. normal
c. substitutes
d. inferio
17. Suppose that when the store increases the price of laundry detergent from $2.50 to $3.90,
quantity demanded decreased from 210 to 130.
What is the change in total revenue as a result of this price change? Make sure to include a
negative sign in your answer if necessary.
18. Suppose that you know that the price elasticity of demand is 1.3. If we increase the price of
this product, then the total revenue will (select one):
a. increase
. remain unchanged
c. decrease