Question 1

If the demand for farm products is income elastic, that would mean that farm products were a necessity.

Accepted Answer

Income elasticity of demand measures how the quantity demanded of a good responds to changes in income. If farm products are income elastic, it means they are considered a luxury rather than a necessity, as demand increases more than proportionally with income.

Question 2

The cab fare in Horseville is regulated. Recently, the government decided to raise it from $2.00 to $2.50 per ride. After this rise in fare, cab ridership decreased by 10 percent.
a) What is the price elasticity of demand for cab rides in Horseville? (Use the midpoint formula to calculate the percentage change in the price.) Is the demand for rides elastic or inelastic?
b) According to your estimate, what happened to the cab drivers' revenue after the fare rose? Explain.
c) Why might your estimate of elasticity be inaccurate?

Accepted Answer

The answer of The cab fare in Horseville is regulated....

Question 3

Studies show that smoking cigars is inversely related to income. Thus cigars are an inferior good.

Accepted Answer

Cigars are an inferior good because they are inversely related to income, meaning that as income increases, the demand for cigars decreases.

Question 4

Goods or services that can be produced only by using unique or rare productive resources tend to have a low elasticity of supply.

Accepted Answer

Goods or services that rely on unique or rare resources are difficult to increase in quantity quickly, leading to a low elasticity of supply as producers cannot easily respond to price changes.

Question 5

-Cory enjoys listening to all types of music. His demand schedules for CDs in 2009 and 2010 are shown in the table above. Cory's income was $30,000 in 2009 and $35,000 in 2010. In 2010, he bought an iPad so he started to download music files from the Internet.
a) Draw Cory's demand curves for CDs in 2009 and 2010. How did Cory's demand for CDs change? Why?
b) For each year, calculate Cory's price elasticity of demand as the price of CDs decreases from $16 to $12. (Use the midpoint method in your calculations.)
c) Why might the price elasticity of Cory's demand for CDs in 2010 be different from that in 2009?
d) If all CD buyers have the same demand as does Cory, what price should the record companies charge in 2010 to maximize their total revenue from CD sales?

Accepted Answer

The answer of 
-Cory enjoys listening to all types of...

Question 6

For baseball memorabilia fans, the baseball with which Hank Aaron hit his 735th career home run is perfectly inelastic in supply and in demand.

Accepted Answer

The supply of the baseball is perfectly inelastic because it is a unique item, but the demand is not perfectly inelastic as it can vary based on collectors' interest and willingness to pay.

Question 7

-The number of taxicabs in Motorville and the taxicab fares are regulated. The fare currently charged is $5 a ride. Motorville taxicab drivers want to obtain government's permission to raise the fare to increase their revenues and ask you to be their economic adviser. After studying the market, you come up with the following demand schedule for taxicab rides:
a) Calculate the price elasticity of demand for taxicab rides as the fare rises from $5 to $6. (Use the midpoint method in your calculations.) Is the demand price elastic or inelastic for this fare rise?
b) What happens to the taxicab drivers' total revenue if the fare rises from $5 to $6? How can you use your answers in part a to answer this question? Should the drivers try to obtain permission to raise the fare?
c) Calculate the price elasticity of demand for taxicab rides as the fare falls from $5 to $4. (Use the midpoint method in your calculations.) Is the demand price elastic or inelastic for this fare decrease?
d) What happens to the taxicab drivers' total revenue if the fare falls from $5 to $4? How can you use your answers in part c to answer this question? Should the drivers try to obtain permission to lower the fare?
e) What fare will maximize the taxicab drivers' total revenue? Explain.

Accepted Answer

The answer of 
-The number of taxicabs in Motorville and...

Question 8

Damage from floods and hurricanes which destroy a large portion of this year's crop of oranges will definitely make oranges more price inelastic in supply.

Accepted Answer

The destruction of a large portion of the orange crop would likely make the supply of oranges more price elastic, as producers would be less able to respond to price changes due to the reduced quantity available.

Question 9

-Suppose that business travelers and leisure travelers have the demand schedules for airline tickets from Atlanta to Philadelphia given in the table above.
a) Draw both demand curves.
b) As the price of tickets rises from $200 to $300, what is the price elasticity of business travelers' demand? What is the price elasticity of leisure travelers' demand? (Use the midpoint method in your calculations.)
c) Why do business travelers and leisure travelers have different price elasticities of demand for airline tickets?
d) At what price is the price elasticity of demand equal to 1 for business travelers? For leisure travelers? Explain.

Accepted Answer

The answer of 
-Suppose that business travelers and leisure travelers...

Question 10

Fantastic growing conditions that produce a bumper crop of oranges on each tree this year will definitely make the short run supply of oranges more price elastic.

Accepted Answer

A bumper crop increases the quantity supplied, but it does not necessarily change the price elasticity of supply, which depends on factors like production flexibility and time.

Quiz 4: Elasticity