Chapter 5 – Check Your Understanding
1. When the demand curve is relatively inelastic and the price falls, what happens to total revenue? If the demand is relatively elastic and price rises, what happens to total revenue?
2. Why is the demand for gasoline relatively inelastic, while the demand for Exxon’s gasoline is relatively elastic?
3. Describe cross elasticity of demand. Why do substitutes have positive cross elasticities? Describe income elasticity of demand. What is the difference between normal and inferior goods?
4. Describe and explain the impact of time on the price elasticity of supply. Draw graph
5. Why would the demand for business airline travel be less elastic than the demand for vacation airline travel by retirees?
6. Would an excise tax placed on cereal be more likely or less likely to be passed on to consumers than an excise tax on wireless phone and data services? Why or why not?
Apply the Concepts
7. One major rationale for farm price supports is that rapidly improving technology, better crop strains, improved fertilizer, and better farming methods increased supply so significantly that farm incomes were severely depressed. Explain how the elasticity of demand for these crops influences this rationale.
8. If the price of chicken rises by 15% and the sales of turkey breasts expand by 10%, what is the cross elasticity of demand for these two products? Are they complements or substitutes?
9. For which of the following pairs of goods or services would the cross elasticity of demand be negative? (a) Uber and Yellow Cab, (b) movie streaming subscriptions and tablets, (c) camping tents and camping permits, (d) bowling and co-ed softball, (e) textbooks and study guides.
10. Consider chip plants: potato and computer. Assume there is a large rise in the demand for computer chips and potato chips.
a How responsive to demand is each in the market period?
b Describe what a manufacturer of each product might do in the short run to increase production.
c How does the long run differ for these products?
d Draw a graph for comparison
11. If one automobile brand has an income elasticity of demand of 1.5 and another has an income elasticity equal to –0.3, what would account for the difference? Give an example of a specific brand for each type of car.
12. Suppose you estimated the cross elasticities of demand for three pairs of products and came up with the following three values: 2.3, 0.1, –1.7. What could you conclude about these three pairs of products? If you wanted to know if two products from two different firms competed with each other in the marketplace, what would you look for?
In The News
13. In September 2015 Turing Pharmaceuticals decided to increase the price of the drug Daraprim, which is used to treat a life-threatening parasitic infection. Unlike typical price increases that never make the evening news, Turing raised the price from $13.50 per dose to $750 per dose, representing an increase of over 50 times the price. Turing’s CEO Martin Shkreli argued that the extreme price increase was justified based on market demand and the fact that the drug does save lives. How would you describe the elasticity of Daraprim? For practically any other business that chooses to raise its price by 50 times, the business would surely lose most if not all of its customers. Why is Turing still in business? How would the elasticity of Daraprim change if there were generic versions of the drug offered by other companies?
14. The market for organic and locally sourced foods has skyrocketed over the past decade as consumers focus on improving their eating habits. However, severe droughts have caused organic food prices to rise significantly, forcing many consumers to shop at conventional supermarkets (which are increasingly adding organic food options) instead of organic food markets such as Whole Foods. In response, companies such as Whole Foods have begun offering more nonorganic options on their store shelves in order to provide their consumers with more affordable options. Based on this response, what did companies such as Whole Foods realize about the elasticity of demand for organic foods that caused them to lower their prices by changing the type of foods they sell?
WORK IT OUT | interactive activity
15. Rising peanut prices have forced peanut butter makers to raise the price of peanut butter from $2 to $3 per jar, causing quantity demanded to fall. In addition, sales of jelly also dropped by 15%. Soon thereafter, makers of chocolate spread dropped its price from $4 to $3 per jar. This resulted in a further decline in peanut butter sales by 20%.
a What is the cross elasticity of demand between peanut butter and jelly (use the midpoint method)? Are these two products complements or substitutes?
b What is the cross elasticity of demand between peanut butter and chocolate spread (use the midpoint method)? Are these two products complements or substitutes?
16. Suppose the demand and supply for imported wagyu beef is as shown in the figure. Now assume that the U.S. government imposes an import tax of $10 per pound on wagyu beef.
a How does the market price change with the imposition of the $10 per pound tax?
b Do the buyers or sellers of wagyu beef bear the greater burden of the tax?
c How much tax revenue does the government collect from this market?
d Calculate the approximate value of deadweight loss created in this market from the tax.
USING THE NUMBERS
17. According to By the Numbers, how much greater is the elasticity of demand for food in Canada than in the United States? How about Mexico compared to the United States?
18. According to By the Numbers, rank the types of alternative fuel vehicles in use from the most popular to the least popular.