Problem Set 1: Use the Point Formula for Demand Elasticities.
Exercise \(\PageIndex{1}\)
Given the following:
\(\textrm{The demand equation is:} Q_{1}= 150 2P_{1}  1.5 P_{2} + 0.1M\)
\(P_{1} = 20\)
\(P_{2} = 30\)
\(M = 100\)
\(\textrm{Calculate} \varepsilon _{11}, \varepsilon_{12}, \varepsilon_{1M}\)
Is demand for Good 1 inelastic, unitary elastic, or elastic?
Is Good 2 a substitute or complement to good 1?
Is Good 1 inferior, a normal necessity, or a normal luxury?
 Answer

\(\varepsilon_{11} = 0.53\)
\(\varepsilon_{12} = 0.6\)
\(\varepsilon_{1M} = 0.13\)
Inelastic
Complement
Normal necessity
Exercise \(\PageIndex{2}\)
Given the following:
\(\textrm{The demand equation is:} Q_{1}= 752.5P_{1}  0.5 P_{2} + 0.5M\)
\(P_{1} = 30\)
\(P_{2} = 40\)
\(M = 200\)
\(\textrm{Calculate} \varepsilon _{11}, \varepsilon_{12}, \varepsilon_{1M}\)
Is demand for Good 1 inelastic, unitary elastic, or elastic?
Is Good 2 a substitute or complement to good 1?
Is Good 1 inferior, a normal necessity, or a normal luxury?
 Answer

\(\varepsilon_{11} = 0.94\)
\(\varepsilon_{12} = 0.25\)
\(\varepsilon_{1M} = 1.25\)
Inelastic
Complement
Normal luxury
Exercise \(\PageIndex{3}\)
Given the following:
\(\textrm{The demand equation is:} Q_{1}= 1503P_{1} + 0.5 P_{2}  0.5M\)
\(P_{1} = 40\)
\(P_{2} = 50\)
\(M = 300\)
\(\textrm{Calculate} \varepsilon _{11}, \varepsilon_{12}, \varepsilon_{1M}\)
Is demand for Good 1 inelastic, unitary elastic, or elastic?
Is Good 2 a substitute or complement to good 1?
Is Good 1 inferior, a normal necessity, or a normal luxury?
 Answer

\(\varepsilon_{11} = 4.8\)
\(\varepsilon_{12} = 1\)
\(\varepsilon_{1M} = 1.2\)
Elastic
Substitute
Inferior
Exercise \(\PageIndex{4}\)
Given the following:
\(\textrm{The demand equation is:} Q_{1}= 1002P_{1} + 1.5 P_{2}  0.2M\)
\(P_{1} = 50\)
\(P_{2} = 40\)
\(M = 200\)
\(\textrm{Calculate} \varepsilon _{11}, \varepsilon_{12}, \varepsilon_{1M}\)
Is demand for Good 1 inelastic, unitary elastic, or elastic?
Is Good 2 a substitute or complement to good 1?
Is Good 1 inferior, a normal necessity, or a normal luxury?
 Answer

\(\varepsilon_{11} = 5\)
\(\varepsilon_{12} = 3\)
\(\varepsilon_{1M} = 2\)
Elastic
Substitute
Inferior
Exercise \(\PageIndex{5}\)
Given the following:
\(\textrm{The demand equation is:} Q_{1}= 902.5P_{1} 0.5 P_{2} +0.5 M\)
\(P_{1} = 30\)
\(P_{2} = 40\)
\(M = 200\)
\(\textrm{Calculate} \varepsilon _{11}, \varepsilon_{12}, \varepsilon_{1M}\)
Is demand for Good 1 inelastic, unitary elastic, or elastic?
Is Good 2 a substitute or complement to good 1?
Is Good 1 inferior, a normal necessity, or a normal luxury?
 Answer

\(\varepsilon_{11} = 0.79\)
\(\varepsilon_{12} = 0.21\)
\(\varepsilon_{1M} = 1.05\)
Inelastic
Complement
Normal luxury
Exercise \(\PageIndex{6}\)
Given the following:
\(\textrm{The demand equation is:} Q_{1}= 1702.5P_{1} 1.5 P_{2} +0.1 M\)
\(P_{1} = 40\)
\(P_{2} = 30\)
\(M = 100\)
\(\textrm{Calculate} \varepsilon _{11}, \varepsilon_{12}, \varepsilon_{1M}\)
Is demand for Good 1 inelastic, unitary elastic, or elastic?
Is Good 2 a substitute or complement to good 1?
Is Good 1 inferior, a normal necessity, or a normal luxury?
 Answer

\(\varepsilon_{11} = 2.86\)
\(\varepsilon_{12} = 1.29\)
\(\varepsilon_{1M} = 0.29\)
Elastic
Complement
Normal necessity
Exercise \(\PageIndex{7}\)
Given the following:
\(\textrm{The demand equation is:} Q_{1}= 1003P_{1} 0.5 P_{2} +0.5 M\)
\(P_{1} = 40\)
\(P_{2} = 20\)
\(M = 300\)
\(\textrm{Calculate} \varepsilon _{11}, \varepsilon_{12}, \varepsilon_{1M}\)
Is demand for Good 1 inelastic, unitary elastic, or elastic?
Is Good 2 a substitute or complement to good 1?
Is Good 1 inferior, a normal necessity, or a normal luxury?
 Answer

Answers:
\(\varepsilon_{11} = 1\)
\(\varepsilon_{12} = 0.08\)
\(\varepsilon_{1M} = 1.25\)
Unitary elastic
Complement
Normal luxury
Exercise \(\PageIndex{8}\)
Given the following:
\(\textrm{The demand equation is:} Q_{1}= 2002P_{1} +0.5 P_{2} 0.1 M\)
\(P_{1} = 20\)
\(P_{2} = 10\)
\(M = 200\)
\(\textrm{Calculate} \varepsilon _{11}, \varepsilon_{12}, \varepsilon_{1M}\)
Is demand for Good 1 inelastic, unitary elastic, or elastic?
Is Good 2 a substitute or complement to good 1?
Is Good 1 inferior, a normal necessity, or a normal luxury?
 Answer

\(\varepsilon_{11} = 0.28\)
\(\varepsilon_{12} = 0.03\)
\(\varepsilon_{1M} = 0.14\)
Inelastic
Substitute
Inferior
Exercise \(\PageIndex{9}\)
Given the following:
\(\textrm{The demand equation is:} Q_{1}= 2002.5P_{1} +1.5 P_{2} 0.5 M\)
\(P_{1} = 10\)
\(P_{2} = 20\)
\(M = 100\)
\(\textrm{Calculate} \varepsilon _{11}, \varepsilon_{12}, \varepsilon_{1M}\)
Is demand for Good 1 inelastic, unitary elastic, or elastic?
Is Good 2 a substitute or complement to good 1?
Is Good 1 inferior, a normal necessity, or a normal luxury?
 Answer

\(\varepsilon_{11} = 0.16\)
\(\varepsilon_{12} = 0.19\)
\(\varepsilon_{1M} = 0.32\)
Inelastic
Substitute
Inferior
Exercise \(\PageIndex{10}\)
Given the following:
\(\textrm{The demand equation is:} Q_{1}= 603P_{1} +1P_{2} +0.1 M\)
\(P_{1} = 20\)
\(P_{2} = 30\)
\(M = 300\)
\(\textrm{Calculate} \varepsilon _{11}, \varepsilon_{12}, \varepsilon_{1M}\)
Is demand for Good 1 inelastic, unitary elastic, or elastic?
Is Good 2 a substitute or complement to good 1?
Is Good 1 inferior, a normal necessity, or a normal luxury?
 Answer

\(\varepsilon_{11} = 1\)
\(\varepsilon_{12} = 0.5\)
\(\varepsilon_{1M} = 0.5\)
Unitary elastic
Substitute
Normal necessity
Problem Set 2: Use Elasticities to Determine Whether to Increase Price.
Exercise \(\PageIndex{1}\)
Given the following:
Your current quantity is 1000 units.
Your current price is 25 dollars.
Your average variable cost is 15 dollars per unit.
You face an ownprice demand elasticity of 3.
What will happen to profit above variable cost if you raise your price by 2 dollars?
 Answer

Your current profit above variable cost is 10000 dollars.
Your price will change by 8 percent.
Your new quantity is 760 units.
If you raise price, the profit above variable cost will be 9120 dollars.
Exercise \(\PageIndex{2}\)
Given the following:
Your current quantity is 1100 units.
Your current price is 40 dollars.
Your average variable cost is 36 dollars per unit.
You face an ownprice demand elasticity of 4.
What will happen to profit above variable cost if you raise your price by 1 dollars?
 Answer

Your current profit above variable cost is 4400 dollars.
Your price will change by 2.5 percent.
Your new quantity is 990 units.
If you raise price, the profit above variable cost will be 4950 dollars.
Exercise \(\PageIndex{3}\)
Given the following:
Your current quantity is 1120 units.
Your current price is 50 dollars.
Your average variable cost is 40 dollars per unit.
You face an ownprice demand elasticity of 5.
What will happen to profit above variable cost if you raise your price by 2 dollars?
 Answer

Your current profit above variable cost is 11200 dollars.
Your price will change by 4 percent.
Your new quantity is 896 units.
If you raise price, the profit above variable cost will be 10752 dollars.
Exercise \(\PageIndex{4}\)
Given the following:
Your current quantity is 1200 units.
Your current price is 20 dollars.
Your average variable cost is 16 dollars per unit.
You face an ownprice demand elasticity of 4.
What will happen to profit above variable cost if you raise your price by 1 dollars?
 Answer

Your current profit above variable cost is 4800 dollars.
Your price will change by 5 percent.
Your new quantity is 960 units.
If you raise price, the profit above variable cost will be 4800 dollars.
Exercise \(\PageIndex{5}\)
Given the following:
Your current quantity is 1300 units.
Your current price is 50 dollars.
Your average variable cost is 40 dollars per unit.
You face an ownprice demand elasticity of 1.5.
What will happen to profit above variable cost if you raise your price by 1 dollars?
 Answer

Your current profit above variable cost is 13000 dollars.
Your price will change by 2 percent.
Your new quantity is 1261 units.
If you raise price, the profit above variable cost will be 13871 dollars.
Exercise \(\PageIndex{6}\)
Given the following:
Your current quantity is 1200 units.
Your current price is 20 dollars.
Your average variable cost is 16 dollars per unit.
You face an ownprice demand elasticity of 0.75.
What will happen to profit above variable cost if you raise your price by 2 dollars?
 Answer

Your current profit above variable cost is 4800 dollars.
Your price will change by 10 percent.
Your new quantity is 1110 units.
If you raise price, the profit above variable cost will be 6660 dollars.
Exercise \(\PageIndex{7}\)
Given the following:
Your current quantity is 1120 units.
Your current price is 50 dollars.
Your average variable cost is 46 dollars per unit.
You face an ownprice demand elasticity of 1.
What will happen to profit above variable cost if you raise your price by 1 dollars?
 Answer

Your current profit above variable cost is 4480 dollars.
Your price will change by 2 percent.
Your new quantity is 1097.6 units.
If you raise price, the profit above variable cost will be 5488 dollars.
Exercise \(\PageIndex{8}\)
Given the following:
Your current quantity is 1200 units.
Your current price is 25 dollars.
Your average variable cost is 21 dollars per unit.
You face an ownprice demand elasticity of 5.
What will happen to profit above variable cost if you raise your price by 1 dollars?
 Answer

Your current profit above variable cost is 4800 dollars.
Your price will change by 4 percent.
Your new quantity is 960 units.
If you raise price, the profit above variable cost will be 4800 dollars.
Exercise \(\PageIndex{9}\)
Given the following:
Your current quantity is 1050 units.
Your current price is 50 dollars.
Your average variable cost is 40 dollars per unit.
You face an ownprice demand elasticity of 5.5.
What will happen to profit above variable cost if you raise your price by 2 dollars?
 Answer

Your current profit above variable cost is 10500 dollars.
Your price will change by 4 percent.
Your new quantity is 819 units.
If you raise price, the profit above variable cost will be 9828 dollars.
Exercise \(\PageIndex{10}\)
Given the following:
Your current quantity is 1000 units.
Your current price is 25 dollars.
Your average variable cost is 21 dollars per unit.
You face an ownprice demand elasticity of 4.5.
What will happen to profit above variable cost if you raise your price by 1 dollars?
 Answer

Your current profit above variable cost is 4000 dollars.
Your price will change by 4 percent.
Your new quantity is 820 units.
If you raise price, the profit above variable cost will be 4100 dollars.
Problem Set 3: Use Elasticities to Determine Whether to Increase Advertising.
Exercise \(\PageIndex{1}\)
Given the following:
Your current quantity is 1000 units.
Your price is 25 dollars.
Your average variable cost (AVC) is 15 dollars per unit.
Your elasticity of demand with respect to advertising is 0.4.
Your current advertising expenditure is $5,000 and is your only fixed cost.
What will happen to profit if you increase advertising by 200 dollars?
 Answer

Your current profit is 5000 dollars.
Your advertising will change by 4 percent.
Your new quantity is 1016 units.
Profit will go down to 4960 dollars (after subtracting the increse in advertising).
Exercise \(\PageIndex{2}\)
Given the following:
Your current quantity is 2000 units.
Your price is 40 dollars.
Your average variable cost (AVC) is 36 dollars per unit.
Your elasticity of demand with respect to advertising is 0.5.
Your current advertising expenditure is $5,000 and is your only fixed cost.
What will happen to profit if you increase advertising by 300 dollars?
 Answer

Your current profit is 3000 dollars.
Your advertising will change by 6 percent.
Your new quantity is 2060 units.
Profit will go down to 2940 dollars (after subtracting the increse in advertising).
Exercise \(\PageIndex{3}\)
Given the following:
Your current quantity is 1500 units.
Your price is 50 dollars.
Your average variable cost (AVC) is 40 dollars per unit.
Your elasticity of demand with respect to advertising is 0.6.
Your current advertising expenditure is $5,000 and is your only fixed cost.
What will happen to profit if you increase advertising by 400 dollars?
 Answer

Your current profit is 10000 dollars.
Your advertising will change by 8 percent.
Your new quantity is 1572 units.
Profit will go up to 10320 dollars (after subtracting the increse in advertising).
Exercise \(\PageIndex{4}\)
Given the following:
Your current quantity is 1200 units.
Your price is 20 dollars.
Your average variable cost (AVC) is 16 dollars per unit.
Your elasticity of demand with respect to advertising is 0.5.
Your current advertising expenditure is $5,000 and is your only fixed cost.
What will happen to profit if you increase advertising by 250 dollars?
 Answer

Your current profit is 200 dollars.
Your advertising will change by 5 percent.
Your new quantity is 1230 units.
Profit will go down to 330 dollars (after subtracting the increse in advertising).
Exercise \(\PageIndex{5}\)
Given the following:
Your current quantity is 1300 units.
Your price is 50 dollars.
Your average variable cost (AVC) is 40 dollars per unit.
Your elasticity of demand with respect to advertising is 1.
Your current advertising expenditure is $5,000 and is your only fixed cost.
What will happen to profit if you increase advertising by 200 dollars?
 Answer

Your current profit is 8000 dollars.
Your advertising will change by 4 percent.
Your new quantity is 1352 units.
Profit will go up to 8320 dollars (after subtracting the increse in advertising).
Exercise \(\PageIndex{6}\)
Given the following:
Your current quantity is 2000 units.
Your price is 20 dollars.
Your average variable cost (AVC) is 16 dollars per unit.
Your elasticity of demand with respect to advertising is 1.5.
Your current advertising expenditure is $5,000 and is your only fixed cost.
What will happen to profit if you increase advertising by 300 dollars?
 Answer

Your current profit is 3000 dollars.
Your advertising will change by 6 percent.
Your new quantity is 2180 units.
Profit will go up to 3420 dollars (after subtracting the increse in advertising).
Exercise \(\PageIndex{7}\)
Given the following:
Your current quantity is 1500 units.
Your price is 50 dollars.
Your average variable cost (AVC) is 46 dollars per unit.
Your elasticity of demand with respect to advertising is 0.4.
Your current advertising expenditure is $5,000 and is your only fixed cost.
What will happen to profit if you increase advertising by 400 dollars?
 Answer

Your current profit is 1000 dollars.
Your advertising will change by 8 percent.
Your new quantity is 1548 units.
Profit will go down to 792 dollars (after subtracting the increse in advertising).
Exercise \(\PageIndex{8}\)
Given the following:
Your current quantity is 1200 units.
Your price is 25 dollars.
Your average variable cost (AVC) is 21 dollars per unit.
Your elasticity of demand with respect to advertising is 0.5.
Your current advertising expenditure is $5,000 and is your only fixed cost.
What will happen to profit if you increase advertising by 250 dollars?
 Answer

Your current profit is 200 dollars.
Your advertising will change by 5 percent.
Your new quantity is 1230 units.
Profit will go down to 330 dollars (after subtracting the increse in advertising).
Exercise \(\PageIndex{9}\)
Given the following:
Your current quantity is 2000 units.
Your price is 50 dollars.
Your average variable cost (AVC) is 40 dollars per unit.
Your elasticity of demand with respect to advertising is 2.
Your current advertising expenditure is $5,000 and is your only fixed cost.
What will happen to profit if you increase advertising by 200 dollars?
 Answer

Your current profit is 15000 dollars.
Your advertising will change by 4 percent.
Your new quantity is 2160 units.
Profit will go up to 16400 dollars (after subtracting the increse in advertising).
Exercise \(\PageIndex{10}\)
Given the following:
Your current quantity is 1000 units.
Your price is 25 dollars.
Your average variable cost (AVC) is 21 dollars per unit.
Your elasticity of demand with respect to advertising is 1.5.
Your current advertising expenditure is $5,000 and is your only fixed cost.
What will happen to profit if you increase advertising by 300 dollars?
 Answer

Your current profit is 1000 dollars.
Your advertising will change by 6 percent.
Your new quantity is 1090 units.
Profit will go up to 940 dollars (after subtracting the increse in advertising).
Problem Set 4: ShortRun and LongRun Elasticities.
Exercise \(\PageIndex{1}\)
Given the following:
The short run demand equation is:
\(\textrm{The short run demand equation is:} Q_{1}^{(t)} = 100  2P_{1} + 0.5 Q_{1}^{(t1)}\)
\(P_{1} = 35\)
\(Q_{1}^{(t1)} =60\)
What is the habit parameter?
What is the longrun demand equation?
What is the shortrun ownprice elasticity of demand?
What is the longrun ownprice elasticity of demand?
When is demand more elastic, in the short or longrun?
 Answer

\(\textrm{Habit parameter}: \gamma = 0.5\)
\(Q_{1}^{LR} = 2004P_{1}\)
\(\varepsilon_{11}^{SR} = 1.17\)
\(\varepsilon_{11}^{LR} = 2.33\)
\(\textrm{In the longrun.}\)
Exercise \(\PageIndex{2}\)
Given the following:
\(\textrm{The short run demand equation is:} Q_{1}^{(t)} = 100  3P_{1} + 0.6 Q_{1}^{(t1)}\)
\(P_{1} = 20\)
\(Q_{1}^{(t1)} =100\)
What is the habit parameter?
What is the longrun demand equation?
What is the shortrun ownprice elasticity of demand?
What is the longrun ownprice elasticity of demand?
When is demand more elastic, in the short or longrun?
 Answer

\(\textrm{Habit parameter}: \gamma = 0.6\)
\(Q_{1}^{LR} = 2507.5P_{1}\)
\(\varepsilon_{11}^{SR} = 0.6\)
\(\varepsilon_{11}^{LR} = 1.5\)
\(\textrm{In the longrun.}\)
Exercise \(\PageIndex{3}\)
Given the following:
\(\textrm{The short run demand equation is:} Q_{1}^{(t)} = 150  4P_{1} + 0.75 Q_{1}^{(t1)}\)
\(P_{1} = 20\)
\(Q_{1}^{(t1)} =280\)
 Answer

\(\textrm{Habit parameter}: \gamma = 0.75\)
\(Q_{1}^{LR} = 60016P_{1}\)
\(\varepsilon_{11}^{SR} = 0.29\)
\(\varepsilon_{11}^{LR} = 1.14\)
\(\textrm{In the longrun.}\)
Exercise \(\PageIndex{4}\)
Given the following:
\(\textrm{The short run demand equation is:} Q_{1}^{(t)} = 250  4P_{1} + 0.8Q_{1}^{(t1)}\)
\(P_{1} = 40\)
\(Q_{1}^{(t1)} =450\)
What is the habit parameter?
What is the longrun demand equation?
What is the shortrun ownprice elasticity of demand?
What is the longrun ownprice elasticity of demand?
When is demand more elastic, in the short or longrun?
 Answer

\(\textrm{Habit parameter}: \gamma = 0.8\)
\(Q_{1}^{LR} = 125020P_{1}\)
\(\varepsilon_{11}^{SR} = 0.36\)
\(\varepsilon_{11}^{LR} = 1.78\)
\(\textrm{In the longrun.}\)
Exercise \(\PageIndex{5}\)
Given the following:
\(\textrm{The short run demand equation is:} Q_{1}^{(t)} = 120  2P_{1} + 0.6Q_{1}^{(t1)}\)
\(P_{1} = 40\)
\(Q_{1}^{(t1)} =100\)
What is the habit parameter?
What is the longrun demand equation?
What is the shortrun ownprice elasticity of demand?
What is the longrun ownprice elasticity of demand?
When is demand more elastic, in the short or longrun?
 Answer

\(\textrm{Habit parameter}: \gamma = 0.6\)
\(Q_{1}^{LR} = 3005P_{1}\)
\(\varepsilon_{11}^{SR} = 0.8\)
\(\varepsilon_{11}^{LR} = 2\)
\(\textrm{In the longrun.}\)
Exercise \(\PageIndex{6}\)
Given the following:
\(\textrm{The short run demand equation is:} Q_{1}^{(t)} = 150  3P_{1} + 0.8Q_{1}^{(t1)}\)
\(P_{1} = 30\)
\(Q_{1}^{(t1)} =300\)
What is the habit parameter?
What is the longrun demand equation?
What is the shortrun ownprice elasticity of demand?
What is the longrun ownprice elasticity of demand?
When is demand more elastic, in the short or longrun?
 Answer

\(\textrm{Habit parameter}: \gamma = 0.8\)
\(Q_{1}^{LR} = 75015P_{1}\)
\(\varepsilon_{11}^{SR} = 0.3\)
\(\varepsilon_{11}^{LR} = 1.5\)
\(\textrm{In the longrun.}\)
Exercise \(\PageIndex{7}\)
Given the following:
\(\textrm{The short run demand equation is:} Q_{1}^{(t)} = 200  3P_{1} + 0.75Q_{1}^{(t1)}\)
\(P_{1} = 45\)
\(Q_{1}^{(t1)} =260\)
What is the habit parameter?
What is the longrun demand equation?
What is the shortrun ownprice elasticity of demand?
What is the longrun ownprice elasticity of demand?
When is demand more elastic, in the short or longrun?
 Answer

\(\textrm{Habit parameter}: \gamma = 0.75\)
\(Q_{1}^{LR} = 80012P_{1}\)
\(\varepsilon_{11}^{SR} = 0.52\)
\(\varepsilon_{11}^{LR} = 2.08\)
\(\textrm{In the longrun.}\)
Exercise \(\PageIndex{8}\)
Given the following:
\(\textrm{The short run demand equation is:} Q_{1}^{(t)} = 80  2P_{1} + 0.6Q_{1}^{(t1)}\)
\(P_{1} = 30\)
\(Q_{1}^{(t1)} =50\)
What is the habit parameter?
What is the longrun demand equation?
What is the shortrun ownprice elasticity of demand?
What is the longrun ownprice elasticity of demand?
When is demand more elastic, in the short or longrun?
 Answer

\(\textrm{Habit parameter}: \gamma = 0.6\)
\(Q_{1}^{LR} = 2005P_{1}\)
\(\varepsilon_{11}^{SR} = 1.2\)
\(\varepsilon_{11}^{LR} = 3\)
\(\textrm{In the longrun.}\)
Exercise \(\PageIndex{9}\)
Given the following:
\(\textrm{The short run demand equation is:} Q_{1}^{(t)} = 120  3P_{1} + 0.5Q_{1}^{(t1)}\)
\(P_{1} = 30\)
\(Q_{1}^{(t1)} =60\)
What is the habit parameter?
What is the longrun demand equation?
What is the shortrun ownprice elasticity of demand?
What is the longrun ownprice elasticity of demand?
When is demand more elastic, in the short or longrun?
 Answer

\(\textrm{Habit parameter}: \gamma = 0.5\)
\(Q_{1}^{LR} = 2406P_{1}\)
\(\varepsilon_{11}^{SR} = 1.5\)
\(\varepsilon_{11}^{LR} = 3\)
\(\textrm{In the longrun.}\)
Exercise \(\PageIndex{10}\)
Given the following:
\(\textrm{The short run demand equation is:} Q_{1}^{(t)} = 100  2P_{1} + 0.5Q_{1}^{(t1)}\)
\(P_{1} = 40\)
\(Q_{1}^{(t1)} =40\)
What is the habit parameter?
What is the longrun demand equation?
What is the shortrun ownprice elasticity of demand?
What is the longrun ownprice elasticity of demand?
When is demand more elastic, in the short or longrun?
 Answer

\(\textrm{Habit parameter}: \gamma = 0.5\)
\(Q_{1}^{LR} = 2004P_{1}\)
\(\varepsilon_{11}^{SR} = 2\)
\(\varepsilon_{11}^{LR} = 4\)
\(\textrm{In the longrun.}\)
Problem Set 5: Multiple Choice.
Exercise \(\PageIndex{1}\)
 When is demand unitary elastic?
a) When the income elasticity is 1.
b) When the ownprice elasticity of demand is 1.
c) When demand is totally unresponsive (inverse demand is a vertical line).
d) All of the above.
 Answer

b
Exercise \(\PageIndex{2}\)
 If price goes up by 4 percent and quantity demanded falls by 2 percent then
a) This is a substitute good.
b) This good has an elastic demand.
c) This good is an inferior good.
d) This good has an inelastic demand.
 Answer

d
Exercise \(\PageIndex{3}\)
 Suppose that the ownprice elasticity of demand is 1. Which statement is true?
a) Profits are maximized.
b) Revenue is maximized.
c) Consumer surplus is maximized.
d) All of the above.
 Answer

b
Exercise \(\PageIndex{4}\)
 Suppose the ownprice elasticity of demand is 0.75. Which statement is true?
a) An increase in price will decrease revenue.
b) An increase in price will increase revenue.
c) The good in question is a substitute in consumption.
d) The good in question is an inferior good.
 Answer

b
Exercise \(\PageIndex{5}\)
 Which of the following elasticity numbers is consistent with a normal good?
a) An income elasticity of demand that is 0.5.
b) An income elasticity of demand that is 0.5.
c) An ownprice elasticity of 0.28.
d) Both a and c.
 Answer

b
Exercise \(\PageIndex{6}\)
 If an increase in income causes an increase in demand, then we know that
a) The good in question is a normal luxury good.
b) The good in question is a normal necessity good.
c) The good in question is a normal good but we can’t tell whether it is classified as a necessity or a luxury without further information.
d) The good in question violates the law of demand.
 Answer

c
Exercise \(\PageIndex{7}\)
 Which demand elasticity number tells you that two products are substitutes in consumption?
a) A crossprice elasticity of 0.5.
b) A crossprice elasticity of 0.5.
c) An income elasticity of 1.5.
d) An ownprice elasticity of 0.75.
 Answer

b
Exercise \(\PageIndex{8}\)
 One problem with using the arc elasticity formula to compute an ownprice elasticity is:
a) It is very hard to compute because you need lots of data points.
b) Actually, there are no problems with using the arc formula to compute elasticities.
c) One must assume that all other factors that affect demand, other than own price, remain the same.
d) If demand has not shifted, the arc formula will often return a positive value for the ownprice elasticity.
 Answer

c
Exercise \(\PageIndex{9}\)
 Given that a firm has some control over the price it charges (it is not a price taker) and it faces a positive marginal cost, which case would be consistent with profit maximization?
a) It sets its price to make demand inelastic.
b) It sets its price to make demand elastic.
c) It sets its price to make demand unitary elastic.
d) It sets its price so that both demand and supply are in the inelastic range.
 Answer

b
Exercise \(\PageIndex{10}\)
 As described in class, the supply schedule for van Gogh paintings:
a) Is perfectly inelastic.
b) Is downward sloping.
c) Maybe quite inelastic but is probably not perfectly inelastic.
d) Is a horizontal line.
e) Choices a and d only.
 Answer

c
Exercise \(\PageIndex{11}\)
 Other things equal, in the long run
a) Demand is less elastic than in the short run.
b) Supply is less elastic than in the short run.
c) Demand is more elastic than in the short run.
d) Both demand and supply are less elastic than in the short run.
 Answer

c
Exercise \(\PageIndex{12}\)
 Which best describes the concept of elasticity?
a) The responsiveness of demand or supply to ownprice or some other shift variable.
b) The idea that demand schedules always slope downwards.
c) The idea that consumer surplus is the area under the demand schedule.
d) The idea that supply schedules always have nonnegative slopes.
 Answer

a