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4.10: Exercises for Chapter 4

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    EXERCISE 4.1

    Consider the information in the table below that describes the demand for movie rentals from your on-line supplier Instant Flicks.

    Price per movie ($) Quantity demanded Total revenue Elasticity of demand
    2 1200
    3 1100
    4 1000
    5 900
    6 800
    7 700
    8 600
    1. Either on graph paper or a spreadsheet, map out the demand curve.

    2. In column 3, insert the total revenue generated at each price.

    3. At what price is total revenue maximized?

    4. In column 4, compute the elasticity of demand corresponding to each $1 price reduction, using the average price and quantity at each state.

    5. Do you see a connection between your answers in parts (c) and (d)?

    EXERCISE 4.2

    Your fruit stall has 100 ripe bananas that must be sold today. Your supply curve is therefore vertical. From past experience, you know that these 100 bananas will all be sold if the price is set at 40 cents per unit.

    1. Draw a supply and demand diagram illustrating the market equilibrium price and quantity.

    2. The demand elasticity is -0.5 at the equilibrium price. But you now discover that 10 of your bananas are rotten and cannot be sold. Draw the new supply curve and calculate the percentage price increase that will be associate with the new equilibrium, on the basis of your knowledge of the demand elasticity.

    EXERCISE 4.3

    University fees in the State of Nirvana have been frozen in real terms for 10 years. During this period enrolments increased by 20 percent, reflecting an increase in demand. This means the supply curve is horizontal at a given price.

    1. Draw a supply curve and two demand curves to represent the two equilibria described.

    2. Can you estimate a price elasticity of demand for university education in this market?

    3. In contrast, during the same time period fees in a neighbouring state (where supply is also horizontal) increased by 60 percent and enrolments increased by 15 percent. Illustrate this situation in a diagram, where supply is again horizontal.

    EXERCISE 4.4

    Consider the demand curve defined by the information in the table below.

    Price of movies Quantity demanded Total revenue Elasticity of demand
    2 200
    3 150
    4 120
    5 100
    1. Plot the demand curve to scale and note that it is non-linear.

    2. Compute the total revenue at each price.

    3. Compute the arc elasticity of demand for each of the three price segments.

    EXERCISE 4.5

    Waterson Power Corporation's regulator has just allowed a rate increase from 9 to 11 cents per kilowatt hour of electricity. The short-run demand elasticity is -0.6 and the long-run demand elasticity is -1.2 at the current price..

    1. What will be the percentage reduction in power demanded in the short run (use the midpoint 'arc' elasticity formula)?

    2. What will be the percentage reduction in power demanded in the long run?

    3. Will revenues increase or decrease in the short and long runs?

    EXERCISE 4.6

    Consider the own- and cross-price elasticity data in the table below.

    % change in price
    CDs Magazines Cappuccinos
    % change in quantity CDs -0.25 0.06 0.01
    Magazines -0.13 -1.20 0.27
    Cappuccinos 0.07 0.41 -0.85
    1. For which of the goods is demand elastic and for which is it inelastic?

    2. What is the effect of an increase in the price of CDs on the purchase of magazines and cappuccinos? What does this suggest about the relationship between CDs and these other commodities; are they substitutes or complements?

    3. In graphical terms, if the price of CDs or the price of cappuccinos increases, illustrate how the demand curve for magazines shifts.

    EXERCISE 4.7

    You are responsible for running the Speedy Bus Company and have information about the elasticity of demand for bus travel: The own-price elasticity is -1.4 at the current price. A friend who works in the competing railway company also tells you that she has estimated the cross-price elasticity of train-travel demand with respect to the price of bus travel to be 1.7.

    1. As an economic analyst, would you advocate an increase or decrease in the price of bus tickets if you wished to increase revenue for Speedy?

    2. Would your price decision have any impact on train ridership?

    EXERCISE 4.8

    A household's income and restaurant visits are observed at different points in time. The table below describes the pattern.

    Income ($) Restaurant visits Income elasticity of demand
    16,000 10
    24,000 15
    32,000 18
    40,000 20
    48,000 22
    56,000 23
    64,000 24
    1. Construct a scatter diagram showing quantity on the vertical axis and income on the horizontal axis.

    2. Is there a positive or negative relationship between these variables?

    3. Compute the income elasticity for each income increase, using midpoint values.

    4. Are restaurant meals a normal or inferior good?

    EXERCISE 4.9

    The demand for bags of candy is given by P=48–0.2Q, and the supply by P=Q. The demand intercepts here are img120.png and Q=240; the supply curve is a 45 degree straight line through the origin.

    1. Illustrate the resulting market equilibrium in a diagram knowing that the demand intercepts are img121.png, and that the supply curve is a 45 degree line through the origin.

    2. If the government now puts a $12 tax on all such candy bags, illustrate on a diagram how the supply curve will change.

    3. Instead of the specific tax imposed in part (b), a percentage tax (ad valorem) equal to 30 percent is imposed. Illustrate how the supply curve would change.

    EXERCISE 4.10

    Optional: Consider the demand curve P=100–2Q. The supply curve is given by P=30.

    1. Draw the supply and demand curves to scale, knowing that the demand curve intercepts are $100 and 50, and compute the equilibrium price and quantity in this market.

    2. If the government imposes a tax of $10 per unit, draw the new equilibrium and compute the new quantity traded and the amount of tax revenue generated.

    3. Is demand elastic or inelastic in this price range? [Hint: you should be able to answer this without calculations, by observing the figure you have constructed.]

    EXERCISE 4.11

    Optional: The supply of Henry's hamburgers is given by P=2+0.5Q; demand is given by Q=20.

    1. Illustrate and compute the market equilibrium, knowing that the supply curve has an intercept of $2 and a slope of 0.5.

    2. A specific tax of $3 per unit is subsequently imposed and that shifts the supply curve upwards and parallel by $3, to become P=5+0.5Q. Solve for the equilibrium price and quantity after the tax.

    3. Insert the post-tax supply curve along with the pre-tax supply curve, and determine who bears the burden of the tax.

    This page titled 4.10: Exercises for Chapter 4 is shared under a CC BY-NC-SA 4.0 license and was authored, remixed, and/or curated by Douglas Curtis and Ian Irvine (Lyryx) via source content that was edited to the style and standards of the LibreTexts platform; a detailed edit history is available upon request.