Supply and Demand and Price

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CHAPTER 20
Supply and Demand: Elasticities and
Government-set Prices

A. Short-Answer, Essays, and Problems

New1.The president of a toy company asks you for advice about whether the company should cut the price of its best-selling doll this year based on the following information: last year the company cut the price of its best-selling doll by 10% and the total revenues from doll sales increased by 10%.

New2.The owner of a health club asks you for advice about whether the company should raise the price of its membership this year based on the following information: last year the club raised the price of its membership by 5% and the number of members paying the same fee fell by 7%.

3.The Metropolitan Transit System recently announced a 50% increase in the price of a transit ticket. The administrators said that they needed an increase in revenue to cover their rising costs. Explain the economic rationale for this decision.

4.Ford Motor Company announced a major rebate program for its cars and trucks. The rebate program amounts to a simple reduction in price. The company executives hope to increase revenue as a result of this rebate program. What economic explanation would justify this decision?

5.A gasoline station very near a professional football stadium parks cars on its lot to make money on game days. Last year it charged $4.00 per car and parked 1,000 cars. This year it raised the parking price to $5.00 and parked 850 cars. Did the station owner make a good economic decision in raising the parking prices from one year to the next? Explain.

6.The president of the Micro Brewing Corporation asks you, as the company economist, to forecast changes in consumer beer purchases associated with a proposed price change. You conduct a survey and find that if the price of a six-pack increases from $5.50 to $7.50, the quantity demanded will decrease from 2,200 units to 1,800 units a month. Should the Micro Brewing Corporation raise its price? Explain the economic basis for this recommendation to the president.

7.The following data shows the relationship between price and quantity demanded at four different prices for a product:

P = $11, Qd = 16
P = $9, Qd = 24
P = $7, Qd = 32
P = $5, Qd = 40

Using the midpoints formula, what is the price elasticity of demand between: (a) $11 and $9; (b) $9 and $7; (c) $7 and $5?

8.On the below demand curve, indicate the character of the price elasticity of demand across all prices.

9.The following is a straight-line demand curve that confronts a single firm.

Quantity
Pricedemanded(3)(4)   
$61__________
52__________
43__________
34__________
25__________
16__________

(a) In column 3, compute total revenue. In column 4, compute the coefficient for the price elasticity of demand at each price using the midpoints formula.

(b) Describe the character of elasticity across the prices based on the total revenue test and the elasticity coefficient.

(c) Does a straight-line demand curve have constant elasticity?

(d) Of what practical significance is your answer to (c)?

10.Using the demand data given, complete the following table by computing total revenue at each of the prices. Indicate whether demand is elastic, inelastic, or unitary between each set of prices.

QuantityTotalCharacter
Pricedemandedrevenue  of demand  
$1,000300$________________
900400________________
800500________________
700600________________
600700________________
500800________________
400900________________
3001,000________________
2001,100________________...
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