Economics Answers: Elasticity

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Homework 4 Master
1. College logo t-shirts priced at $15 sell at a rate of 25 per week, but when the bookstore marks them down to $10 it finds that it can sell 50 t-shirts per week. What is the price elasticity of demand for the logo t-shirts? Is the demand elastic or inelastic?
Answer

Ed = -1.675 (elastic)

2. Check out the following video (http://www.youtube.com/watch?v=ncZkrO06le8). Do the early shoppers appear to have elastic or inelastic demand on Black Friday?
Answer

Elastic. Very responsive to price changes.

3. In the accompanying table, assume that the price of ice skates increases from $10 to $20 per pair. Using the midpoint method, calculate the price elasticity of demand for ice skates for hockey players. Is demand elastic or inelastic?

Price of Ice Skates
Quantity Demanded (hockey players)

10
95
20
85
40
75
50
65
60
60

Answer

Ed = -0.16 (inelastic)
4. If a 20% increase in price causes a 10% drop in the quantity demanded is the price elasticity of demand elastic, unitary, or inelastic?
Answer

-10 = -0.5 (inelastic) 20

5. Characterize each of the following goods as perfectly elastic, relatively elastic, relative inelastic, or perfectly inelastic.
a) A life-saving medication
b) Demand for a $20 bill
c) A fast food restaurant located in the food court of a shopping mall
d) The water bill you pay

Answer

A) Perfectly inelastic (QD unresponsive to change in price)
B) Perfectly elastic (only prepared to pay 1 price)
C) Elastic (lots of substitutes)
D) Inelastic (few substitutes)

6. A local paintball business receives total revenue of $8,000 a month when they charge $10 per person and they receive $10,000 in total revenue when they charge $6 per person. Over that range of prices, does the business face elastic, unitary, or inelastic demand?
Answer

TR = P x Q

$8,000 = $10 x 800

$10,000 = $6 x 1,666.67

When price falls & TR rises, demand is elastic.

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