Econ HW; Ch.

20 & 21 Name Due:

SHORT ANSWER Answer all questions on a separate sheet of paper.

1. Name and describe the four major determinants of price elasticity of demand;
use 1-2 sentences for each.
Type of Good: Demand tends to be more elastic if for the good/service if it is
a luxury.
Time period: Demand tends to be more elastic during the short run time
period.
Number of substitutes: The larger the number of close substitutes then the
good tends to be more elastic.
Proportion of Income: Demand is more elastic for products that cost a higher
portion of a consumers income. For example, elasticity of demand for a
leather couch is higher than a sweatshirt.

2. Is the demand for each of the following products elastic or inelastic? Justify your
answer with reference to the prevailing determinant of price elasticity of demand.
a. Water: Water is a necessary good, therefore it is more likely that the good is
price inelastic.
b. bottled water - Bottled water is a luxury good and also it does have
numerous number of substitutes so it is more likely that it is price elastic.
c. tooth paste - Toothpaste is widely used everywhere for dental hygiene
seen as a necessity for our health. In that sense, as a necessary good it is most
likely price ineastic.
d. Crest toothpaste - Crest toothpaste is a brand luxury good with numerous
close substitutes so it would be price elastic.
e. Ketchup - Ketchup is a good with many substitutes as well that is widely
used along with many foods so it would price elastic.
f. diamond bracelets - Depending on the diamond bracelet, even though this
is a luxury good it does not have a few close substitutes. Higher end diamond
bracelets would most likely be price inelastic.
g. cell phone service - It has numerous close substitutes that are competing
with each other and it is widely used so it is most likely price elastic.
h. college education - The perception of a college education has changed
and now it is societally viewed as a necessary good to succeed in life. Even if
colleges were to raise prices over tuition it is most likely the number of students that
still want a college degree would stay somewhat similar. College education is price
elastic.

3. Because of a legal settlement in 1999, the U.S. tobacco companies had to raise
the average price of a pack of cigarettes from $1.95 to $2.45. After the increase,
sales declined 8 percent. What does this imply for the price elasticity of demand for
cigarettes? Explain.
[Look @ pic]

4. Use the midpoint convention to calculate the price elasticity of demand, then state
whether the demand is elastic or inelastic:
 a. Price changes between $50 and $60; quantity demanded changes between
100 and 80
i.[pic]
b. Price changes between $8 and $6; quantity demanded changes between
1000 and 1100
[pic]

5.
a.True, false, or uncertain: If a company wants to increase its revenue, it
should lower its price to get more customers. Explain.
This is uncertain because it is based on the elasticity of demand of the
good/service the company is selling. If the company has a good that is elastic
then under the total revenue test, it should lower its price to increase its
revenue. In that case the statement would be true, a decrease in price would
get more customers and overall increase sales. However, if the price is
inelastic, the company should raise its price for more total revenue. For
example, in the market of cigarettes (an addictive good) raising the price still
have a high quantity consumer demand.

b. True, false, or uncertain. If a company wants to increase its revenue, it

should simply raise the price it charges.
This is once again uncertain for the similar rationale in part a. If the
company is selling a product that is price inelastic (insensitive to price
changes) then yes it is true that simply raising the price it charges (to a
certain extent) would increase the companys total revenue. But if the
good is price elastic then this would actually decrease total revenue.

c. True, false, or uncertain: Price elasticity of supply is always elastic

because a company will always want to sell more of its product when the market
price goes up. Explain.
This is false. There are factors of productions that come into play in
terms of cost production towards whether the company would raise
produce more units of the good. While the market price going up
would mean that quantity supply would increase, we would also need
to consider economies of scale in terms of whether supply is price
elastic or inelastic. Certain companies that have millions of workers or
expensive machinery just to produce more units of a good would
actually lead to a profit loss because managing the company at the
size would lead to decreasing returns to scale.

6.
a. Suppose TJMaxx reduced the price of dress shoes by 25%; consequently,
sales of black socks increased 10%. Is this cross elasticity positive or
negative? What does this imply about the relationship between dress shoes and
black socks?
[pic]
 b.Suppose Target increased the price of Crayola crayons by 10%;
consequently, sales of colored pencils increased 5%. Is this cross elasticity positive
or negative? What does this imply about the relationship between dress shoes and
black socks?

7. Rank the following products in order from most income elastic to least income
elastic.
1. Tickets to the Patriots
2. New Ford F-150 pick-up truck
3. Socks
4. Milk
5. St. Johns Tuition

Explain your ranking in 2-3 sentences.

In the last twenty five years, there has been a dramatic expansion of small retail
convenience stores (such as Cumberland Farms, 7-Elevens, gas station stores,
etc.). The prices at those stores are often much higher than those in larger
supermarkets. What explains the success of the convenience stores?

Michelle buys crackers and peanuts each week at prices of $2.50 and $1.75,
respectively. Last week, the marginal utility she received from eating crackers was
50 utils and the marginal utility she received from eating peanuts was 40 utils. Did
she buy the utility maximizing combination of crackers and peanuts? If not, should
she have bought more peanuts or more crackers?

Larry obtains utility from eating pizza, as shown on the table below. Complete the
table and answer the questions below:

Pizza Slices Eaten Total Utility Marginal Utility

00x
1 80 ______
2 140 ______
3 ____ 40
4 200 ______
5 ____ 10
` 6 205 ______

At what rate is total utility increasing: a constant rate, a decreasing rate, or an

increasing rate?
True, False, or Uncertain. Larry should purchase only 1 slice of pizza since that
maximizes marginal utility. Explain.
True, False, or Uncertain. Larry may be acting rationally by eating zero slices of
pizza. Explain.
True, False, or Uncertain. Larry may be acting rationally by eating six slices of
pizza. Explain.