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1. Among the following pairs, which is likely to have the greatest price elasticity of demand? Why?
a. Cars or Toyotas
b. Electricity usage during a month or during a year
c. Cable television or an apartment rental
2. A family friend is shopping for an exclusive Vera Wang wedding gown for $8,000 but feel that the price is excessive. She argues that the company should lower prices not only to benefit customers but also to increase the company’s revenues and profits. What has she assumed about the price elasticity of demand for these gowns? Is her assumption likely to be correct or incorrect? Why?
3. Arrange the following goods from least to most elastic, explaining your ordering: gasoline, Shell gasoline, and Shell gasoline at a particular gas station.
4. In a recent fare war, America West reduced the price of its roundtrip airfare from Charlotte, North Carolina, to New York City from $198 to $138 to match American Airlines. America West matched the fare reluctantly, saying it would cost the company millions of dollars in revenue for those tickets to be sold for less. American, on the other hand, believed the fare cut would increase its revenue even if rival airlines matched the lower fares. What different assumptions about the underlying price elasticity of demand for airline tickets on that route did each airline believe true?
5. You have been hired by the city to determine whether or not an increase in the price of tickets for the mass transit system would raise system revenues. The debate has been heated and the city council seems to be divided. One side argues that in order to increase revenues from the transit system, prices must be increased. The opposing side argues that a price increase at this time will lower revenues. What assumptions are each side making about the price elasticity of demand, and how might you determine the best course of action?
6. Calculate the elasticity of demand when an increase in supply causes the equilibrium price and quantity to change from $9 and 2,000 to $7 and 3,000, respectively.
7. Calculate the cross-price elasticity of demand between computers and printers, where a 10 percent decrease in the price of computers results in a 15 percent increase in the quantity of printers demanded.
8. Calculate the income elasticity of demand for DVDs, where a 10 percent increase in income results in a 20 percent increase in the quantity of DVDs demanded at a given price. Decide from your answer, whether DVDs are normal or inferior goods.
9. Calculate the elasticity of supply when an increase in demand causes the equilibrium price and quantity to change from $2.00 and 500 to $2.80 and 1,000, respectively.
Should the government offer more tax incentive to private employers?
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