Tutorial_4_solutions

1. For each of the following pairs of goods, which good would you expect to have more elastic demand and why? a. required textbooks or mystery novels b. Beethoven recordings or classical music recordings in general c. subway rides during the next 6 months or subway rides during the next 5 years d. root beer or water 2. Suppose that business travellers and vacationers have the following demand for airline tickets from New York to Boston: PriceDemand (business travellers) Demand (vacationers) 1502,100 1,000 2002,000800 2501,900600 3001,800400 a. As the price of tickets rises from $200 to $250, what is the price elasticity of demand for (i) business travellers and (ii) vacationers? (Use the midpoint method in your calculations.) b. Why might vacationers have a different elasticity from business travellers? 3. Suppose the price of elasticity of gasoline is 0.3 in the short run and 0.9 in the long run. a. If the price of a gallon of gasoline falls from $2.50 to $2.25, what happens to the quantity of gasoline demanded in the short run? In the long run? (Use the midpoint formula in your calculations.) b. Why might the elasticity of demand for gasoline depend on time horizon? 4. Consider public policy aimed at smoking. a. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes costs $2 and the government wants to reduce smoking by 20%, by how much should it increase the price? b. If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking 1 year from now or 5 years from now? c. Studies also find that teenagers have higher price elasticity than do adults. Why might this be true? 5. You are the curator of a museum. The museum is running short of funds, so you decide to increase revenue. Should you increase or decrease the price of admissions? Explain. 6. Corn has an elastic demand, and gasoline has an inelastic demand. Suppose that the government places a tax on each product that lowers the supply of each product by half (that is, the quantity supplied at each price is 50 percent of what it was). a. What happens to the equilibrium price and quantity in each market? b. Which product experiences a larger change in price? c. Which product experiences a larger change in quantity? d. What happens to total consumer spending on each product? 1. a. Mystery novels have more elastic demand than required textbooks, because mystery novels have close substitutes and are a luxury good, while required textbooks are a necessity with no close substitutes. If the price of mystery novels were to rise, readers could substitute other types of novels, or buy fewer novels altogether. But if the price of required textbooks were to rise, students would have little choice but to pay the higher price. Thus, the quantity demanded of required textbooks is less responsive to price than the quantity deman