Economics (McConnell), 18th Edition

Chapter 6: Elasticity, Consumer Surplus, and Producer Surplus

Key Questions

1. Graph the accompanying demand data, and then use the midpoint formula for E_d to determine price elasticity of demand for each of the four possible $1 price changes. What can you conclude about the relationship between the slope of a curve and its elasticity? Explain in a nontechnical way why demand is elastic in the northwest segment of the demand curve and inelastic in the southeast segment.

2. Calculate total-revenue data from the demand schedule in question 2. Graph total revenue below your demand curve. Generalize about the relationship between price elasticity and total revenue.

3. How would the following changes in price affect total revenue? That is, would total revenue increase, decline, or remain unchanged?

Price falls and demand is inelastic.
Price rises and demand is elastic.
Price rises and supply is elastic.
Price rises and supply is inelastic.
Price rises and demand is inelastic.
Price falls and demand is elastic.
Price falls and demand is of unit elasticity.

4. What are the major determinants of price elasticity of demand? Use those determinants and your own reasoning in judging whether demand for each of the following products is probably elastic or inelastic: (a) bottled water; (b) toothpaste; (c) Crest toothpaste; (d) ketchup; (e) diamond bracelets; (f) Microsoft Windows operating system.

5. What is the formula for measuring the price elasticity of supply? Suppose the price of apples goes up from $20 to $22 a box. In direct response, Goldsboro Farms supplies 1200 boxes of apples instead of 1000 boxes. Compute the coefficient of price elasticity (midpoints approach) for Goldsboro's supply. Is its supply elastic, or is it inelastic?

6. Suppose the cross elasticity of demand for products A and B is +3.6 and for products C and D is -5.4. What can you conclude about how products A and B are related? Products C and D?

7. The income elasticities of demand for movies, dental services, and clothing have been estimated to be +3.4, +1, and +.5, respectively. Interpret these coefficients. What does it mean if an income elasticity coefficient is negative?

8. Use the ideas of consumer surplus and producer surplus to explain why economists say competitive markets are efficient. Why are below- or above-equilibrium levels of output inefficient, according to these two sets of ideas?