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Chapter 16: Problem 601

Describe each of the following situations in terms of demand elasticity. a) You have a cold and the only medicine that can help you used to cost \(\$ 1.50\) per bottle but now costs \(\$ 20.00\) a bottle. You buy it anyway. b) At \(\$ 80\) per ticket you would buy 2 tickets, but scalpers want \(\$ 100\) a seat for the Stanley cup finals, so you stay at home and watch the games on television. c) Chocolate bars double in price overnight from \(10 \$$ to \)20 \mathrm{C}$, yet you buy the same number as before.

Short Answer

Expert verified
a) Inelastic demand: The medicine's price increased by 1233.33%, but the demand did not change (E < 1). b) Elastic demand: The ticket's price increased by 25%, and the demand decreased by 100% (E > 1). c) Unitary elastic demand: The chocolate bar's price increased by 100%, but the demand remained the same (E = 1).

Step by step solution

01

Situation a

In this situation, the price of the medicine increased from \(1.50 to \)20.00, which is a % increase of \(\frac{20-1.50}{1.50} * 100 = 1233.33%\). However, the demand did not change and the patient still buys the medicine. This indicates that the demand is inelastic, as the % change in quantity demanded is much smaller than the % change in price (E < 1).
02

Situation b

In this situation, the price of the tickets increased from \(80 to \)100, which is a % increase of \(\frac{100-80}{80} * 100 = 25%\). The demand for tickets decreases from 2 to 0, which is a % decrease of \(\frac{2-0}{2} * 100 = 100%\). Since the % change in quantity demanded is greater than the % change in price, the demand is elastic (E > 1).
03

Situation c

In this situation, the price of chocolate bars doubled from \(10 to \)20, which is a % increase of \(\frac{20-10}{10} * 100 = 100%\). However, the demand remains the same, and the consumer buys the same number of chocolate bars. This indicates that the demand is unitary elastic, as the % change in quantity demanded is equal to the % change in price (E = 1).

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Most popular questions from this chapter

Why is it that a profit-maximizing businessman would always raise prices when facing an inelastic demand curve but might or might not raise prices when facing an elastic demand curve?

Suppose you are given the linear demand function in Table1. $$ \begin{array}{|l|l|l|} \hline \mathrm{Q} & \mathrm{P} & \\ \hline 3 & 7 & \\ 4 & 6 & \\ 5 & 5 & \text { Table 1 } \\ 6 & 4 & \\ 7 & 3 & \\ \hline \end{array} $$ a) Find the point of unitary elasticity. b) Suppose you were given the general linear equation for demand: \(\mathrm{P}=\mathrm{a}+\mathrm{bQ} .\) Use calculus to find the point of unitary elasticity. c) Solve part a) using the information obtained in part b).

At Price \(=\$ \mathrm{q}\), quantity demanded, \(\mathrm{Q}_{\mathrm{D}}=11 .\) At Price \(=\) \(\$ 11, \mathrm{QD}=9\). Find the elasticity of demand using a) \(\mathrm{P}=9, \mathrm{Q}_{\mathrm{D}}=11\) as a base b) \(\mathrm{P}=11, \mathrm{Q}_{\mathrm{D}}=9\) as a base c) average values as a base.

How would you define the following two elasticities: income elasticity of imports and interest elasticity of investments?

Define elasticity of demand.
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