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Chapter 6: Problem 9

In each of the following cases, do you think the price elasticity of supply is (i) perfectly elastic; (ii) perfectly inelastic; (iii) elastic, but not perfectly elastic; or (iv) inelastic, but not perfectly inelastic? Explain using a diagram. a. An increase in demand this summer for luxury cruises leads to a huge jump in the sales price of a cabin on the Queen Mary 2 . b. The price of a kilowatt of electricity is the same during periods of high electricity demand as during periods of low electricity demand. c. Fewer people want to fly during February than during any other month. The airlines cancel about \(10 \%\) of their flights as ticket prices fall about $20 \%$ during this month. d. Owners of vacation homes in Maine rent them out during the summer. Due to the soft economy this year, a \(30 \%\) decline in the price of a vacation rental leads more than half of homeowners to occupy their vacation homes themselves during the summer.

Short Answer

Expert verified
a. Luxury cruises b. Electricity price c. Airline ticket prices in February d. Vacation home rentals a. In the case of luxury cruises, the price elasticity of supply is perfectly inelastic. b. For electricity price, the price elasticity of supply is perfectly inelastic. c. With airline ticket prices in February, the price elasticity of supply is inelastic but not perfectly inelastic. d. In the case of vacation home rentals, the price elasticity of supply is elastic but not perfectly elastic.

Step by step solution

01

a. Luxury cruises

In this case, the increase in demand for luxury cruises leads to a huge jump in the sales price of a cabin. Since the price increases significantly and the supply of cabins on Queen Mary 2 is fixed (there cannot be new cabins added immediately), we can conclude that the price elasticity of supply is perfectly inelastic. The supply curve would be a vertical line in this case, as the quantity remains constant regardless of price changes.
02

b. Electricity price

The price of electricity remains the same during both high and low demand periods, indicating that the amount of electricity supplied is not affected by the price. This suggests that the price elasticity of supply for electricity is perfectly inelastic. The supply curve would be a vertical line, as the supply remains constant irrespective of price changes.
03

c. Airline ticket prices in February

In February, as the demand for flights decreases, the price of tickets drops by \(20 \%\) and the airlines cancel about \(10 \%\) of their flights. The reduction in quantity supplied is less than the decrease in price, which indicates that the supply is inelastic, but not perfectly inelastic. The supply curve would be steep but not vertical.
04

d. Vacation home rentals

A \(30 \%\) decline in the price of a vacation rental leads more than half of homeowners to occupy their vacation homes themselves during the summer. As the reduction in price causes a relatively larger reduction in the quantity supplied, the supply is elastic but not perfectly elastic. The supply curve would be a flatter curve, as the quantity supplied adjusts more than proportionately to price changes.

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