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Chapter 6: Problem 11

Amazon allows authors who self-publish their e-books to set the prices they charge. One author was quoted as saying, "I am able to drop prices and, by sheer volume of sales, increase my income." Was the demand for her books price elastic or price inelastic? Briefly explain.

Short Answer

Expert verified
The demand for this author's e-books is price elastic because a decrease in price led to a more than proportional increase in sales volume, hence an increase in total revenue.

Step by step solution

01

Understanding the Given Information

Firstly, let's consider the given information. The author is able to drop prices of her e-books and increase her income through increased sales. This indicates that when she drops the price of her e-books, the quantity demanded of her books increases greatly, resulting in higher revenue.
02

Apply the Concepts of Price Elasticity of Demand

In economics, when quantity demanded is highly responsive to changes in price, we refer to the demand as being price elastic. This author's e-books appear to be a clear illustration of a good with price elastic demand.
03

Explanation Based on Observations

In this case, a decrease in price led to an increase in the author's income due to an increase in the volume of e-books sold. This suggests that the demand for her books is price elastic. This is because an elastic good or service is one where a change in price leads to a more than proportional change in the quantity demanded.

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Most popular questions from this chapter

Economists' estimates of price elasticities can differ somewhat, depending on the time period and on the markets in which the price and quantity data used in the estimates were gathered. An article in the New York Times contained the following statement from the Centers for Disease Control and Prevention: "A 10 percent increase in the price of cigarettes reduces consumption by 3 percent to 5 percent." Given this information, compute the range of the price elasticity of demand for cigarettes. Explain whether the demand for cigarettes is elastic, inelastic, or unit elastic. If cigarette manufacturers raise prices, will their revenue increase or decrease? Briefly explain.

Define the income elasticity of demand. How does the income elasticity of a normal good differ from the income elasticity of an inferior good? Is it possible to tell from the income elasticity of demand whether a product is a luxury good or a necessity good?

According to a news story about the bus system in the Lehigh Valley in Pennsylvania, "Ridership fell 14 percent ... after a 33 percent increase" in bus fares. Based on this information, is the demand for bus trips price elastic or price inelastic? Explain your answer in terms of the five determinants of price elasticity.

Draw a graph of a perfectly inelastic demand curve. Think of a product that would have a perfectly inelastic demand curve. Explain why demand for this product would be perfectly inelastic.

(Related to the Apply the Concept on page 203) An article in the Wall Street Journal notes that although U.S. oil production has increased rapidly in recent years, the increase has still amounted to only 5 percent of world production. Still, that increase has been "enough to help trigger a price collapse." Briefly explain under what circumstances a small increase in supply can lead to a large decline in equilibrium price.
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