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Chapter 4: Q8. (page 166)

Judy has decided to allocate exactly $500 to college textbooks every year, even though she knows that the prices are likely to increase by 5 to 10 percent per year and that she will be getting a substantial monetary gift from her grandparents next year. What is Judy’s price elasticity of demand for textbooks? Income elasticity?

Short Answer

Expert verified

Judy’s demand elasticity for the textbook will be unitary elastic since expenditure remains the same even if the price rises.

The income elasticity of Judy will be perfectly inelastic or zero since her allocation remain constant even if she receives a monetary gift.

Step by step solution

01

Demand elasticity

The demand elasticity measures the degree of responsiveness in quantity demanded due to change in the price. One sees that Judy has a set expenditure of $500 for her textbook even if the price rises. It is the case of unit elastic demand only; since the expenditure is the same, Judy will keep altering her demand the same as the change in price. Therefore, her price elasticity of demand elasticity would be equal to -1.

02

Income elasticity

The income elasticities measure the change in the quantity demanded of the commodity due to a change in the income. Judy plans to keep the expenditure constant even if she receives a monetary gift from her grandparents. Even if her income increases, her income elasticity would be perfectly inelastic or equal to zero.

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Most popular questions from this chapter

An individual consumes two goods, clothing and food. Given the information below, illustrate both the income-consumption curve and the Engel curve for clothing and food.

PRICE

CLOTHING

PRICE

FOOD

QUANTITY

CLOTHING

QUANTITY

FOOD

INCOME
\(10
\)2
620\(100
\)10
\(2
835\)150
\(10
\)2
1145\(200
\)10
\(2
1550\)250

Suppose that you are the consultant to an agricultural cooperative that is deciding whether members should cut their production of cotton in half next year. The cooperative wants your advice as to whether this action will increase members’ revenues. Knowing that cotton (C) and soybeans (S) both compete for agricultural land in the South, you estimate the demand for cotton to be C = 3.5 - 1.0PC + 0.25PS + 0.50I, where PC is the price of cotton, PS the price of soybeans, and income. Should you support or oppose the plan? Is there any additional information that would help you to provide a definitive answer?

A consumer lives on a diet of solely steak and potatoes. Her budget is \(30 for every 10 days, and she must buy enough potatoes to eat at least two potatoes per day.

a. A potato costs \)0.50 and the price of a steak is \(10.How much will the consumer purchase of each good?

b. Now suppose that the price of potato increases to \)1. How much will the consumer purchase of each good?

c. Now suppose that the price of potato increases to $1.25. How much will the consumer purchase of each good?

d. What kind of good is the potato?

e. Would you expect the demand curve for potatoes to continue to follow this trend indefinitely? Why or why not?

The director of a theater company in a small college town is considering changing the way he prices tickets. He has hired an economic consulting firm to estimate the demand for tickets. The firm has classified people who go to the theater into two groups and has come up with two demand functions. The demand curves for the general public (Qgp) and students (Qs)

are given below:

Qgp = 500 - 5P

Qs = 200 - 4P

a. Graph the two demand curves on one graph, withon the vertical axis andQon the horizontal axis. If the current price of tickets is \(35, identify the quantity demanded by each group.

b. Find the price elasticity of demand for each group at the current price and quantity.

c. Is the director maximizing the revenue he collects from ticket sales by charging \)35 for each ticket? Explain.

d. What price should he charge each group if he wants to maximize revenue collected from ticket sales?

a. Orange juice and apple juice are known to be perfect substitutes. Draw the appropriate price consumption curve (for a variable price of orange juice) and income-consumption curve.

b. Left shoes and right shoes are perfect complements. Draw the appropriate price-consumption and income-consumption curves.
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