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Assignment 6:

Elasticity and Its Applications

(10 Points)

Terms and Definitions: Define the following terms

Elastic Demand: _______________________________________________________________

______________________________________________________________________________

Elasticity: ____________________________________________________________________

______________________________________________________________________________

Income Elasticity: ______________________________________________________________

______________________________________________________________________________

Inelastic Demand: ______________________________________________________________

______________________________________________________________________________

Inferior Good: _________________________________________________________________

______________________________________________________________________________

Luxury Good: _________________________________________________________________

______________________________________________________________________________

Normal Good: _________________________________________________________________

______________________________________________________________________________

Unit Elastic Demand: ___________________________________________________________

______________________________________________________________________________

Discussion Questions:

1. If the percentage change in ____________ is greater than the percentage change in

_______________, then demand is said to be elastic.

2. If the percentage change in quantity demanded is ______________ the percentage

change in price, the demand is said to be unit elastic.

3. If the percentage change in quantity demanded is ________________ than the percentage

change in price, then demand is said to be inelastic.

Demand for Computers

$300

$400

$500

$200

$100

4 0

$600

$700

3 0

5 0

6 0

9 0

4. If the total revenue of a good increases as price decreases, then demand elasticity is

considered ________________.

5. If the total revenue of a good ________________as price increases, then demand

elasticity is considered inelastic.

6. Total revenue is maximized where demand elasticity is _________________________.

7. A horizontal demand curve is considered __________________ because the percentage

change in _______________ is zero no matter where you mover along the demand curve.

8. A vertical demand curve is considered __________________ because the percentage

change in _______________ is zero no matter where you mover along the demand curve.

7. The more substitutes a good has, the higher the demand elasticity of the good. Explain

why this makes sense and why are more expensive goods usually more elastic.

________________________________________________________________________

Short Answer Questions:

1. Suppose a 10% change in the price of gasoline decreases the quantity of gasoline

demanded by .5%. Calculate the elasticity of demand and determine whether the demand

is elastic, inelastic, or unit elastic.

2. Suppose a rise in movie ticket prices from $8.00 to $10.00 reduces the quantity of tickets

sold from 1000 to 600. Calculate the demand elasticity for movie tickets and determine

whether the demand elasticity is elastic, inelastic, or unit elastic.

3. In 2010, an excise tax on the production of cigarettes increased the price of a pack of cigarettes

from $4.00 to $5.00. This decreased the quantity of cigarettes demanded by 5%. Calculate the

elasticity of demand and determine whether the demand is elastic, inelastic, or unit elastic.

Use the graph below to answer the following questions.

4. Calculate the elasticity of demand for the following:

From point B to point C. _______________

From point C to point D. _______________

From point D to point E. _______________

5. Order the points from most inelastic to most elastic.

6. Calculate total revenue at each point on the graph above.

TR at point A: ______ x _______ = TR at point B: ______ x _______ =

TR at point C: ______ x _______ = TR at point D: ______ x _______ =

TR at point E: ______ x _______ = TR at point F: ______ x _______ =

7. Suppose incomes increase by 10%. As a result of the price increase, the quantity of BMW’s

increase by 25%. Calculate the income elasticity and determine whether the good is a normal

good, an inferior good, or a luxury good.