Question

1. Economists have estimated that a 10 percent increase in the price of a pack of cigarettes results in a 4 percent decrease in the quantity of cigarettes demanded among the adult population. For teenagers, the same 10 percent price hike results in a 14 percent decrease in the quantity demanded.
a. What is the price elasticity of demand for cigarettes for the adult population?
b. Among teenagers, what is the price elasticity of demand?
c. Offer some reasons why the price elasticity is different among teenagers than among the population as a whole.

2. Suppose that each of the four corners of an intersection contains a gas station, and that consumers think that the different brands of gasoline are essentially same.
a. Do you think that the price elasticity of demand for each station’s gasoline is above or below 1.0? Explain your answer.
b. Do you think that the price elasticity of demand for each station’s gasoline is larger, smaller, or the same as the price elasticity of demand for gasoline in general in the United States? Explain your answer.

3. The Bugsbane Music Box Company is convinced that an increase in its price will decrease the total amount of money spent on its music boxes. If this belief is correct, is the demand for Bugsbane’s music boxes elastic or inelastic?

4. Is each of the following statements true or false?
a. If a product’s income elasticity of demand is less than 1.0, then an increase in its price definitely will increase its total revenue.
b. It is possible for a product’s income elasticity of demand to be positive at low levels of income and negative at higher levels of income.

5. What is the sign of the cross elasticity of demand for each of the following pairs of goods?
a. Tea and coffee.
b. Tennis balls and tennis rackets.
c. Coke and Pepsi.
d. Fishing licenses and fishing poles.

6. The price elasticity of demand can range between
a. zero and one.
b. negative infinity and infinity.
c. zero and infinity.
d. negative one and one.

7. A 10 percent increase in the quantity of spinach demanded results from a 20 percent fall in its price. The price elasticity of demand for spinach is
a. 0.5.
b. 2.0.
c. 10.0.
d. 20.0.

8. If the price elasticity of demand for books is 0.3, then a 12 percent rise in the price of books decreases the quantity demanded by
a. 3.60.
b. 4.00.
c. 12.0.
d. None of the above answers is correct.

Answer 1

1)

a) Price elasticity of demand measures the degree of responsiveness of the quantity demanded of a commodity to a change in the price of the commodity. It is calculated as-

Price elasticity of demand= % change in quantity demanded/ % change in price

Given that a 10% increase in the price of a pack of cigarettes results in a 4% decrease in the quantity demanded by the adult population.

So, % change in quantity demanded= 4% , % change in price= 10%

Price elasticity of demand= 4% / 10%

Price elasticity of demand= 0.4

Hence, the price elasticity of demand for the adult population is 0.4. As price elasticity of demand is less than 1, price elasticity of demand is inelastic for adult population.

b) Given that a 10% increase in the price of a pack of cigarettes results in a 14% decrease in the quantity demanded by teenagers.

So, % change in price= 10% , % change in quantity demanded= 14%

Price elasticity of demand= % change in quantity demanded / % change in price

Price elasticity of demand= 14% / 10%

Price elasticity of demand= 1.4

​​​​​​Hence, the price elasticity of demand for teenagers is 1.4. As price elasticity of demand is greater than 1, price elasticity of demand for teenagers is elastic.

c) From the above calculations we can see that price elasticity of demand for cigarettes is inelastic for adult population while it is elastic for teenagers. Some reasons for difference in price elasticity of demand among adult population and teenagers is-

1) Income differences- As teenagers are generally students studying or earning a part time income, they usually have less income to spend. As such, an increase in the price of a pack of cigarettes results in decrease in the quantity demanded by a greater percentage. On the other hand, the adult population is constituted of people having a good job and earning good income. As such, an increase in the price of a pack of cigarettes does not affects much and hence the quantity demanded decreases by a smaller percentage than price.

2) Habit- Adult population is more habitual of consuming cigarettes than teenagers. As such, an increase in the price of a pack of cigarettes does not decreases the quantity demanded by larger percentage for adult population due to being more habitual of consuming cigarettes. On the other hand, teenagers being less habitual of consuming cigarettes, the quantity demanded decreases by a larger percentage than change in price.