Question

1. Five brief scenarios are presented below. Apply the correct elasticity term to each scenario and explain your answer. (a) John must have an appendectomy. Upon arriving at the hospital he is told that for this week only they are doing abdominal operations at half price. Even in the face of a 50 percent price cut, John insists that he wants only one operation. (b) The Dell Corporation announces that it is willing to sell as many model 3000 computers as are ordered at a fixed price of $500 per unit. (c) Northwest Airlines increased all its fares by 25 percent. As a result the number of passengers declined by 25 percent and the total revenue of Northwest Airlines remained the same. (d) Newsweek magazine raised its price to annual subscribers by 50 percent. As a result annual subscriptions fell by 30 percent. Although it lost some readership, Newsweek significantly increased its revenues. (e) The price of soybeans went up by 60 percent. In response farmers planted more soybeans and output increase by 70 percent.

Answer 1

Question 1

(a)

In the given case, demand remains same even though there is change in price.

When demand remains same even though there is change in price then demand is said to be perfectly inelastic.

Thus, the given scenario represents perfectly inelastic demand.

(b)

In the given case, supplier is ready to supply whatever quantity at a given price.

When a supplier is willing to sell whatever quantity at a given price then supply is said to be perfectly elastic.

Thus, the given scenario represents perfectly elastic supply.

(c)

In the given case, increase in fares (price) by 25 percent has resulted in a decrease in quantity demanded by 25 percent.

When percentage change in quantity demanded is equal to the percentage change in price then demand is said to be unit elastic.

Thus, the given scenario represents unit elastic demand.

(d)

In given case, price is increased by 50 percent. This has resulted in a decrease in quantity demanded by 30 percent.

When percentage change in quantity demanded is less than the precentage change in price then demand is said to be inelastic.

Thus, the given scenario represents inelastic demand.

(e)

In given case, price has increased by 60 percent. This has resulted in an increase in quantity supplied by 70 percent.

When percentage change in quantity supplied is greater than the percentage change in price then supply is said to be elastic.

Thus, the given scenario represents elastic supply.