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ANSWERS TO CHAPTER working with numbers and graphs

1. A college raises its annual tuition from $2,000 to $2,500, and its student enrollment falls from 4,877 to 4,705. Compute the price
elasticity of demand. Is demand elastic or inelastic?

Using the formula for Ed, we find Ed = [(4,705 4,877) / (4,877 + 4,705) / 2]
[(2,500 2,000) / (2,500 + 2,000) / 2] = 0.16. Therefore, demand is inelastic, since Ed < 1.

2. As the price of good X rises from $10 to $12, the quantity demanded of good Y rises from 100 units to 114 units. Are X and Y
substitutes or complements? What is the cross elasticity of demand?

Using the formula for Ec, we find Ec = [(100 114) / (114 + 100) / 2]
[(10 12) / (12 + 10) / 2] = 0.72. Therefore, X and Y are substitutes, since Ec > 0.

3. The quantity demanded of good X rises from 130 to 145 units as income rises from $2,000 to $2,500 a month. What is the
income elasticity of demand?

Using the formula for EY, we find EY = [(130 145) / (130 + 145) / 2]
[(2,000 2,500) / (2,500 + 2000) / 2] = 0.491.

4. The quantity supplied of a good rises from 120 to 140 as price rises from $4 to $5.50. What is price elasticity of supply?

Using the formula for Es, we find:

Es = [(120 140) / (120 + 140) / 2] [(4 5.5) / (4 + 5.5) / 2] = 0.487.

5. In the following figure, what is the price elasticity of demand between the two prices on D1? on D2?

D1: Using the formula for Ed, we find Ed = [(8 12) / (8 + 12) / 2] [(12 10) / (12 + 10) / 2] = 2.2

D2: Using the formula for Ed, we find Ed = [(10 12) / (10 + 12) / 2] [(12 10) / (12 + 10) / 2] = 1
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