Elasticity of Demand and Supply

1.

Assume the Malaysian passengers have the following demand for airline tickets from
Kuala Lumpur to London.
Quantity Demanded
Price (RM)
1 500
2 000
2 500
3 000
5 000

2.

Business Travellers
21 000
20 000
19 000
18 000
15 000

Vacationers
10 000
8 000
6 000
4 000
2 000

(i)

Using the mid-point formula, calculate the price elasticity of demand for both the
business travelers and vacationers when the price of air tickets rises from:

(a)

RM1 500 to RM2 000

(b)

RM2 000 to RM2 500

(c)

RM2 500 to RM3 000

(d)

RM3 000 to RM5 000

(ii)

Do the business travelers have a different elasticity from the vacationers? State
your reason.

Assume the price elasticity of demand for petrol is 0.2 in the short-run and 0.7 in the
long-run. Using the mid-point formula, calculate the quantity demanded for oil if the
price of oil rises from RM2.00 to RM2.30 per litre:
(a) In the short-run.
(b) In the long-run.
(c) State the reason why this form of elasticity depends on time horizon.

3.

The table below shows the Mr. As demand schedule for DVD. Use the mid-point method
to calculate the following.
Price (RM)
8
10
12
14
16

Quantity Demanded
Income = RM5 000
Income = RM7 000
40
50
32
45
24
30
16
20
8
12

(a) The price elasticity of demand when:

(i)

Mr As income is RM5 000.

(ii)

Mr. As income is RM7 000.

(b) The income elasticity of demand when the price of DVD changes from RM8 up to
RM16.
4.

The New Straits Time reported that the number of people in Kuala Lumpur using the
commuter decline recently due to an increase in the commuter fare. Its report stated
There were nearly 4 million fewer passengers in January 2014, the 1 st full month after
the price increased 25% to RM10.50 than the previous January, a 4.5% decline. Using
the mid-point method:
(a) Estimate the price elasticity of demand for the commuter ride.
(b) Estimate the total revenue incur when the commuter fare increases.
(c) Is the estimation realiable?

5.

The government of Malaysia is aiming to reduce the number of people who smoke with
the aim to reduce the overall expenditure on smoke-related health. Studies indicate that
the price elasticity of demand for cigarettes is about 0.4. Use the mid-point formula,
(a) Calculate the percentage increase in price that the government should put in place
if it wishes to reduce smoking by 20%. Assume the current price for cigarettes is
RM5.70 per pack.
(b) If the government permanently increases the price of cigarettes, will the policy
have a larger effect on smoking in the short-run or the long-run?
(c) Studies also find that teenagers have a higher price elasticity than adults. State

the reason.