Problem No.

For each of the following scenarios, decide whether you agree or disagree and explain your
answer.

1. If the elasticity of demand for cocaine is -0.2 and the Drug Enforcement Administration
succeeds in reducing supply substantially, causing the street price of the drug to rise by
50%, buyers will spend less on cocaine.

 Disagree. The elasticity of demand of cocaine is relatively inelastic. Meaning, higher

prices lead not to less use, but to an increase in total spending. Thus, when price
increases, total revenue will rise.

2. Every year Christmas tree vendors bring tens of thousands of trees from the forest of
New England to New York City and Boston. During the last two years, the market has
been very competitive; as a result, price has fallen by 10 percent. If the price elasticity of
demand was -1.3, vendors would lose revenues altogether as a result of the price decline.

 Disagree. The elasticity of demand of trees is relatively elastic. Thus, a decrease in

price makes still makes the total revenue rises. Meaning if we decrease prices, the
revenue gained from the more units sold will outweigh the revenue lost from the
decrease in price.

3. If the demand for a good has unitary elasticity, or elasticity is -1, it is always true that an
increase in its price will lead to more revenues for sellers taken as a whole.

 Disagree. If a demand for a good is unitary elastic, a percentage price increase will
lead to a same percentage decrease quantity demanded. Thus, it will result to a same
percentage decline in the revenue.
Problem No. 2 

1. Using the midpoint formula and the following graph, calculate the price elasticity of
demand and the price elasticity of supply when the price changes from $4 to $9 and
when the price changes from $9 to $15. Please present your complete solution.

Price changes from $4 to $9

P1 = $4 : P2 = $9
Q1 = 16 : Q2 = 10

Price elasticity of Demand = Q2-Q1/[(Q2+Q1)/2 ÷ P2-P1/[(P2+P1)/2

Price elasticity of Demand = (10-16)/[(10+16)/2] ÷ (9-4)/[(9+4)/2

Price elasticity of Demand = -0.46 ÷ 0.77

Price elasticity of Demand = -0.6

Price changes from $4 to $9

P1 = $4 : P2 = $9
Q1 = 3 : Q2 = 10

Price elasticity of Supply = Q2-Q1/[(Q2+Q1)/2 ÷ P2-P1/[(P2+P1)/2

Price elasticity of Supply = (10-3)/[(10+3)/2] ÷ (9-4)/[(9+4)/2

Price elasticity of Supply = 01.08 ÷ 0.77

Price elasticity of Supply = 1.4

Price changes from $9 to $15
P1 = $9 : P2 = $15
Q1 = 10 : Q2 = 5

Price elasticity of Demand = Q2-Q1/[(Q2+Q1)/2 ÷ P2-P1/[(P2+P1)/2

Price elasticity of Demand = (5-10)/[(5+10)/2] ÷ (15-9)/[(15+9)/2

Price elasticity of Demand = -0.67 ÷ 0.5

Price elasticity of Demand = -1.33

Price changes from $9 to $15

P1 = $9 : P2 = $15
Q1 = 10 : Q2 = 16

Price elasticity of Supply = Q2-Q1/[(Q2+Q1)/2 ÷ P2-P1/[(P2+P1)/2

Price elasticity of Supply = (16-10)/[(16+10)/2] ÷ (15-9)/[(15+9)/2

Price elasticity of Supply = 0.46 ÷ 0.5

Price elasticity of Supply = 0.92

Problem No. 3 

For each of the following products, explain whether demand is likely to be elastic or inelastic.

1. Cigarette - Inelastic

A lot of people have their smoking habits. Therefore, cigarettes are considered to be
inelastic. Also, there is nothing else close substitute for cigarettes.

2. Tacos - Elastic

Tacos are elastic it is because there are a lot of substitute for tacos. Also, this isn’t a
necessity of a person.

3. Gasoline - Inelastic

Demand for gasoline is inelastic because it has a lack of substitute and people need it
every day for transportation.

4. Milk – Inelastic

Milk is considered to be inelastic it is because milk is a necessity. Meaning, consumers

tend to purchase the same amount of milk, even when the price change.

5. Honda Accord automobiles - Elastic

Honda Accord automobiles are considered to be elastic because there are a lot of
substitute close to the product.

6. Newspapers - Inelastic

Newspapers are considered to be inelastic it is because a lot of people needs it every day
and also there is no close substitute to newspaper.