TUTORIAL 3

Topic: Elasticity of Demand and Supply

1. The local video store had been hiring out videos at €2 each. On average, 1800
videos were hired per week. In response to an increase in running costs, the store
has increased the video hire to €2.50, resulting in the typical number of videos
hired per week falling to 1250.

Calculate and interpret the price elasticity of demand for this store’s video hire
using averaging method.

2. Assume the number of bicycles demanded and supplied in Berlin, at various

prices, is as follows:

Price of bicycle Quantity demanded per year Quantity supplied per year
(€) (‘000) (‘000)
60 23 11
80 20 16
100 17 21
120 14 26

a. Calculate the price elasticity of demand and supply between the prices €80
and €100, and interpret your answer.

b. Is the demand for and supply of bicycles elastic or inelastic over this price
range?

3. Suppose that adults and students have the following demand for movie tickets at
Megastar Cineplex:

Price of ticket Quantity demanded Quantity demanded

($) (adults) (students)
15 2,100 1,000
20 2,000 800
25 1,900 600
30 1,800 400

a. As the price of movie tickets rises from $20 to $25, what is the price
elasticity of demand for i) adults and ii) students? (Using the
midpoint/averaging method in your calculation.)

b. Why might adults have different elasticity from students?

 4. Calculate the cross-price elasticity for the following goods. Are they substitutes
or complements?

a. The price of movie theater tickets goes up by 10% causing the quantity
demanded for video rentals to go up by 4%

b. Computer prices fall by 20% causing the quantity of software demanded to

increase by 15%

c. The price of apples falls by 5% causing the quantity of oranges demanded to

fall by 5%

d. The price of ice-cream falls by 6% causing the quantity demanded of frozen

yogurt to fall by 1%

5. Suppose that your demand schedule for CD is as follows:

Price Quantity demanded Quantity demanded

(€) (income = €10,000) (income = €12,000)
8 40 50
10 32 45
12 24 30
14 16 20
16 8 12

a. Use the midpoint method to calculate your price elasticity of demand as the
price of CD increases from €8 to €10 if i) your income is €10,000 and ii)
your income is €12,000

b. Calculate your income elasticity of demand as your income increases from

€10,000 to €12,000 if i) the price is €12 ii) the price is €16

6. Explain the likely cross-price elasticity of demand between the following

products
a. Rice and noodles

b. Electricity and electric stoves

Multiple choices
7. The price elasticity of demand:

a. indicates how far consumer can stretch their budgets

b. measures how much price rises when demand increases
c. measure how much quantity demanded responds to a change in price
d. indicates whether a good is “normal” or “inferior”

8. As prices increase by 1 percent, quantity supplied increases by 2%. This means:

a. supply is elastic
b. supply is inelastic
c. supply is unit-elastic
d. the firm is operating in its market period

9. Which of the following is correct?

a. Slope and elasticity are identical concepts

b. Slope measures percentage change in quantity divided by percentage
change in price, elasticity does the opposite
c. Elasticity measures percentage change in price divided by a percentage
change in quantity
d. Slope and elasticity are closely related

10. The income elasticity determines whether goods are:

a. normal or inferior
b. elastic or inelastic
c. individual or collective
d. substitutes or complements

11. The midpoint method of calculating price elasticity:

a. calculates elasticity by dividing the change by the midpoint of the initial

and final levels
b. corrects a problem that causes the elasticity from A to B to be different
from the elasticity from point B to point A
c. gives the same answer regardless of the direction of change
d. All of the above are true

12. As one moves downward along a straight-line demand curve, price elasticity:
 a. declines
b. rises
c. remains constant
d. declines at first, then rises

13. If the price of one dozen eggs increases from €1.6 to €2, quantity demanded will
decrease from 600 to 400. The elasticity of demand for eggs (using midpoint
formula) is:

a. 0.08
b. 1.8
c. 11.26
d. 1.9