Practice Problems for Elasticity

Problem : Yesterday, the price of envelopes was P3 a box, and Julie was willing to
buy 10 boxes. Today, the price has gone up to P3.75 a box, and Julie is now willing to
buy 8 boxes. Is Julie's demand for envelopes elastic or inelastic? What is Julie's
elasticity of demand?

To find Julie's elasticity of demand, we need to divide the percent

change in quantity by the percent change in price.

% Change in Quantity = (8 - 10)/(10) = -0.20 = -20%

% Change in Price = (3.75 - 3.00)/(3.00) = 0.25 = 25%
Elasticity = |(-20%)/(25%)| = |-0.8| = 0.8

Her elasticity of demand is the absolute value of -0.8, or 0.8.

Julie's elasticity of demand is inelastic, since it is less than 1.

Problem : If Neil's elasticity of demand for hot dogs is constantly 0.9, and he buys 4
hot dogs when the price is P1.50 per hot dog, how many will he buy when the price is
P1.00 per hot dog?

This time, we are using elasticity to find quantity, instead of the

other way around. We will use the same formula, plug in what we know,
and solve from there.

Elasticity =
And, in the case of John, %Change in Quantity = (X – 4)/4
Therefore :
Elasticity = 0.9 = |((X – 4)/4)/(% Change in Price)|
% Change in Price = (1.00 - 1.50)/(1.50) = -33%
0.9 = |(X – 4)/4)/(-33%)|
|((X - 4)/4)| = 0.3
0.3 = (X - 4)/4
X = 5.2

Since Neil probably can't buy fractions of hot dogs, it looks like he
will buy 5 hot dogs when the price drops to P1.00 per hot dog.

Problem : Which of the following goods are likely to have elastic demand, and which
are likely to have inelastic demand?

Home heating oil

Pepsi
Chocolate
Water
Heart medication
Oriental rugs

Elastic demand: Pepsi, chocolate, and Oriental rugs

Inelastic demand: Home heating oil, water, and heart medication
Problem : If supply is unit elastic and demand is inelastic, a shift in which curve
would affect quantity more? Price more?

Shifting the demand curve would affect quantity more, and shifting
the supply curve would affect price more.

Problem : Katherine advertises to sell cookies for P4 a dozen. She sells 50 dozen, and
decides that she can charge more. She raises the price to P6 a dozen and sells 40
dozen. What is the elasticity of demand? Assuming that the elasticity of demand is
constant, how many would she sell if the price were P10 a box?

To find the elasticity of demand, we need to divide the percent

change in quantity by the percent change in price.

% Change in Quantity = (40 - 50)/(50) = -0.20 = -20%

% Change in Price = (6.00 - 4.00)/(4.00) = 0.50 = 50%
Elasticity = |(-20%)/(50%)| = |-0.4| = 0.4

The elasticity of demand is 0.4 (inelastic).

To find the quantity when the price is P10 a box, we use the same
formula:

Elasticity = 0.4 = |(% Change in Quantity)/(% Change in Price)|

% Change in Price = (10.00 - 4.00)/(4.00) = 1.5 = 150%

Remember that before taking the absolute value, elasticity was -0.4,
so use -0.4 to calculate the changes in quantity, or you will end up
with a big increase in consumption, instead of a decrease!

-0.4 = |(% Change in Quantity)/(150%)|

|(%Change in Quantity)| = -60% = -0.6
-0.6 = (X - 50)/50
X = 20

The new demand at P10 a dozen will be 20 dozen cookies