Activity No.

3 Elasticity Problems and Applications

Instruction: Analyze and answer all the situations provided. Use the scoring guide below as basis.

5 4 3 2 1

All the ideas are Most of the ideas Some of the ideas Was able to Attempted to
correct and are correct and are correct and present at least answer
substantiated substantiated substantiated one valid idea

Situation 1: Suppose that your demand schedule for flash drive is as follows:

PRICE QUANTITY DEMANDED Quantity Demanded (Income=

Php12,0000)
(INCOME= Php 10,000)

8 40 Flash drives 50 flash drives

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 flash
drive increases from Php8 to Php 10 if your (i) income is Php 10,000 and (ii) your income is
Php 12,000.

b. Calculate your income elasticity of demand as your income increases from Php 10,000 to
Php 12,000 if the (i) price is Php 12 and the (ii) price is Php 16
Situation 2: Consider public policy aimed at smoking:

a. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of
cigarettes currently costs Php 2 and the government wants to reduce smoking by 20 percent, by
how much should it increase the price?

If a cigarette currently costs Php 2, therefore

the government should increase it by 50% from
its original price, and this gives us an additional
price of Php 1.

b. If the government permanently increases the price of cigarettes, will the policy have a larger on
smoking, 1 year from now or 5 years from now?

If the government will continue to increase the price of cigarettes, it will definitely leave
a large impact to the people. Smoking activities will decline and demand will eventually
decrease in the long run as the price of cigarette is increased for years. This long-term
change in price will create an elastic effect to the quantity demanded for cigarettes in
the market.

c. Studies also find that teenagers have a higher price elasticity than do adults. Why might this be
true?

Teenagers will have high price elasticity than adults for the reason that they are very
susceptible to changes in price, most especially to non-essential goods like cigarettes.
This occurrence is plausible due to one determinant of demand which is the income of
consumers that validates the idea that quantity demanded depends on the purchasing
power of a consumer. Most teenagers have weak purchasing power due to unstable
source of income hence this explains how they have higher price elasticity than adults.
Situation 3: Pharmaceutical drugs have an inelastic demand, and computers have an elastic demand.
Suppose that technological advance doubles the supply of both products (that is, the quantity
supplied at each price is twice what it was).

a. What happens to the equilibrium price and quantity in each market?

The equilibrium price in both pharmaceutical drugs and computers will drop, in addition,
the equilibrium quantity of both products will rise.

b. Which product experiences a larger change in price?

Pharmaceutical drugs will have a higher change in price because of its inelasticity
compared to computers. This can be explained by the law of supply which particularly
states that when price increases, quantity supplied increases.

c. Which product experiences a larger change in quantity?

Computers will experience larger change in quantity. Computers compared to

pharmaceutical drugs are more elastic in the market that’s why they do have a greater
variation in quantity.

d. What happens to total consumer spending on each product?

Consumer spending on both products vary. For pharmaceutical drugs, the total
consumer spending declines. Meanwhile, the total consumer spending for computers
increases.