Elasticity of Demand

Class Questions
1. Moving along a demand curve, quantity demanded increases 2.5 percent when price decreases
5 percent.
a. The price elasticity of demand is calculated to be ________.
b. Given the price elasticity calculated in part a, demand is ________ (elastic, inelastic, unitary
elastic) along this portion of the demand curve.
c. For this interval of demand, the percentage change in quantity in absolute value is ________
(greater than, less than, equal to) the percentage change in price in absolute value.

2. Fill in the blanks:

a. The price elasticity of demand for a firm’s product is equal to –2.25 over the range of prices
being considered by the firm’s manager. If the manager increases the price of the product by 9
percent, the manager predicts the quantity demanded will ________ (increase, decrease) by
________ percent.

3. Fill in the blanks:

a. If price falls and total revenue falls, demand must be ________.
b. When demand is inelastic, a decrease in price causes quantity demanded to ________and total
revenue to ________.
c. If price rises and total revenue rises, demand must be ________.
d. When demand is elastic, an increase in price causes quantity demanded to ________and total
revenue to ________.
e. If price rises and total revenue stays the same, demand must be ________ elastic.
f. When demand is unitary elastic, a decrease in price causes quantity demanded to ________and
total revenue to ________.

4. The general linear demand for good X is estimated to be

Qd = 250,000 - 500P - 1.50M - 240PR

Where P is the price of good X, M is average income of consumers, who buy good X, and PR is
the price of related good R. The values of P, M, and PR are expected to be $200, $60,000, and
$100, respectively. Use these values at this point on demand to make the following
computations.
a. Compute the quantity of good X demanded for the given values of P, M, and PR.
b. Calculate the price elasticity of demand E. At this point on the demand for X, is demand
elastic, inelastic, or unitary elastic? How would increase the price of X affect total revenue?
Explain.
c. Calculate the income elasticity of demand EM. Is good X normal or inferior? Explain how a 4
percent increase in income would affect demand for X, all other factors affecting the demand for
X remaining the same.
d. Calculate the cross-price elasticity EXR. Are the goods X and R substitutes or complements?
Explain how a 5 percent decrease in the price of related good R would affect demand for X, all
other factors affecting the demand for X remaining the same.
5. Assume that the demand for cosmetic or plastic surgery is price inelastic. Are the following
statements true or false? Explain.

a. When the price of plastic surgery increases, the number of operations decreases.
b. The percentage change in the price of plastic surgery is less than the percentage change in
quantity demanded.
c. Changes in the price of plastic surgery do not affect the number of operations.
d. Quantity demanded is quite responsive to changes in price.
e. If more plastic surgery is performed, expenditures on plastic surgery will decrease.
f. The marginal revenue of another operation is negative.