Handout No.

Elasticity Practice Questions

Prepared by Aisha Khan

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?

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

would affect price more.

Problem : Katherine advertises to sell cookies for $4 a dozen. She sells 50 dozen, and decides

that she can charge more. She raises the price to $6 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 $10 a box?

Answer. 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 (elastic).

To find the quantity when the price is $10 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 $10 a dozen will be 20 dozen cookies.