UNIVERSITY OF TECHNOLOGY, JAMAICA

SCHOOL OF BUSINESS ADMINSTRATION

ECO 1001: INTRODUCTION TO MICROECONOMICS
TUTORIAL #3 - ELASTICITY

1. Define price elasticity of demand.

2. What does it mean for a good to have a perfectly inelastic demand? Draw a demand curve of
this type. Explain why it has the shape that it does.

3. What does it mean for a good to have a perfectly elastic demand? Draw a demand curve of
this type. Explain why it has the shape that it does.

4. Suppose the taxi fare from UTECH to half way tree rose 60%, taxi men find that passengers
fell by 80%. Calculate the price elasticity of demand for taxi rides from UTECH to half way
tree.

5. The demand for bottled water in Kingston is as follows. Is the demand curve for this good a straight
line, how do you know?
Pr. (US$) Qd
(per bottle) (bottles per week)
$1.00 500
$1.50 400
$2.00 300
$2.50 200
$3.00 100

a) Calculate the price elasticity of demand for bottled water for a price rise from $1.00 to
$1.50. Is demand elastic or inelastic for this price change?

6. When the price of bread rises from $1.25 to $1.50 per loaf, quantity demanded falls from
5,800 per week to 5,500.
(a) Calculate total revenue both before and after the price change.
(b) What can we tell about the price elasticity of demand for bread based on the changes in total
revenue? (HINT: based on the changes in total revenue is the good an inelastic or elastic
good)
7. From the information in the following table,
Quantity
Income Demanded
$10,000 50
$20,000 60
$30,000 70
$40,000 80
$50,000 90
(a) Calculate the income elasticity of demand for this good if income increases from $10,000 to
$20,000,
(b) Calculate the income elasticity of demand for this good if income increases from $40,000 to
$50,000.
(c) Is this a normal or an inferior good? How can you tell?
(d) Does the proportion of household income spent on this good increase or decrease as income
increases?
(e) Is this good considered an economic luxury, an economic necessity, or neither? Why?

8. Sahara demand and supply curves for No.2 pencils in are Qd = 100-20P and Qs =10+40P
respectively. Given the price of No.2 pencils is $1.50
(a) Calculate the price elastic of demand and the price elasticity of supply when the price increase
$2.00
(b) Determine Sahara income elasticity of demand if an increase in her income (from $10,000 to
$11,500) doubles her demand for No.2 pencils.
(c) Suppose a decrease in the price of pens from $20 to $15 caused the demand for No.2 pencils to
reduce by 50% calculate the cross price elastic of demand and interpret your result.

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Additional Questions

The Figure below shows the demand for pens. Use this figure to answer questions 1 - 6
(Note: use the mid-point method to calculate elasticity)

1. Between points F and G, the price elasticity of demand is?

A. -0.50
B. -0.25
C. -2.00
D. -0.67

2. The price elasticity of demand for pens is considered to be

A. relatively inelastic.
B. perfectly elastic.
C. perfectly inelastic.
D. unitary elastic.

3. If the price of pen ________ rises, the total revenue will ________.
A. rises; decreases
B. falls; remain unchanged
C. falls; increases
D. rises; increases

4. The income level at demand curve D is $1,000. Suppose an increase in consumers income level to
$2000 shift the demand curve to the right ( at demand curve D’) the income elasticity of demand for
pens at a $2 is
A. 0.9375
B. 1.0714
C. -0.9375
D. -1.0714

5. Based on the income elasticity (calculated above), Pens is generally considered to be

A. an inferior good.
B. a luxury good.
C. a necessity.
D. inexpensive, relative to other goods.

6. If the price of paper increases, resulting in an increase in the demand for pens (from D to D’). The
cross-price elasticity of demand between pens and paper is
A. positive.
B. negative.
C. zero.
D. indeterminate from this information.

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 Use the information in the following table to answer questions 7-14.

Use 2010 as the starting and calculate all elasticities using the midpoint formula.

quantity of quantity of consumers'

price of PENS price of
date PENS average
PENS supplied PENCILS
demanded income

Jan 2010 $1.25 each 1100 units 800 units $34,000/year $0.35 each

Jan 2011 $2.50 each 750 units 1200 units $42,000/year $0.70 each

7. What is the price elasticity of demand for pens?

A. -0.32
B. -0.57
C. -1.76
D. -3.14

8. Based on the price elasticity of demand for pens, if price increases total revenue will
A. increase.
B. decrease.
C. remain constant.
D. Cannot be determined.

9. What is the cross-price elasticity of demand for pens with respect to pencils?
A. -1.35
B. -0.75
C. -0.57
D. -0.32

10. What kind of goods are pens and pencils, based on the cross-price elasticity?
A. inferior
B. complements
C. normal
D. substitutes

11. What is the income elasticity of demand for pens?

A. -1.80
B. -1.35
C. 0.74
D. 0.56

12. What kind of good are pens, based on the income elasticity?
A. inferior
B. complements
C. normal
D. substitutes

13. What is the supply elasticity for pens?

0.33
A. 0.60
B. 1.67
C. 2.00

14. For Jamaica Public Service (JPS), a 3 percent increase in price electricity will result in a 10 percent
decrease in quantity demanded. Based on the price elasticity of demand of JPS’s service,
A. the demand for JPS service is inelastic.
B. the relevant time horizon for this product is short.
C. electricity is a necessity.
D. there are many close substitutes for electricity.