LIST OF EXERCISES ON ELASTICITY

TEACHER: ANDREA CRISTINA DORR

STUDENT:

1. About the price elasticity of demand:

a) What are the factors that influence the price elasticity of demand?

b) Why is the price elasticity of demand for salt close to zero?

c) Explain why, when demand is inelastic, price increases of the product must raise the
total revenue of sellers.

Answer:

a. The factors that influence the price elasticity of demand are the existence of substitute goods; the
weight of the good in the budget and the essentiality of the good.

b. The table salt, being hardly replaceable, having a small impact on the budget, and being a product
essential presents price-demand elasticity close to zero, meaning it is expected that, even if the
the price of salt doubles, people will maintain their demanded quantities of salt.
c. When the demand for a good is inelastic, it is expected that there will be no variation in quantity.
demanded when there is a price increase. Therefore, total revenue being equal to the product of price
unit price and quantity, if there is a price increase, while keeping the quantity constant, there will be an increase in
total revenue.

income elasticity of demand

price elasticity of supply.

Response: Income elasticity of demand is the percentage change in the quantity demanded of a
well x, for each unit of percentage variation in the consumer's income. Cross-price elasticity
of the demand between the goods x and y is the percentage variation of the quantity demanded of good x for each
the unit of percentage variation of price y. And the price elasticity of supply is the percentage variation in
the quantity supplied of good x, for each unit of percentage variation in the price of good x.

3. Explain why individuals generally substitute the consumption of second-rate meat for
first-class meat when they receive a raise in income?

Response: Because the second-class meat is considered an inferior good, where the income elasticity is
negative. That is, in the case of an inferior good, its consumption will not increase with an increase in
it will diminish, as this good is replaced by a better one.

4. Natural products have inelastic demand to price. What does this mean? That
What consequences do they have for rural companies? What can be done to change this situation?

Response: A product has inelastic demand when its demand has a low variation in
due to changes in prices. Raw products are inelastic because they are linked to
a necessary and basic consumption, both for raw materials and for direct food.
It means that when the price goes down, the demand increases less than proportionally and the revenue of
producer falls. On the other hand, when its price increases, demand also varies little and revenue from the
the producer increases. The producer should therefore fear overproduction, as the drop in prices
will result in a decrease in revenue. This theoretical situation does not change; what can change is the producer trying
offer higher value-added products that attract the consumer and make your product more
elastic.

5. A market research revealed that the cross-price elasticity of demand for chocolate in
Nescau powder and Fitness brand cornflakes is -0.3.
a) How do you interpret this result?
b) What is the relationship between these two assets?

Response:

a) The cross elasticity between powdered chocolate and cereal is the percentage variation of the quantity
demand for cocoa powder, for each unit of percentage variation in the price of cornflakes,
resulting in a value less than zero.
b) Since the cross elasticity between these two goods has a negative value, less than zero, these goods
they are complementary, that is, when the price of cereal increases, the quantity demanded of
powdered chocolate will decrease.

6. Data:
R$ 20.00
R$ 30.00

It is requested:
a) Calculate the price elasticity of demand at the point (P0, Q0).
b) Calculate the price elasticity of demand at the point (P1, Q1).
c) Calculate the price elasticity of demand at the midpoint between 0 and 1.
d) Classify the demand for this product according to price elasticity.
Response:

-2/5
ELASTICITY = VAR. QUANT. / VAR. PRICE X PRICE / QUANT.
-3/4
ELASTICITY = VAR. QUANT. / VAR. PRICE X PRICE / QUANT.
-5/9

ELASTICITY AT THE ARC OR AT THE MIDPOINT = CHANGE IN QUANTITY/CHANGE IN

PRICE X [(P1 + P2)/2] / [(Q1 + Q2)/2] =

the demand for this product is inelastic.

7. Indicate the alternative that does not present a factor that affects the price elasticity of demand:

a) Availability of substitute goods;

b) Technology;
c) Essentiality of the good;
d) Relative importance of the good in the consumer's budget;
e) Time horizon.

Response: b
8. Point out the correct alternative:
a) When the price increases, total revenue increases if the demand is elastic, ceteris paribus.
b) When the price increases, total revenue decreases, if the demand is inelastic, ceteris paribus.
c) Price drops of a good will result in decreases in the revenue of the producers of that good, if the
demand for elastic, ceteris paribus.
d) Price drops of a good will result in revenue increases for the producers of that good, if the
inelastic demand, ceteris paribus.
e) All the previous options are false.

ANSWER: alternative e.
Solution:
The alternatives b, c are false. The total sales revenue of the companies (which corresponds to the expenses
The total expenditure of the consumer is given by: RT = p.q
Where:RT= total revenue
p = unit selling price
q= quantity sold
From this expression, it seems clear that:
• Elastic demand: when the price decreases, quantity increases more than proportionally; when the price increases, quantity decreases more.

that proportionally, RT increases.

• Inelastic demand: if quantity increases, it rises less than proportionally; if it decreases, it falls proportionally.

increases less than proportionally, RT falls.

• Unit elastic demand: the variation is identical (with opposite sign) to the variation of q.
that keeps aRT unchanged. We then observe that the alternatives a, b, c are false and the alternative
it's correct.

9. Regarding the demand function, it is correct to state:

a) An increase in the price of the good will leave the quantity demanded of the good unchanged, unless
also the nominal income of the consumer should be increased.
b) An increase in the price of the good, all else being constant, will imply an increase in expenditure on
consumer with the good, if the demand is elastic in relation to variations in the price of this good.
c) If this equation is represented by a negatively sloped line, the coefficient of
Price elasticity will be constant along this entire line.
d) If this function is represented by a straight line parallel to the price axis, the price elasticity
the demand will be infinite.
e) If the demand is absolutely inelastic with respect to changes in the price of the good, the function
demand will be represented by a line parallel to the price axis.

alternative e.
Solution:
When the demand curve is parallel to the price axis, the price elasticity of demand is zero (e,
By definition, demand is absolutely inelastic). It means that, whatever the variation of
prices, the quantity demanded does not change. When the demand is parallel to the quantity axis,
It is said that it is infinitely elastic. An example is the market in perfect competition; as it is
As shown in Chapter 2, the demand for individual firms is given by the market price.
10. Indicate the correct statement.
a) An increase in consumer income will result in higher demand regardless of the.
well.
b) A drop in the dex price, all else being equal, will leave the spending unchanged.
consumers with the good, if the price elasticity of demand is equal to 1.
c) The total expenditure of the consumer reaches a maximum at the point on the demand curve for the good where the
price elasticity is equal to zero.
d) The price elasticity of demand for good x does not depend on the variety of existing substitute goods.
in the market.
An increase in the price of the bemy, substitute, will shift the demand curve dex to the left.

alternative b.
Solution:
A drop in the dex price, with all else remaining constant, will leave spending unchanged.
consumers with the good, if the price elasticity of demand is equal to 1. This happens because the
the price drop will be proportionally equal to the increase in the quantity consumed. Thus, the
consumer spending will remain constant.

11. If a demand curve is unit elastic at all its points, it means

regarding (a) the graphical appearance of the demand curve and (b) the total spending of buyers
for the acquisition of the merchandise, which:
a) The demand curve is a straight line and the total expenses of the buyers are the same for everyone
the price levels.
b) The demand curve is not a straight line, and the total expenditure of buyers decreases when the price falls.
c) The demand curve is a straight line and, when the price falls, the total spending of buyers increases.
first and then they fall.
d) The demand curve is not a straight line and the total expenses of buyers increase when the price
cai.
e) N.a.

ANSWER: option e.
Solution:
None of the answers (a, b, c) is correct. The demand curve could not be a straight line (in which
it would be impossible to always have unit elasticity) and the total expenses of buyers would be the
same at all price levels, as a percentage increase in price would be met by a
percentage drop in the quantity of the same magnitude, not affecting expenses.

12. Point out the correct alternative:

a) If the price varies by $2, and the quantity demanded by 10 units, we conclude that the demand is
elastic.
b) The cross-price elasticity between two goods is always positive.
c) The price elasticity of demand for salt is relatively low.
d) The price elasticity of demand for food is generally quite high.
The income elasticity of demand for manufactured goods is relatively low.
option c.
Solution:
In this case, it is convenient to analyze all the alternatives:
• Alternative a: it is incorrect because it only cites one absolute value for price and another for quantity.
Therefore, the statement is inconclusive regarding the price elasticity of demand;
• alternative b: the cross-price elasticity between two goods will only be positive if the goods are
substitutes;
Alternative c: is correct, since essential goods, such as salt, have relatively low price elasticity.
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Alternative d: is incorrect, as the price elasticity of demand for essential goods, such as
food tends to be low;
Alternative e: is incorrect because the income elasticity of manufactured goods is relatively high.
the higher the income, the tendency is to increase the consumption of manufactured products
what foods, whose consumption has a physiological limit.

13. The demand curve for a certain good is expressed by the function Q = 1,000/P3. One can
to assert that:
a) If the market price increases, consumers will spend less income on acquiring this.
market.
b) If the market price decreases, consumers will spend less income on the acquisition of this
product.
If the market price increases, consumers will spend more income on acquiring that product.
d) If the market price decreases, consumers will spend the same amount of income on purchases.
of the product.
e) The total spending of consumers on the acquisition of the product increases in the same proportion as the
increase in market price.

alternative a.
Solution:
The function demandQ= 1.000/P3 can be rewritten as Q= 1.000P–3, and it is a function
power (of the type y = ax–b). It is mathematically proven in the appendix to this chapter in the textbook that,
in power functions, the exponent of the variable x (in the exercise, the exponent of the price, equals -3) is the
own price elasticity of demand.
We then have a highly elastic demand (an increase in price of, say, 10% leads to a
decrease in the quantity demanded by 30%, all else constant.
With elastic demand, if the price of the good increases, consumers will spend less income on it.
purchase of the asset, given that the decrease in the quantity purchased will be proportionally greater than the
increase in the price of the good. Thus, the alternative is correct.

14. If the demand curve is of a type where a 10% reduction in price causes a
5% increase in the quantity of goods that the public acquires, in this region of the curve, the
search regarding the price will be:
Elastic.
b) Unitarily elastic.
c) Infinitely elastic.
d) Inelastic, although not perfectly.
e) Totally inelastic or anelastic.

alternative d.
Solution:
It is a price elasticity of demand equal to -0.5,
because:Epp= + 5% = – 0.5 – 10%
That is, a demand that is not very sensitive (that is, inelastic) when the price varies: the quantity
demand varies less than proportionally to the change in price, ceteris paribus.

15. A demand curve is expressed as p = 10 - 0.2q where p represents the price and q the quantity.
quantity. The market is in equilibrium at the price p = 2. The price changes to p = 2.04, and
everything else held constant, the quantity equilibrates at q = 39.8. The price elasticity of
demand at the initial market price is:
0.02
0.05
-0.48
-0.25
0.25

option d.
Solution:
Given the price elasticity of demand formula at the equilibrium price (or usual) p0, we have:
By the demand equation p = 10 - 0.2q, we can find q0. Since p0 = 2, we have q0 = 40.
Substituting the obtained values into the elasticity equation, we have: therefore, with Epp = -0.25, the
demand is inelastic at point p0 = 2.
Epp= 2 .(39.8 – 40) 40 (2.04 – 2)
= -0.25 or E = |0.25|