1. Refer to the table below: Points on
Demand Curve Price
(per ounce) C
D
H
I $0.40
$0.35
$0.15
$0.10 Quantity
Demanded (ounces
per show)
4
6
20
25 (a) Compute the price elasticity between point C to point D and point H to point I.
Instructions: Enter your responses rounded to two decimal places. Do not include a minus sign.
Use the mid-point formula.
C to D = H to I = (b) Compute the total revenue at point C, point D, point H, and point I.
Instructions: Enter your responses rounded to two decimal places.
Point C = $ Point D = $ Point H = $ Point I = $ 2. Refer to the “In the News” below:
In the News: Samsung Stung by Apple Moves
Samsung reported a staggering 20 percent drop in sales of its flagship smartphone, the
Galaxy S5, for the last three months. Profits declined even more—a 49 percent collapse from
last year. The reason for this collapse: Apple's introduction of its large-screen iPhone 6 and
price cuts on the iPhone 5. Apple dropped the price of the 16GB iPhone 5s from $199 to $99
and the 8GB iPhone 5s from $99 to a cool $0, with contract. Source: News reports, October 2014. By changing the denominator in each case, compute the percentage change in the 16GB iPhone
5s price, as computed from
Instructions: Enter your responses as a percent rounded to one decimal place.
(a) The initial price.
percent (b) The final price.
percent (c) The average price.
percent 3. Refer to the “In the News” below: In the News: Federal Cigarette Tax Going Up Again
In his fiscal year (FY) 2015 budget proposal, President Obama envisions another hike in the
federal excise tax on cigarettes. He engineered a tripling of the tax - from 39 cents to $1.01 per
pack - in 2009. Now he wants to hike the tax by another 94 cents, to $1.95 per pack. It's easy to
see why Obama (himself a smoker) likes the idea. The 2009 tax hike brought an extra $9 billion
a year into the U.S. Treasury. It also reduced smoking and smoking-related health costs. This time around, the Congressional Budget Office projects a 94 cent tax hike will increase
federal revenue by $78 billion over ten years, helping to bring down project deficits. The CBO
also projects that the higher price will reduce the number of smokers by 2.5 million and the
number of smoking-related deaths by 18,000 over the same period. Smokers don't like the idea at all, of course. Nor do the states, which will see their own tax
revenues decline along with the cigarette sales. And convenience stores like 7-Eleven will see a
big part of their profits go up in smoke. If the price of a pack of cigarettes (including taxes) was $6 before the proposed 2015 tax hike
was appoved,
(a) What was the price after the tax hike?
Instructions: Enter your response rounded to two decimal places.
$ (b) What was the (average) percentage increase in price?
Instructions: Enter your response rounded to one decimal place.
percent. (c) If cigarette sales decline by 7.2 percent, what is the price elasticity of demand?
Instructions: Enter your response rounded to two decimal places. 4. Refer to the “In the News” below: In the News: Americans Apply Brakes as Gas Price Soars
U.S. drivers bought about 2.4 million fewer gallons of gasoline last week, compared to a year
ago. That’s a 3.6 percent drop in the volume of gasoline sold. Price appears to be the culprit.
Faced with a 32 percent jump in gas prices since last year, consumers are cutting back on
nonessential trips and using public transit more often. Source: News reports, April 12-15, 2011. What was the price elasticity of demand for gasoline?
Instructions: Enter your response rounded to two decimal places. 5. According to the income elasticity formula below, By how much will popcorn sales increase if average income goes up by 2 percent? (Assume the
income elasticity of popcorn is 3.29.)
Instructions: Enter your response as a percent rounded to two decimal places.
percent 6. Refer to the “In the News” below: In the News: SUV Sales Drop with Gasoline Price Rise
Analysts say that with the increase in gasoline prices comes a drop in SUV sales and trade-in
values at dealerships. The U.S. Department of Energy said that during the past week, U.S.
gasoline prices topped $3 a gallon—the highest level since October 2008. . . . According to Alec Gutierrez, lead analyst for vehicle evaluation at Kelley Blue Book, SUV
sales have decreased about 1 percent since the last major gasoline price hike in spring 2008. He
doesn’t believe that SUV sales will decrease significantly unless prices reach $3.50 to $4 per
gallon.
-Andrew Christian
Source: 4WheelsNews.com. If a gasoline price hike of 13 percent caused the SUV sales drop described, what is the crossprice elasticity of demand between gasoline and SUVs?
Instructions: Enter your response rounded to two decimal places. Indicate negative answers
with a (–) negative sign.
Cross-price elasticity 7. Refer to the “In the News” below: In the News: SUV Sales Drop with Gasoline Price Rise
Analysts say that with the increase in gasoline prices comes a drop in SUV sales and trade-in
values at dealerships. The U.S. Department of Energy said that during the past week, U.S.
gasoline prices topped $3 a gallon—the highest level since October 2008. . . . According to Alec Gutierrez, lead analyst for vehicle evaluation at Kelley Blue Book, SUV
sales have decreased about 1 percent since the last major gasoline price hike in spring 2008. He
doesn’t believe that SUV sales will decrease significantly unless prices reach $3.50 to $4 per
gallon.
-Andrew Christian
Source: 4WheelsNews.com. If a gasoline price hike of 5 percent caused the SUV sales drop described, what is the cross-price
elasticity of demand between gasoline and SUVs?
Instructions: Enter your response rounded to two decimal places. Indicate negative answers
with a (–) negative sign.
Cross-price elasticity: 8. Suppose consumers buy 40 million packs of cigarettes per month at a price of $5 per
pack. If a $1 tax is added to that price,
(a) By what percentage does the price change? (Use the formula below.) Instructions: Enter your response as a percent rounded to one decimal place. percent (b) By what percentage will cigarette sales decline in the short run? (See the table below
for a clue.) Product
Relatively elastic ( E > 1 )
Airline travel, long run
Restaurant meals
Fresh fish
New cars, short run
Unitary elastic ( E = 1)
Private education
Radios and televisions
Shoes
Movies
Relatively inelastic ( E < 1 )
Cigarettes
Coffee
Gasoline, short run
Electricity (in homes)
Long-distance phone calls Price Elasticity
2.4
2.3
2.2
1.2 - 1.5
1.1
1.2
0.9
0.9
0.4
0.3
0.2
0.1
0.1 Instructions: Enter your response as a percent rounded to one decimal place.
percent (c) Refer to the “In the News” below: In the News: Professor Becker Corrects President’s Math
President Clinton has seized upon the cigarette excise tax as an expedient and politically correct
means of increasing federal revenue. In 1994 the federal government took in $12 billion from
the present 24-cents-per-pack tax. If the tax were quadrupled to $1 a pack, Clinton figures tax revenues would increase by more than $50 billion over three years. Those added revenues
would help finance the health care reforms the president so dearly wants. Professor Gary Becker, a Nobel Prize–winning economist at the University of Chicago, says
Clinton’s math is wrong. The White House assumed that cigarette sales would drop by 4 percent
for every 10 percent increase in price. Professor Becker says that reflects only the first-year
response to higher prices, not the full adjustment of smokers’ behavior. Over a three-year
period, cigarette consumption is likely to decline by 8 percent for every 10 percent increase in
price—twice as much as Clinton assumed. As a result, the $1-a-pack tax will bring in much less
revenue than President Clinton projected. Source: Gary S. Becker, "Warning: A Higher Cigarette Tax May Be Hazardous to Health Financing,"
BusinessWeek, August 15, 1994, p. 18. According to Gary Becker, by how much will sales decline in the long run?
Instructions: Enter your response as a percent rounded to one decimal place.
percent

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