Chapter 3 Homework: Elasticity of Demand
Calculate the missing values in the table below. 1 2 $Price/unit Quantity
Demanded $7.00 100 $6.50 200 $6.00 300 $5.50 400 $5.00 500 $4.50 600 $4.00 700 $3.50 800 $3.00 900 $2.50 1000 $2.00 1100 $1.50 1200 Arc
Point
Elasticity Elasticity Total
Revenue Marginal
Revenue Advertising Elasticity. Enchantment Cosmetics, Inc., offers a line of cosmetic
and perfume products marketed through leading department stores. Product
Manager Erica Kane recently raised the suggested retail price on a popular line
of mascara products from $9 to $12 following increases in the costs of labor and
materials. Unfortunately, sales dropped sharply from 16,200 to 9,000 units per
month. In an effort to regain lost sales, Enchantment ran a coupon promotion
featuring $5 off the new regular price. Coupon printing and distribution costs
totaled $500 per month and represented a substantial increase over the typical
advertising budget of $3,250 per month. Despite these added costs, the
promotion was judged to be a success, as it proved to be highly popular with
consumers. In the period prior to expiration, coupons were used on 40% of all
purchases and monthly sales rose to 15,000 units. Q. Calculate the arc price elasticity implied by the initial response to the
Enchantment price increase. 3 Hanna Corporation markets a compact microwave oven. In 2010 they sold 23,000 units
at $375 each. Per capita disposable income in 2010 was $6,750. Hanna economists have
determined that the arc price elasticity for this microwave oven is -1.2. (a) In 2011 Hanna is planning to lower the price of the microwave oven to $325. Forecast
sales volume for 2011 assuming that all other things remain equal.
(b) However, in checking with government economists, Hanna finds that per capita
disposable income is expected to rise to $7,000 in 2011. In the past the company has
observed an arc income elasticity of +2.5 for microwave ovens. Forecast 2011 sales given
that the price is reduces to $325 and that per capita disposable income increases to
$7,000. Assume that the price and income effects are independent and additive. 4 Explain the difference in the elasticities. 5 What is the formula for measuring the price elasticity of supply?
Suppose the price of apples goes up from $20 to $22 a box. In direct response,
Goldsboro Farms supplies 1200 boxes of apples instead of 1000 boxes.
Calculate the coefficient of price elasticity (arc approach) for Goldsboro’s supply.
Is its supply elastic, or is it inelastic? 6 Suppose the cross elasticity of demand for products A and B is +3.6 and for products C
and D is -5.4. What can you conclude about how products A and B are related? Products
C and D? 7 (Price Elasticity of Supply) Calculate the price elasticity of supply for each of the following
combinations of price and quantity supplied. In each case, determine whether supply is
elastic, inelastic, perfectly elastic, perfectly inelastic, or unit elastic in each case.
a. Price falls from $2.25 to $1.75; quantity supplied falls from 600 units to 400 units.
b. Price falls from $2.25 to $1.75; quantity supplied falls from 600 units to 500 units.
c. Price falls from $2.25 to $1.75; quantity supplied remains at 600 units.
d. Price increases from $1.75 to $2.25; quantity supplied increases from 466.67 units to
600 units. 8 (Calculating Price Elasticity of Demand) Suppose that 50 units of a good are demanded
at a price of $1 per unit. A reduction in price to $0.20 results in an increase in quantity
demanded to 70 units. Show that these data yield a price elasticity of 0.25. By what
percentage would a 10 percent rise in the price reduce the quantity demanded,
assuming price elasticity remains constant along the demand curve?

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