3. For each of the following pairs of goods, which good would you expect to have more elastic
demand and why?
a. required textbooks or mystery novels
b. Beethoven recordings or classical music recordings in general
c. cooking oil during the next six months or cooking oil during the next five years
d. root beer or water
Answer:
Quantity of Nicotine Gums
Price of Nicotine Gums
MGMG 506 Thai Economy in the Global Context Dr. Tientip Subhanij
College of Management Mahidol University
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4
a. Mystery novels have more elastic demand than required textbooks, because mystery
novels have close substitutes and are a luxury good, while required textbooks are a
necessity with no close substitutes. If the price of mystery novels were to rise,
readers could substitute other types of novels, or buy fewer novels altogether. But if
the price of required textbooks were to rise, students would have little choice but to
pay the higher price. Thus the quantity demanded of required textbooks is less
responsive to price than the quantity demanded of mystery novels.
b. Beethoven recordings have more elastic demand than classical music recordings in
general. Beethoven recordings are a narrower market than classical music recordings,
so it’s easy to find close substitutes for them. If the price of Beethoven recordings
were to rise, people could substitute other classical recordings, like Mozart. But if the
price of all classical recordings were to rise, substitution would be more difficult (a
transition from classical music to rap is unlikely!). Thus the quantity demanded of
classical recordings is less responsive to price than the quantity demanded of
Beethoven recordings.
c. Cooking oil during the next five years has more elastic demand than cooking oil
during the next six months. Goods have a more elastic demand over longer time
horizons. If the price of cooking oil were to rise temporarily, consumers couldn't
switch to other sources of energy without great expense. But if the price of cooking
oil were to be high for a long time, people would gradually switch to electricity. As a
result, the quantity demanded of cooking oil during the next six months is less
responsive to price than the quantity demanded of cooking oil during the next five
years.
d. Root beer has more elastic demand than water. Root beer is a luxury with close
substitutes, while water is a necessity with no close substitutes. If the price of water
were to rise, consumers have little choice but to pay the higher price. But if the price
of root beer were to rise, consumers could easily switch to other carbonated drinks.
So the quantity demanded of root beer is more responsive to price than the quantity
demanded of water.
4. (Shifting Demand) Using demand and supply curves, show the effect of each of the following on
the market for cigarettes:
a.A cure for lung cancer is found.
b.The price of cigars increases.
c. Wages increase substantially in states that grow tobacco.
d.A fertilizer that increases the yield per acre of tobacco is discovered.
e. There is a sharp increase in the price of matches, lighters, and lighter fluid.
f. More states pass laws restricting smoking in restaurants and public places.
Answer:
a. This should shift the demand curve for cigarettes to the right.
MGMG 506 Thai Economy in the Global Context Dr. Tientip Subhanij
College of Management Mahidol University
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5
b.This should shift the demand curve for cigarettes to the right.
c. This should shift the supply curve of cigarettes to the left
d.This should shift the supply curve of cigarettes to the right.
e. This should shift the demand curve for cigarettes to the left.
f. This should shift the demand curve of cigarettes to the left.
5. (Price Elasticity and Total Revenue) Fill in the blanks for each price-quantity combination listed in
the following table. What relationship have you depicted?
Price
P Q Elasticity Total Revenue
$9 1
$8 2 ________ ___________
$7 3 ________ ___________
$6 4 ________ ___________
$5 5 ________ ___________
$4 6 ________ ___________
$3 7 ________ ___________
$2 8 ________ ___________
Answer: This example shows the relationship between price elasticity of demand and total
revenue.
Price
P Q Elasticity Total Revenue
$9 1
$8 2 –5.7 $16
$7 3 –3.0 $21
$6 4 –1.86 $24
$5 5 –1.22 $25
$4 6 –0.82 $24
$3 7 –0.54 $21
$2 8 –0.33 $16
Thus, when the price elasticity is greater than 1.0 in absolute value, a reduction in price
increases total revenue,