Unit 6 Elasticity Worksheet Name _________________________________ Price elasticity of demand is a measure of how responsive demand is to a change in price. If a price change leads to a considerably bigger change in quantity demanded, we would consider demand for the good to be responsive to a price change - elastic. If, however, a similar price change leads to a much smaller change in demand, demand is inelastic. = If price elasticity of demand > 1, demand is elastic. If price elasticity of demand is greater than 0 and less than 1, demand is inelastic. If price elasticity of demand = 1, demand is unit elastic. (Remember that price elasticity of demand would always be negative so we ignore that by using the absolute value) = 100 Problem 1: Calculate price elasticity of demand for the demand curve at the left for each of the following price ranges: a to b: %Qd = (4-2)/2 x 100 = 100% %P = (14-16)/16 x 100 = 12.5% Ed = 100/12.5 = 8 c to d: %Qd = %P = Ed = e to f: What do you notice about elasticity? Problem 2: If the producer of the good raises the price by 15 percent, quantity demanded of the good will increase/decrease by 30 percent. The price elasticity of demand for a good is ____. Demand for this good is elastic/inelastic/unit elastic. Problem 3: The price elasticity of demand for a good is 0.5. Demand for this good is elastic/inelastic/unit elastic. If the price of the good increases by 8 percent, quantity demanded of the good will increase/decrease by _____ percent. Problem 4: The price elasticity of demand for a good is 2.3. Demand for this good is elastic/inelastic/unit elastic. If the price of the good decreases by 10 percent, quantity demanded of the good will increase/decrease by _____ percent. Problem 5: Dallas College sells their sweatshirts for $20 each. At this price, the school sells 100 sweatshirts per week. The new president wants to increase revenue, so he increases the price to $30. Sales drop to 40 sweatshirts per week. a) What is price elasticity of demand across this price range? b) In this range, price elasticity of demand for sweatshirts is elastic/inelastic. c) Calculate total revenue when P = $20. TR = _________ d) Calculate total revenue when P = $30. TR = _________ e) Was the price increase a good idea? Why did revenue do what it did? Problem 6: Katy's albums are selling like hotcakes so she decides to raise the price from $15 to $18. Although she sells fewer albums, total sales (revenues) are up! This means demand for Katy's albums is elastic/inelastic. Katy's $3 price change is a 20% price increase. If the quantity of albums demanded by her fans fell by 12%, we know the price elasticity of demand for her albums is equal to ___________. Problem 7: Our demand for goods tends to become more elastic over time (more sensitive to prices). Explain why. = % % Problem 8: Chris Rock told me that raising the price of bullets by 50% would decrease demand for guns by 40%. What is the cross price elasticity of demand for these two goods, and what is their relationship? According to Chris, gym membership and guns are substitutes. Therefore, the cross price elasticity of demand for gym membership and guns is positive/negative. = % % Problem 9: Suppose the income elasticity of demand for beans is -1. If consumer incomes increase by 7 percent, quantity demanded of beans will increase/decrease by _____ percent. Explain how you know whether this good is normal or inferior. Problem 10: What is the formula for price elasticity of supply? The price elasticity of supply for a good is 1.4. Demand/Supply is elastic/inelastic/unit elastic. If the price of the good decreases by 10 percent, quantity demanded/supplied will increase/decrease by _____ percent.