Econ 201 Tutorial #3

Date: Week 5
Coverage: Chapter 4 Elasticity

I. Multiple Choice Questions:

1. Suppose that the demand for widgets is price inelastic. We know that the numerical value for the price
elasticity coefficient is:
A) greater than one.
B) equal to one.
C) greater than zero but less than one.
D) less than zero.
2. The demand for a product is elastic when:
A) a fall in the price of the product causes total expenditures by consumers on the product to fall.
B) the percentage change in quantity demanded equals the percentage change in price.
C) total expenditures by consumers for the product increase when the product's price falls.
D) a fall in the price of the product does not affect the firm's revenue.
3. All of the following statements are incorrect except:
A) demand is more elastic in the short run than in the long run.
B) the time period available for adjustment to changes in a good's price does not affect the
elasticity of demand for the good.
C) the longer the time period consumers have to adjust to price changes, the more elastic will be
demand.
D) the long-run demand curve for a good is steeper than the good's short-run demand curve.
4. If the percentage increase in quantity demanded of good X is larger than the percentage decrease in the
price of good Y, the cross-price elasticity is:
A) greater than zero but less than one.
B) greater than unity.
C) equal to unity.
D) equal to zero.
5. If your income falls and you increase your demand for hamburger, then this suggests that hamburger is
a(n):
A) normal good.
B) substitute good.
C) inferior good.
D) complementary good.
6. If quantity supplied increases from 1,000 to 1,160 units when prices rise by 8 percent, the elasticity of
supply using the initial quantity as base is:
A) 0.2.
B) 3.4.
C) 2.
D) cannot be determined from the information provided.
7. If we move along a linear downward-sloping demand curve, the price elasticity of demand (in absolute
value)
A) Rises when the price rises
B) Is constant and equal to unity
C) Is constant and equal to zero
D) Is constant but not necessarily equal to unity
8. Suppose when the price of a pair of winter boots rises from $200 to $250 the quantity demanded for
boots falls from 500 to 400 pairs. What is the price elasticity of demand?
A) -0.9
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 B) -1
C) -0.7
D) -0.8
9. Suppose the quantity demanded is equal to 4 when P = $8, and quantity demanded is equal to 2 when P =
$12. What is the slope of this segment of the demand curve?
A) -2.5
B) -1.5
C) -1
D) -2
10. Gasoline stations have often been accused by consumer groups that they conspire to raise prices
together in an attempt to generate more revenues. This practice is called price-fixing and it is illegal in
Canada. The gasoline station owners must believe that their price elasticity of demand (in absolute
value) is
A) Equal to infinity
B) Equal to one
C) Larger than one
D) Smaller than one
11. If you allocate a fixed amount of money per month to spend on entertainment regardless of price
changes, the price elasticity of demand for entertainment is
A) Less than zero
B) Cannot be determined without more information
C) Larger than unity
D) Equal to unity
12. Suppose you transformed your “Order-from-the-menu” sushi restaurant into an “All-you-can-eat”
format. You believe that this would bring in a lot more revenue because of a large spike in the number
of customers even though each customer would be spending less. This decision reflects your belief that
A) The demand for your sushi is elastic
B) The demand for your sushi is unit elastic
C) The demand for your sushi inelastic
D) The supply of your sushi is elastic
13. The U.S. government has been encouraging the production of electric or hybrid cars in recent years.
Such cars need time to develop and improve and also to educate the consumers. As a result, we can
expect the demand for gasoline to be ____ in the short run and ____ in the long run.
A) Inelastic; inelastic
B) Elastic; elastic
C) Inelastic; elastic
D) Elastic; inelastic
14. If beef and pork are substitutes, a rise in the price of beef is represented by ____ the demand curve for
beef and a ____ the demand curve for pork.
A) Movements along; rightward shift in
B) A rightward shift in; movement along
C) Movements along; leftward shift in
D) A leftward shift in; movement along
15. In the 2008 recession, data revealed that manufacturers of chocolate bars, such as Nestle and Cadbury,
enjoyed substantial increase in sale. This suggests that chocolate bars are
A) Luxury goods
B) Necessity goods
C) Normal goods
D) Inferior goods

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II. Short Questions:

1. The market for cigarettes in Canada has been the topic of a lot of debate. Let’s think about how this
market works and how it is affected by government intervention. Suppose the demand and supply
curves for cigarettes are the following:

Demand: P = 70 - 0.1Qd Supply: P = 0.2Qs + 10

The price is in dollars and quantity is in millions of cartons per week.

(i) What is the market equilibrium in cigarettes?

(ii) Suppose the government places a $15 per carton excise tax on cigarettes in an effort to reduce
smoking. Cigarette producers are required to pay this tax out of their revenues. Draw the supply
and demand graph based on the original supply and demand curves, and then show the change
caused by this tax. What is the new equilibrium price and quantity?

(iii) There are several implications of this tax program for the various groups in the
economy. Let’s consider each:
Consumers: How much have prices increased for consumers?
Producers: How much do producers receive per pack AFTER they pay the excise tax?
Government: How much money is collected in excise taxes?
Is this tax strategy successful in reducing smoking?

(iv)Some people have argued that increased cigarette prices will reduce smoking by just a small
amount. What are they assuming about the demand curve for cigarettes?

Tax break to break the habit

TORONTO — Ontario residents have another incentive to quit smoking — a tax incentive.

The provincial government announced Monday it will introduce a Retail Sales Tax (RST) exemption on
tobacco cessation aids.

Beginning August 13, nicotine replacement therapy products including nicotine patches, gum, lozenges,
inhalers, sprays and tablets will be exempt from RST at point-of-sale. The RST exemption on the
qualifying tobacco cessation products is expected to provide some savings to Ontario consumers in a full
year, said Health Promotion Minister Jim Watson.

“Helping Ontarians quit smoking is a major aspect of the Smoke-Free Ontario Strategy,” Watson said.
“These savings will assist a mother, father or one of your loved ones when they make the decision to quit
smoking.”

Smokers using the patch over 10 weeks at an estimated cost of $300, would save $24 in taxes.

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(v) With a graph for nicotine patches on the left and a graph for tobacco on the right, demonstrate how
the elimination of the retail sales tax (consumer tax) on nicotine patches would affect both markets.
Be sure to draw both the demand and supply curves in both diagrams.

(vi) Based on your graphs, is the cross-price elasticity of these two products positive or negative? Explain.

2. Total Revenue, Elasticities and Pricing Strategies

Suppose you are an economist working on how to price the Spice Girls Reunion Concert tickets. You
estimated the demand for the tickets (based on past album sales, news in the media, online polls, etc.) to be

Total Market Demand: Qd=1200-2P Supply: Qs=2P-100

(i) Find the total revenue you will earn from these concerts.

Now suppose you suspect that you can separate your potential consumers into two types: type 1 (teenagers)
and type 2 (you and I). Their demand functions are as follows:

Type 1 Demand: Q1=900-0.4P Type 2 Demand: Q2=300-1.6P

For simplicity, assume that the type 1 consumers cannot buy the tickets from the concert organizers and
then turn around and sell them to the type 2 consumers, and vice versa. Also assume that when the
consumers buy the tickets, they have to show an identification card to identify their type. Notice that
Qd=Q1+Q2.

(ii) Which type of consumers has a more elastic demand? Explain.

(iii) Find the equilibrium price and quantity for each type.

(iv) Now find the total revenue from both types together.

(v) Calculate the point elasticity of each type at the equilibrium price and quantity [recall that =
(1/slope)*(P/Q)].

(vi) Consider your total revenue in (i) and (iv): Explain intuitively why your revenue is now higher/lower
than the revenue you have found in (i). Relate your argument to elasticities.