Principles of Economics, 7e 1. Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston:...

Principles of Economics, 7e

1. Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston:

a. As the price of tickets rises from $200 to $250, what is the price elasticity of demand for (i) business travelers and (ii) vacationers? (Use the midpoint method in your calculations.)

b. Why might vacationers have a different elasticity from business travelers?

4. 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. subway rides during the next six months or subway rides during the next five years

d. root beer or water

5. Suppose the price elasticity of demand for heating oil is 0.2 in the short run and 0.7 in the long run.

a. If the price of heating oil rises from $1.80 to $2.20 per gallon, what happens to the quantity of heating oil demanded in the short run? In the long run? (Use the midpoint method in your calculations.)

b. Why might this elasticity depend on the time horizon?

6. A price change causes the quantity demanded of a good to decrease by 30 percent, while the total revenue of that good increases by 15 percent. Is the demand curve elastic or inelastic? Explain.

7. Cups of coffee and donuts are complements. Both have inelastic demand. A hurricane destroys half the coffee bean crop. Use appropriately labeled diagrams to answer the following questions.

a. What happens to the price of coffee beans?

b. What happens to the price of a cup of coffee? What happens to total expenditure on cups of coffee?

c. What happens to the price of donuts? What happens to total expenditure on donuts?

8. Maria has decided always to spend one-third of her income on clothing.

a. What is her income elasticity of clothing demand?

b. What is her price elasticity of clothing demand?

c. If Maria's tastes change and she decides to spend only one-fourth of her income on clothing, how does her demand curve change? What is her income elasticity and price elasticity now?

9. The New York Times reported (Feb.17, 1996) that subway ridership declined after a fare increase: “There were nearly 4 million fewer riders in December 1995, the first full month after the price of a token increased 25 cents to $1.50, than in the previous December, a 4.3 percent decline.”

a. Use these data to estimate the price elasticity of demand for subway rides.

b. According to your estimate, what happens to the Transit Authority's revenue when the fare rises?

c. Why might your estimate of the elasticity be unreliable?

10. Two drivers—Walt and Jessie—each drive up to a gas station. Before looking at the price, each places an order. Walt says, “I'd like 10 gallons of gas.” Jessie says, “I'd like $10 worth of gas.” What is each driver's price elasticity of demand?

11. Consider public policy aimed at smoking.

a. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes currently costs $2 and the government wants to reduce smoking by 20 percent, by how much should it increase the price?

b. If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking one year from now or five years from now?

c. Studies also find that teenagers have a higher price elasticity of demand than do adults. Why might this be true?

12. You are the curator of a museum. The museum is running short of funds, so you decide to increase revenue. Should you increase or decrease the price of admission? Explain.

13. Explain why the following might be true: A drought around the world raises the total revenue that farmers receive from the sale of grain, but a drought only in Kansas reduces the total revenue that Kansas farmers receive.