Tutorial 3
Elasticity
1. (a) The price elasticity of demand measures the responsiveness of the quantity demanded / price
to a change in the quantity demanded / the quantity supplied / price.
[Delete wrong words.]
(b) Give the formula for price elasticity of demand.
2. Back in the mid-1990s, the government in the UK announced that for every 10 per cent rise in the
price of cigarettes, the demand was likely to fall by 6 per cent. If this information was correct,
what was the value of the price elasticity of demand for cigarettes at the time?
3. The following table shows the quantity of a product demanded at two different prices:
P Qd
16 25
14 35
(a) What is the price elasticity of demand when the price decreases from TND16 to TND14?
(use the mid point formula for your calculations)
(b) Is this demand an elastic or inelastic? Explain your answer.
4. The following diagram shows two demand curves that cross at a price of P0.
Price
P0
P1
D2
D1
Q0 Q1 Q2 Quantity
Which of the following statements are true?
(a) Curve D1 is inelastic and curve D2 elastic. ............................................................... True / False
(b) Demand is more elastic between P0 and P1 along curve D2 than along curve D1.... True / False
(c) The price elasticity of demand between P0 and P1 in the case of curve D2 is equal to:
Q2 Q0 P0 P1
True / False
mid Q mid P
(d) For any given change in price there will be a larger proportionate change in quantity along
curve D1 than along curve D2. True / False
5. Fill in the rest of the following table: (For the final column use the formula: Qd / mid Qd P /
mid P)
Quantity Price Total consumer Elastic or
demanded (000s) (TND) expenditure inelastic demand Price elasticity
of demand
7 13 ………..
………. ……….
9 11 ………..
………. ……….
11 9 ………..
………. ……….
13 7 ………..
6. What is the formula for income elasticity of demand?
7. Consider public policy aimed at smoking :
(a) Studies indicate that price elasticity of demand for cigarettes is about 0.4. If a pack of
cigarettes costs TND 2 and the government wants to reduce smoking by 20%, 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 than do adults. Why might this
be true?
8. The following is an equation for a demand curve:
𝑄𝑑 = 60 − 15 𝑃 + 𝑃2 , where 𝑄𝑑 is measured in 000s of units
(a) Draw the demand curve.
(b) Calculate the price elasticity of demand on the above demand curve at a price of (i) 5; (ii) 2;
(iii) 0.
9. (a) What would you understand by the ‘wage elasticity of demand for labour’? How would the
magnitude of this elasticity affect the working of the market for plumbers?
(b) How is the concept of income elasticity of demand relevant in understanding how the structure
of economies changes over the years.
10. MK Corp estimates that its demand function is as follows:
Q = 150 – 5.4 P + 0.8 A + 2.8 Y -1.2 P*
where Q is the quantity demanded per month (in 000s units), P is the product’s price (in TND), A is
the firm’s advertising expenditure (in tnd’000 per month), Y is per capita disposable income (in
tnd’000), and P* is the price of AJ Corp.
2
(a) During the next five years, per capita disposable income is expected to increase by tnd2,500.
What effect will this have on the firm’s sales volume?
(b) If MK wants to change its price by enough to offset the effect of the increase in income, by
how much must it raise its price?
(c) If MK raises its price by this amount, will it increase or decrease the price elasticity of
demand? Explain.
(d) What can be said about the relationship between the products of MK and AJ?
(e) If next year MK intends to charge tnd15 and spend tnd10,000 per month on promotion, while
it believes per capita income will be tnd12,000 and AJ’s price will be tnd3, calculate the
income elasticity of demand. What does this tell you about the nature of MK’s product?
(f) What effect would an increase in advertising of tnd1000 have on profitability, if each
additional unit costs tnd10 to produce?
11. The following is the demand schedule for chocolate:
Price (in Quantity Elasticity Description
TND)
7 0
6 2
5 4
4 6
3 8
2 10
1 12
0 14
(a) Fill in the table (use the midpoint formula to compute the elasticities)
(b) Draw the demand curve, then, deduce the demand equation
(c) Write the formulas of (a) the slope of the demand curve and (b) the price elasticity of demand
(d) What is the relationship between the two?