Chapter 5 Assignment: Elasticity
1. Transatlantic air travel in business class has an estimated elasticity of demand of 0.40, while
transatlantic air travel in economy class has an estimated price elasticity of 0.62. Why do you think
this is the case? Business class demand (0.40) is more inelastic than economy class (0.62). This is likely
because business travelers often view air travel as a necessity for professional obligations and have fewer
substitutes available on short notice. Conversely, economy travelers are typically more price-sensitive,
viewing the trip as a luxury or having a longer time horizon to seek alternative travel dates or methods.
2. What is the relationship between price elasticity and position on the demand curve? For example,
as you move up the demand curve to higher prices and lower quantities, what happens to the
measured elasticity? How would you explain that? As you move up a linear demand curve toward higher
prices and lower quantities, the measured elasticity increases. This occurs because at higher price points, a
specific dollar change represents a smaller percentage change in price, while the corresponding change in
quantity represents a much larger percentage change in quantity due to the lower base number.
3. Can you think of an industry (or product) with near-infinite elasticity of supply in the short term?
That is, what is an industry that could increase Qs almost without limit in response to an increase in
the price? Digital products, such as software downloads, e-books, or streaming services, exhibit perfectly
elastic supply in the short term. Once the initial product is created and the hosting infrastructure is in place,
firms can increase the quantity supplied almost without limit in response to any price increase without
incurring significant additional production costs.
4. Would you expect supply to play a more significant role in determining the price of a basic necessity
like food or a luxury like perfume? Explain. Hint: Think about how the price elasticity of demand
will differ between necessities and luxuries. Supply plays a more significant role in determining the price
of a basic necessity like food. Because the demand for food is inelastic, any shift in the supply curve results
in a dramatic change in equilibrium price. For luxuries like perfume, demand is elastic, meaning supply
shifts primarily result in a change in the quantity bought and sold rather than a large price swing.
5. A city has built a bridge over a river and decides to charge a toll to everyone who crosses. For one
year, the city charges a variety of different tolls and records how many drivers cross the bridge, thus
gathering information about elasticity of demand. If the city wishes to raise as much revenue as
possible from the tolls, where on the demand curve will it choose to set the toll: the inelastic portion,
the elastic portion, or the unit-elastic portion? Explain. To raise as much revenue as possible, the city
should set the toll at the unit-elastic portion of the demand curve. At this point, the percentage change in
price is exactly equal to the percentage change in quantity (E = 1), meaning total revenue is at its peak. If
the city is in the inelastic portion, raising the price increases revenue; if it is in the elastic portion, lowering
the price increases revenue.
6. In a market where the supply curve is perfectly inelastic, how does an excise tax affect the price
paid by consumers and the quantity bought and sold? In a market with perfectly inelastic supply, the
supply curve is a vertical line. When an excise tax is introduced, the quantity bought and sold remains
unchanged because producers cannot adjust their output. Consequently, the tax incidence falls entirely on
the sellers (producers), and the price paid by consumers does not rise.
7. Economists define normal goods as having a positive income elasticity. We can divide normal goods
into two types: those whose income elasticity is less than one and those whose income elasticity is
greater than one. Think about products that would fall into each category. Can you propose names
for each category?
• Necessities: Normal goods with an income elasticity between zero and one (0 < E_i < 1). As income
rises, the quantity demanded increases, but at a slower rate than the income growth.
• Luxuries: Normal goods with an income elasticity greater than one (E_i > 1). Consumption of these
goods grows faster than the rate of income increase.
8. The equation for a demand curve is P=48−3Q. What is the elasticity in moving from a quantity of
5 to a quantity of 6?
• At Q_1 = 5, P_1 = 48 - 3(5) = 33.
• At Q_2 = 6, P_2 = 48 - 3(6) = 30.
• Using the Midpoint Method:
6−5 1
o %∆𝑄 = (6+5)/2
= 5.5 = 18.18%
30−33 −3
o %∆𝑃 = (30+33)/2
= 31.5 = −9.52%
• Elasticity = 18.18 / |-9.52 =1.91(Elastic).
9. The equation for a supply curve is 4P=Q. What is the elasticity of supply as price rises from 3 to
4? What is the elasticity of supply as the price rises from 7 to 8? Would you expect these answers to
be the same?
• This equation represents a linear supply curve passing through the origin (P = 0.25Q).
• For any price change (3 to 4 or 7 to 8), the elasticity will be unitary (1.0).
• I would expect these answers to be the same because any straight-line supply curve that originates
from the zero-point (0,0) has a constant elasticity of one.
10. The equation for a supply curve is P=3Q−8. What is the elasticity in moving from a price of 4 to
a price of 7?
• At P_1 = 4, 4 = 3Q – 8 = 12 = 3Q = Q_1 = 4.
• At P_2 = 7, 7 = 3Q – 8 = 15 = 3Q = Q_2 = 5.
• Using the Midpoint Method:
5−4 1
o %∆𝑄 = (5+4 )/2
= 4.5 = 22.22%
7− 4 3
o %∆𝑃 = (7+4)/2
= 5.5 = −54.55%
• Elasticity = 22.22 / 54.55 = 0.41 (Inelastic).
11. A certain professional-football stadium has 70,000 seats. What is the shape of the supply curve
for tickets to football games at that stadium? Explain. The supply curve for a 70,000-seat stadium is
perfectly inelastic. This is because the quantity of seats is fixed; the stadium cannot "supply" more seats
regardless of how high the ticket price rises.