Exercise 2.

3 (PED and price elasticity of supply)

1. Suppose the price of paper rises 10% and the quantity demanded falls 15%.
a. Is the price elasticity of demand for paper elastic, unit elastic, or inelastic?
b. Will revenue rise, decline, or stay the same with the given change in price?
2. Suppose the price of a can of green beans rises 6 percent and the quantity supplied rises 3
percent. Is the price elasticity of supply elastic, unit elastic, or inelastic?
3. For each of the following items assume the price elasticity of demand is as indicated.
Determine whether the good or service is elastic, unit elastic, or inelastic.
Also determine what would happen to the total revenue for the sellers of the items given the
indicated price change?
a. Medical care. PED = 0.1. Price rises.
b. Cars. PED = 1.2. Price falls.
c. Wheat. PED = 1.8. Price rises.
d. Cigarettes. PED = 0.7. Price falls.
e. Carpet cleaning. PED = 1. Price rises.
4. Suppose the price of almonds rises from $4.35 to $5.15 per pound and the quantity demanded
falls from 800 to 735 kilograms.
a. What is the price elasticity of demand for almonds in this price range?
b. Are almonds elastic, unitary elastic, or inelastic in this price range?
c. What is the interpretation of that price elasticity of demand-what does it mean?

Answer Exercise 2.3 (PED and price elasticity of supply)

1. Price elasticity of demand is the percent change in quantity demanded divided by the percent
change in price. Demand is elastic if the price elasticity is greater than one (always drop the
negative sign-take the absolute value); a rise in price will lower total revenue. Demand is
inelastic if the price elasticity is less than one; a rise in price will increase total revenue. Demand
is unit elastic if the price elasticity is equal to one; a rise in price leaves total revenue unchanged.
a. rice elasticity of demand is 15%/10% = 1.5. Since 1.5 > 1, demand is elastic.
b. Total revenue falls. This is because the percent decrease in the quantity demanded (15%)
exceeds the percent increase in the price (10%)
2. Price elasticity of supply is 3%/6% = 0.5. Since 0.5 < 1, supply is inelastic. Recall, price
elasticity of supply is defined in your text as the percent change in quantity supplied divided by
the percent change in price. Supply is elastic if the price elasticity is greater than one. Supply is
inelastic if the price elasticity is less than one. Supply is unit elastic if the price elasticity is equal
to one.
3a. Inelastic, because the coefficient (number) is less than one. Total revenue would rise.
3b. Elastic, because the coefficient is greater than one. Total revenue would rise.
3c. Elastic, because the coefficient is greater than one. Total revenue would fall.
3d. Inelastic, because the coefficient is less than one. Total revenue would fall.
3e. Unitary elastic, because the coefficient is equal to one. Total revenue would remain
unchanged (the percentage increase in the price is just offset by a proportional percentage
decrease in the quantity demanded).
4a. PED = (735-800) / 800
(5.15-4.35) / 4.35
= 0.4418

(remember to drop the negative sign).

4b. Consumers have an inelastic demand for almonds in this price range because the absolute
value of the elasticity of demand coefficient is less than one.
4c. Price inelasticity means consumers are relatively unresponsive to a price change.