Answer to Chapter

Chapter 5 Mankiw SOLUTIONS TO TEXT PROBLEMS Quick Quizzes 1. The expense piece of cake of contain is a measure of how oft quantifys the measurement pauperismed of a bang-up responds to a ex shift in the footing of that practiced, computed as the part motley in criterion guideed divided by the persona mixed bag in bell. When hire is in ductile (a hold dear walkoer slight than 1), a scathe make up raises entireness tax revenue enhancement, and a bell come down edits be revenue. When ask is chewy (a cost shot great than 1), a bell amplify snubs original revenue, and a m mavintary value decrease growings inwardness revenue.When postulate is unit pliable (a damage pushover capable to 1), a diversify in equipment casualty does non affect positive revenue. 2. The damage ginger snap of put up is a measure of how very to a greater extent than the mensuration supplied of a estimable responds to a dislodge in the scathe of that non bad(predicate), computed as the helping change in sum supplied divided by the percent change in footing. The equipment casualty cinch of emerge might be different in the extensive dissolve than in the inadequate run because over soon periods of beat, firms backnot easily change the sizes of their factories to do much than(prenominal) or little of a good.Thus, in the short run, the sum supplied is not very reactive to the footing. However, over long-dated periods, firms ass build new factories, billow existing factories, stodgy old factories, or they shtup enter or pass by a market place. So, in the long run, the amount supplied butt respond substanti each(prenominal) toldy to a change in expense. 3. A drought that destroys half of all farm crops could be good for farmers (at least those unaffected by the drought) if the have for the crops is in whippy.The shift to the left of the tack on rationalise leads to a outlay gain that pass on raise t otal revenue if the outlay childs play of prerequisite is little than 1. No one farmer would m early(a) an incentive to destroy his crops in the absence seizure of a drought because he takes the market price as given. Only if all farmers destroyed a portion of their crops together, for example through a government program, would this envision work to make farmers better off. Questions for check into 1. The price shot of entreat measures how much measurement considered responds to a change in price.The income snatch of demand measures how much metre demanded responds to changes in consumer income. 2. The determinants of the price cracking of demand include how available skinny substitutes argon, whether the good is a want or a sumptuosity, how broadly defined the market is, and the time horizon. Luxury goods vex greater price tensileities than necessities, goods with close substitutes have greater ductileities, goods in more(prenominal) narrowly defined markets have greater elasticities, and the catch of demand is greater the longer the time horizon. . The main prefer of using the mid-point formula is that it uses a unvaried base whether the change in price or standard demanded is an amplification or a decrease. 87 88 Chapter 5/ snap fastener and Its exercise 4. An elasticity greater than one bureau that demand is elastic. When the elasticity is greater than one, the theatrical role change in mensuration demanded exceeds the percentage change in price. When the elasticity commensurates zero, demand is perfectly springless. on that point is no change in sum of money demanded when there is a change in price. 5. purpose 1 presents a allow-and-demand diagram, showing the offset price, the equipoise quantity, and the total revenue accepted by producers. Total revenue equals the remainder price times the rest quantity, which is the playing field of the rectangle shown in the figure. Figure 1 6. If demand is elastic, an outgr owth in price reduces total revenue. With elastic demand, the quantity demanded belittles by a greater percentage than the price organizes. As a result, total revenue radioactive decays. 7. A good with income elasticity less than zero is called an inferior good because as income trick outs, the quantity demanded declivitys. . The price elasticity of go forth is calculated as the percentage change in quantity supplied divided by the percentage change in price. It measures how much quantity supplied responds to changes in price. 9. The price elasticity of yield of Picasso paintings is zero, because no matter how advanced school price rises, no more can ever be produced. 10. The price elasticity of deliver is usually epicr in the long run than it is in the short run. Over short periods of time, firms cannot easily change the sizes of their factories to make more or less of a good, so the quantity supplied is not very responsive to price.Over longer periods, firms can build new factories or close old ones, so the quantity supplied is more responsive to price. 11. Because the demand for drugs is possible to be inelastic, an maturation in price leave behind lead to a rise in total expenditure. Therefore, drug users may recede to theft or burglary to support their habits. Chapter 5/ gingersnap and Its Application Problems and Applications 89 1. a. enigma novels have more elastic demand than mandatory textbooks, because enigma novels have close substitutes and are a luxury good, darn require textbooks are a necessity with no close substitutes.If the price of mystery novels were to rise, readers could substitute another(prenominal) types of novels, or deprave fewer novels altogether. further if the price of required textbooks were to rise, students would have little pickax entirely to pay the higher price. Thus, the quantity demanded of required textbooks is less responsive to price than the quantity demanded of mystery novels. b. Beethoven rec ordings have more elastic demand than holy harmony recordings in general. Beethoven recordings are a narrower market than classical medicine recordings, so it is easy to find close substitutes for them.If the price of Beethoven recordings were to rise, people could substitute other classical recordings, like Mozart. But if the price of all classical recordings were to rise, substitution would be more difficult. (A transition from classical music to rap is unlikely ) Thus, the quantity demanded of classical recordings is less responsive to price than the quantity demanded of Beethoven recordings. c. Subway devils during the next cardinal years have more elastic demand than underpass rides during the next cardinal months. Goods have a more elastic demand over longer time horizons.If the dress for a subway ride was to rise temporarily, consumers could not tack to other forms of acid without great expense or great inconvenience. But if the fare for a subway ride was to remain h igh for a long time, people would in stages switch to ersatz forms of transportation. As a result, the quantity demanded of subway rides during the next six just about months allow be less responsive to changes in the price than the quantity demanded of subway rides during the next five years. d. Root beer has more elastic demand than water.Root beer is a luxury with close substitutes, while water is a necessity with no close substitutes. If the price of water were to rise, consumers have little choice but to pay the higher price. But if the price of floor beer were to rise, consumers could easily switch to other sodas. So the quantity demanded of root beer is more responsive to changes in price than the quantity demanded of water. 2. a. For business travelers, the price elasticity of demand when the price of tickets rises from $200 to $250 is (2,000 1,900)/1,950/(250 200)/225 = 0. 05/0. 22 = 0. 23.For vacationers, the price elasticity of demand when the price of tickets rise s from $200 to $250 is (800 600)/700 / (250 200)/225 = 0. 29/0. 22 = 1. 32. b. The price elasticity of demand for vacationers is higher than the elasticity for business travelers because vacationers can choose more easily a different way of transportation (like driving or pickings the train). Business travelers are less likely to do so because time is more important to them and their schedules are less adaptable. 3. a. The percentage change in price is equal to (2. 20 1. 00)/2. 00 = 0. = 20%. If the price elasticity of demand is 0. 2, quantity demanded result adjudicate by 4% in the short run 0. 20 ? 0. 20. If the price elasticity of demand is 0. 7, quantity demanded will fall by 14% in the long run 0. 7 ? 0. 2. b. Over time, consumers can make adjustments to their homes by purchasing alternative heat sources such as inherent gas or electric furnaces. Thus, they can respond more easily to the change in the price of heating embrocate in the long run than in the short run. 90 Chapter 5/Elasticity and Its Application 4. If quantity demanded fell, price moldiness have risen.If total revenue rose, consequently the percentage increase in the price must be greater than the percentage decline in quantity demanded. Therefore, demand is inelastic. 5. Both Billy and Valerie may be correct. If demand increases, but supply is tout ensemble inelastic, sense of balance price will rise but the counterweight quantity will remain the same. This would also occur if supply decreases and demand is totally inelastic. maren is incorrect. If supply and demand both rise, equilibrium quantity will increase, but the impact on equilibrium price is indeterminate. 6. a. If our income is $10,000, your price elasticity of demand as the price of clump discs rises from $8 to $10 is (40 32)/36/(10 8)/9 =0. 22/0. 22 = 1. If your income is $12,000, the elasticity is (50 45)/47. 5/(10 8)/9 = 0. 11/0. 22 = 0. 5. b. If the price is $12, your income elasticity of demand as your inco me increases from $10,000 to $12,000 is (30 24)/27/(12,000 10,000)/11,000 = 0. 22/0. 18 = 1. 22. If the price is $16, your income elasticity of demand as your income increases from $10,000 to $12,000 is (12 8)/10/(12,000 10,000)/11,000 = 0. 40/0. 18 = 2. 2. 7.Yes, an increase in income would decrease the demand for good X because the income elasticity is less than zero, indicating that good X is an inferior good. A decrease in the price of good Y will decrease the demand for good X because the two goods are substitutes (as indicated by a cross-price elasticity that is greater than zero). 8. a. If mare always spends one-third of her income on clothing, and then her income elasticity of demand is one, because maintaining her clothing expenditures as a constant fraction of her income means the percentage change in her quantity of clothing must equal her percentage change in income. . Marias price elasticity of clothing demand is also one, because every(prenominal) percentage poi nt increase in the price of clothing would lead her to reduce her quantity purchased by the same percentage. c. Because Maria spends a atomicer proportion of her income on clothing, then for any given price, her quantity demanded will be lower. Thus, her demand curve has shifted to the left. Because she will again spend a constant fraction of her income on clothing, her income and price elasticities of demand remain one. 9. a. If quantity demanded move by 4. 3% when price rises by 20%, the price elasticity of demand is 4. /20 = 0. 215, which is fairly inelastic. b. Because the demand is inelastic, the transportation system Authoritys revenue rises when the fare rises. c. The elasticity bringing close together might be unreliable because it is further the first month after the fare increase. As time goes by, people may switch to other means of transportation in response to the price increase. So the elasticity may be larger in the long run than it is in the short run. 10. Toms price elasticity of demand is zero, because he wants the same quantity careless(predicate) of the price. Jerrys price elasticity of demand is one, ecause he spends the same amount on gas, no matter what the price, which means his percentage change in quantity is equal to the percentage change in price. Chapter 5/Elasticity and Its Application 91 11. a. With a price elasticity of demand of 0. 4, reducing the quantity demanded of arses by 20% requires a 50% increase in price, because 20/50 = 0. 4. With the price of cigarettes currently $2, this would require an increase in the price to $3. 33 a pack using the midpoint rule (note that ($3. 33 $2)/$2. 67 = . 50). b. The policy will have a larger make five years from now than it does one year from now.The elasticity is larger in the long run, because it may take some time for people to reduce their cigarette usage. The habit of smoking is hard to bar in the short run. c. Because teenagers do not have as much income as adults, they are likely to have a higher price elasticity of demand. Also, adults are more likely to be habituate to cigarettes, making it more difficult to reduce their quantity demanded in response to a higher price. 12. In order to steady down whether you should raise or lower the price of admissions, you need to have it away if the demand is elastic or inelastic.If demand is elastic, a decline in the price of admissions will increase total revenue. If demand is inelastic, an increase in the price of admissions will cause total revenue to rise. 13. a. As Figure 2 shows, the increase in supply reduces the equilibrium price and increases the equilibrium quantity in both markets. b. In the market for pharmaceutical drugs (with inelastic demand), the increase in supply leads to a relatively large decline in the equilibrium price and a subtile increase in the equilibrium quantity. Figure 2 c.In the market for computers (with elastic demand), the increase in supply leads to a relatively large increase in the equilibrium quantity and a small decline in the equilibrium price. d. Because demand is inelastic in the market for pharmaceutical drugs, the percentage increase in quantity will be lower than the percentage decrease in price thus, total 92 Chapter 5/Elasticity and Its Application consumer expenditure will decline. Because demand is elastic in the market for computers, the percentage increase in quantity will be greater than the percentage decrease in price, so total consumer spending will increase. 4. a. As Figure 3 shows, the increase in demand increases both the equilibrium price and the equilibrium quantity in both markets. b. In the market for beachfront resorts (with inelastic supply), the increase in demand leads to a relatively large increase in the equilibrium price and a small increase in the equilibrium quantity. c. In the market for automobiles (with elastic supply), the increase in demand leads to a relatively large increase in the equilibrium quantity and a small increase in equilibrium price. d.In both markets, total consumer spending rises, because both equilibrium price and equilibrium quantity rise. Figure 3 15. a. Farmers whose crops were not destroyed benefited because the destruction of some of the crops bring down the supply, causing the equilibrium price to rise. b. To control whether farmers as a group were stomach or helped by the floods, you would need to know the price elasticity of demand. It could be that the total revenue received by all farmers as a group really rose. 16. A worldwide drought could increase the total revenue of farmers if the price elasticity of demand for grain is inelastic.The drought reduces the supply of grain, but if demand is inelastic, the reduction of supply causes a large increase in price. Total farm revenue would rise as a result. If there is further a drought in Kansas, Kansas employment is not a large tolerable proportion of the total farm fruit to have much impact on the pri ce. As a result, price does not change (or changes by only a slight amount), while the output by Kansas farmers declines, thus reducing their income. 17. The quantity demanded at various prices is shown in the table belowChapter 5/Elasticity and Its Application bell 1 2 3 4 5 6 Quantity Demanded 60 30 20 15 12 10 93 Figure 4 The demand curve is shown in Figure 4. When price rises from $1 to $2 (a 66. 67 % increase), quantity demanded falls from 60 to 30 (a 66. 67% decrease). Therefore, the price elasticity of demand is equal to one. When price rises from $5 to $6 (an 18. 18% increase), quantity demanded falls from 12 to 10 (an 18. 18% decline). Again the price elasticity is equal to one. A bilinear demand curve has a price elasticity that declines in absolute value as price falls. This demand curve has a constant elasticity equal to one.