# Calculate the Elasticity Of Demand

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**Assignment -Elasticity of Demand and Supply**

**Price elasticity of supply in the short run and long run**

The following graph shows the long-run supply curve for pears.

Place the orange line (square symbol) on the graph to show the most likely short-run supply curve for pears. (Note: Place the points of the line either on Y and V or on Y and S.)

**Substitutes, complements, or unrelated**

You work for a marketing firm that has just landed a contract with Run-of-the-Mills to help them promote three of their products: penguin patties, frizzles, and cannies. All of these products have been on the market for some time, but, to entice better sales, Run-of-the-Mills wants to try a new advertisement that will market two of the products that consumers will likely consume together. As a former economics student, you know that complements are typically consumed together while substitutes can take the place of other goods.

Run-of-the-Mills provides your marketing firm with the following data: When the price of penguin patties decreases by 20%, the quantity of frizzles sold decreases by 22% and the quantity of cannies sold increases by 7%. Your job is to use the cross-price elasticity between penguin patties and the other goods to determine which goods your marketing firm should advertise together.

Complete the first column of the following table by computing the cross-price elasticity between penguin patties and frizzles, and then between penguin patties and cannies. In the second column, determine if penguin patties are a complement to or a substitute for each of the goods listed. Finally, complete the final column by indicating which good you should recommend marketing with penguin patties.

Relative to Penguin Patties | Recommend Marketing with Penguin Patties | ||

Cost-Price Elasticity of Demand | Complement or Substitute | ||

Frizzles | |||

Cannies |

**Effect of a tax on buyers and sellers**

The following graph shows the daily market for shoes when the tax on sellers set at $0 per pair.

Suppose the government institutes a tax of $23.20 per pair, to be paid by the seller. (Hint: To see the impact of the tax, enter the value of the tax in the Tax on Sellers field and move the green line to the after-tax equilibrium by adjusting the value in the Quantity field. Then, enter zero in the Tax on Sellers field. You should see a tax wedge between the price buyers pay and the price sellers receive.)

Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph.

Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.

Fill in the following table with the quantity sold, the price buyers pay, and the price sellers receive and after the tax.

Quantity (Pairs of jeans) | Price Buyers Pay (Dollars per pair) | Price Sellers Receive (Dollars per pair) | |

Before Tax | |||

After Tax |

Using the data you entered in the previous table, calculate the tax burden that falls in buyers and sellers, respectively, and calculate the price elasticity of demand and supply throughout the relevant ranges using the midpoint method. Enter your result in following table.

Tax Burden (Dollars per pair) | Elasticity | |

Buyers | ||

Sellers |

**Elasticity and total revenue**

The following graph shows the daily demand curve for bippitybops in Houston.

Use the green rectangle (triangle symbols) to compute total revenue at various prices along the demand curve.

Note: You will not be graded on any changes made to this graph.

On the following graph, use the green point (triangle symbol) to plot the annual total revenue when the market price is $30, $45, $60, $75, $90, $105, and $120 per bippitybop.

According to the midpoint method, the price elasticity of demand between points A and B is approximately _____ (0, 0.54, 1.86, 14) .

Suppose the price of bippitybops is currently $45 per bippitybop, shown as point B on the initial graph. Because the price elasticity of demand between points A and B is _____ (elastic, inelastic, unit elastic), a $15-per-bippitybop increase in price will lead to _____ (a decrease, an increase, no change) in total revenue per day.

In general, in order for a price decrease to cause a decrease in total revenue, demand must be _____ (elastic, inelastic, unit elastic).

**Calculating the price elasticity of demand: A step by step guide**

Suppose that during the past year, the price of a laptop computer fell from $2,650 to $2,430. During the same time period, consumer sales increased from 495,000 to 664,000 laptops.

Calculate the elasticity of demand between these two price-quantity combinations by using the following steps. After each step, complete the relevant part of the table with the appropriate answers. (Note: For decreases in price or quantity, enter values in the Change column with a minus sign.)

Step 1: Fill in the appropriate values for original quantity, new quantity, original price, and new price.

Step 2: Calculate the average quantity by adding the original quantity and the new quantity and then dividing by 2. Do the same for the average price.

Step 3: Calculate the change in quantity by subtracting the original quantity from the new quantity. Do the same for the change in price.

Step 4: Calculate the percentage change in quantity demanded by dividing the change in quantity by the average quantity. Do the same to calculate the percentage change in price.

Step 5: Calculate the price elasticity of demand by dividing the percentage change in quantity demanded by the percentage change in price, ignoring the negative sign.

Using the midpoint method, the elasticity of demand for laptops is about _____.

**The variety of demand curves**

The following graph displays four demand curves (LL, MM, NN, and OO) that interest at point A.

Using the graph, indicating whether each statement is true or false –

Curve MM is more elastic between points A and C than curve NN is between points A and D.

Between points A and D, curve NN is inelastic.

Between points A and B, curve LL is unit elastic.

**Determinants of the price elasticity of demand**

Consider some determinants of the price elasticity of demand:

- The availability of dose substitutes
- The proportion of a consumer’s budget spent on the good
- The time horizon being considered

A good without any dose substitutes is likely to have relatively ______ demand, because consumers cannot easily switch to a substitute good if the price of the good rises.

A good’s price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the least elastic demand?

- Diamond necklace
- A heart valve for heart attack victims

Price elasticity for a good depends on the share of a consumer’s budget spent on a good. Other things being equal, which of the following goods has the most elastic demand?

- Computer
- Laundry detergent
- Salt

The price elasticity of demand for a good also depends on how you define the good.

Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to have the least elastic demand, and which will have demand that falls in between.

Categories | Most Elastic | In Between | Least Elastic |

Clothing | |||

Pants | |||

Boot-cut jeans |

The price elasticity of demand is also affected by the given time horizon.

If the price of gasoline is relatively high for a long time, consumers are more likely to buy more fuel-efficient cars or switch to alternatives such as public transportation. Therefore, the demand for gasoline is________elastic in the short run than in the long run.

**Calculating the price elasticity of supply**

Larry is a stay-at-home who lives in Philadelphia and teaches tennis lessons for extra cash. At a wage of $30 per hour, he is willing to teach 6 hours per week. At $50 per hour, he is willing to teach 16 hours per week.

Using the midpoint method, the elasticity of Larry’s labor supply between the wages of $30 and $50 per hour is approximately _____, which means that Larry’s supply of labor within this age range is ______.

**Application: Elasticity and hotel rooms**

The following graph input tool shows the daily demand for hotel rooms at the Big Winner Hotel and Casino in Las Vegas, Nevada. To help the hotel management better understand the market, an economist identified three primary factors that affect the demand for rooms each night. These demand factors, along with the values corresponding to the initial demand curve, are shown in the following table and alongside the graph input tool.

Demand Factor | Initial Value |

Average American household income | $50,000 per year |

Roundtrip airfare from Los Angeles (LAX) to Las Vegas (LAS) | $200 per round trip |

Room rate at the Lucky Hotel and Casino, which is near the Big Winner | $250 per night |

Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph.

Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.

For each of the following scenarios, begin by assuming that all demand factors are set to their original values and Big Winner is charging $300 per room per night.

If average household income increases by 20%, from $50,000 to $60,000 per year, the quantity of rooms demanded at the Big Winner _______ from _______ rooms per night to _______ rooms per night. Therefore, the income elasticity of demand is _______, meaning that hotel rooms at the Big Winner are _______.

If the price of an airline ticket from LAX to LAS were to increase by 10%, from $200 to $220 roundtrip, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Big Winner _______ from _______ rooms per night to _______ rooms per night. Because the cross-price elasticity of demand is_______ , hotel rooms at the Big Winner and airline trips between LAX and LAS are _______.

Big Winner is debating decreasing the price of its rooms to $275 per night. Under the initial demand conditions, you can see that this would cause its total revenue to _______. Decreasing the price will always have this effect on revenue when Big Winner is operating on the _______ portion of its demand curve.

Note – All the graph in the attached file.

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