1. As I showed in clas, the elasticity of demand for coffee is -0.25. Suppose th
ID: 1137183 • Letter: 1
Question
1. As I showed in clas, the elasticity of demand for coffee is -0.25. Suppose that 5 million people buy cups of coffee every day. a. Is the demand for coffee elastic or inelastic? b. If the price of coffee increases by 20%, how many cups of coffee will people buy now? 2. Lets think about the demand for drugs as discussed in Chapter 5. Addicts have an inelastic demand for drugs. What happens to seller revenues when price of a product increases and demand for the product is inelastic? What happens to seller revenues when price of a product decreases and demand for the product is inelastic? a. We can model the war on drugs as an increase in the cost of drugs (more expensive to supply). What does this mean will happen to the revenue of drug pushers? b. 3. Which will have a higher elasticity of demand? Why? a. Demand for plastic surgery or demand for emergency surgery b. Demand for gasoline right now or demand for gasoline in a year? c. Demand for a flight to Europe or demand for a flight to the city of Bruges? For each of the following, indicate if the supply for the good would become more elastic or less elastic as a result of each change, and briefly justify your answer. (In each case the supply curve will also shift, but we are interested in changes in the elasticity.) 4. The supply curve for diamonds if a new process for manufacturing diamonds is created The supply curve for food if pesticides and fertilizers were just invented The supply curve for plastic if a very large share of oil output was used to make plastic The supply curve for nurses after several years of decreasing wages in nursing a. b. c. d.Explanation / Answer
1.
a. Since the elasticity value is less than absolute value of 1, it is inelastic
b. 4.75 million coffee cups would be sold for a price increase of 20 percent
Cups
Price
% change in P
% change in Cups
Ed
5
10
4.7
12
0.2
-0.06
-0.30
2.
a. When demand is inelastic and price increases the revenue would increase as people would not mind for price increase. When demand is inelastic and price decreases the revenue and the increases quantity.
b. The revenue would decrease
3.
a. Demand for plastic surgery as people would demand more for decrease in price whereas emergency surgery is inelastic of price
b. Demand for gasoline now as the need is now
c. Demand for Europe as it is costlier and is a luxury when compared to Bruges(need)
4.
a. It would be more elastic as it reduces the price
b. It would be less elastic as it takes some time to adopt in the market
c. More elastic as it would reduce cost immediately
d. More elastic as the wages would be decreasing and for an increase in price the supply would be more
Cups
Price
% change in P
% change in Cups
Ed
5
10
4.7
12
0.2
-0.06
-0.30
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