What is elasticity?
What is likely to be more elastic: the demand for JSU T-shirts or the demand for JSU football T-shirts?
Assume that the Internet results in increased competition for the JSU Bookstore. Explain this (verbally and graphically) in terms of a change in elasticity of demand.
University of Chicago Prof. Austan Goolsbee and Yale University Prof. Judith Chevalier argue in a paper that price changes at one Internet site affect sales of both that retailer and its competitor. It considers sales at Amazon.com and BarnesandNoble.com, and finds that "[a] 1 percent price increase at BN.com pushes sales down 4 percent, making price rises a bad idea. By contrast, the same increase at Amazon reduces sales by only 0.5 percent a net revenue gain." It concludes that Amazon.com has demonstrated it is possible to build large base of customers who will not go to competition if prices are raised. Question: Fully explain this phenomenon in terms of elasticity. What factors probably go into making consumers less price responsive at Amazon.com's web site vs. Barnes and Noble's web site?
Many public colleges and universities have raised tuition in recent years. Will tuition increases result in more revenue? Under what conditions will revenue (a) rise, (b) fall, or (c) remain the same? Explain this in words, focusing on the increased relationship between the increased revenue from the students who enroll despite the higher tuition and the lost revenue from lower enrollment. If the true price elasticity for public university education was -1.2 (as suggested in a recent article), what would you suggest colleges do to expand revenue? Also, how do you suppose the supply and demand for higher education changes during a recession, if at all?
Define: unit elasticity. What do you think would happen to sales revenues if price fell in a market characterized by unit elasticity?
Sue loves ice cream but cannot stand frozen yogurt deserts. Carole likes both and can hardly tell the difference between the two. Who will have the more elastic demand for yogurt?
What effect would the practice of obtaining prescription drugs from Canada on the Internet have on the elasticity of demand for prescription drugs? Why?
***
For which one of the following goods would you expect the demand to be most elastic?
a. gasoline
b. premium gasoline
c. unleaded gasoline
d. Exxon unleaded gasoline
The demand curve for cigarettes is likely to be
a. horizontal.
b. very flat (but not horizontal).
c. vertical
d. very steep (but not vertical).
John enjoys hockey games more than movies yet in a typical year he goes to 10 movies and 2 hockey games. This suggests that
a. John is clearly not maximizing utility.
b. if John is rational, hockey must be more expensive than movies.
c. if John is rational, movies must be more expensive than hockey.
d. the price of NASCAR races (a hockey substitute) has increased.
e. none of the above
Which one of the following goods would likely have the most elastic demand?
a. Kellogg's corn flakes
b. salt
c. a new Toyota automobile
d. fresh green beans
If a 10 percent rise in airfares leads to a 5 percent increase in total expenditures on air travel, the price elasticity of demand for air travel in this range must be
a. 2.0.
b. elastic.
c. 0.5.
d. inelastic.
If the board of regents of a major state university system plans to raise tuition in order to increase revenues, the regents must believe student demand is
a. elastic.
b. inelastic.
c. of unitary elasticity.
d. perfectly elastic.
Assume that Joe's Bakery sells 130 pies at a price of $9, 110 pies at a price of $10, and 95 pies at a price of $11.
a. Calculate the absolute value of the arc elasticity of demand if Joe raised the price of pies from $9 to $10. Is demand in this range elastic or inelastic?
b. Assume that Joe lowers his price from $11 to $9. What is the arc elasticity of demand?
What is likely to be more elastic: the demand for JSU T-shirts or the demand for JSU football T-shirts?
Assume that the Internet results in increased competition for the JSU Bookstore. Explain this (verbally and graphically) in terms of a change in elasticity of demand.
University of Chicago Prof. Austan Goolsbee and Yale University Prof. Judith Chevalier argue in a paper that price changes at one Internet site affect sales of both that retailer and its competitor. It considers sales at Amazon.com and BarnesandNoble.com, and finds that "[a] 1 percent price increase at BN.com pushes sales down 4 percent, making price rises a bad idea. By contrast, the same increase at Amazon reduces sales by only 0.5 percent a net revenue gain." It concludes that Amazon.com has demonstrated it is possible to build large base of customers who will not go to competition if prices are raised. Question: Fully explain this phenomenon in terms of elasticity. What factors probably go into making consumers less price responsive at Amazon.com's web site vs. Barnes and Noble's web site?
Many public colleges and universities have raised tuition in recent years. Will tuition increases result in more revenue? Under what conditions will revenue (a) rise, (b) fall, or (c) remain the same? Explain this in words, focusing on the increased relationship between the increased revenue from the students who enroll despite the higher tuition and the lost revenue from lower enrollment. If the true price elasticity for public university education was -1.2 (as suggested in a recent article), what would you suggest colleges do to expand revenue? Also, how do you suppose the supply and demand for higher education changes during a recession, if at all?
Define: unit elasticity. What do you think would happen to sales revenues if price fell in a market characterized by unit elasticity?
Sue loves ice cream but cannot stand frozen yogurt deserts. Carole likes both and can hardly tell the difference between the two. Who will have the more elastic demand for yogurt?
What effect would the practice of obtaining prescription drugs from Canada on the Internet have on the elasticity of demand for prescription drugs? Why?
***
For which one of the following goods would you expect the demand to be most elastic?
a. gasoline
b. premium gasoline
c. unleaded gasoline
d. Exxon unleaded gasoline
The demand curve for cigarettes is likely to be
a. horizontal.
b. very flat (but not horizontal).
c. vertical
d. very steep (but not vertical).
John enjoys hockey games more than movies yet in a typical year he goes to 10 movies and 2 hockey games. This suggests that
a. John is clearly not maximizing utility.
b. if John is rational, hockey must be more expensive than movies.
c. if John is rational, movies must be more expensive than hockey.
d. the price of NASCAR races (a hockey substitute) has increased.
e. none of the above
Which one of the following goods would likely have the most elastic demand?
a. Kellogg's corn flakes
b. salt
c. a new Toyota automobile
d. fresh green beans
If a 10 percent rise in airfares leads to a 5 percent increase in total expenditures on air travel, the price elasticity of demand for air travel in this range must be
a. 2.0.
b. elastic.
c. 0.5.
d. inelastic.
If the board of regents of a major state university system plans to raise tuition in order to increase revenues, the regents must believe student demand is
a. elastic.
b. inelastic.
c. of unitary elasticity.
d. perfectly elastic.
Assume that Joe's Bakery sells 130 pies at a price of $9, 110 pies at a price of $10, and 95 pies at a price of $11.
a. Calculate the absolute value of the arc elasticity of demand if Joe raised the price of pies from $9 to $10. Is demand in this range elastic or inelastic?
b. Assume that Joe lowers his price from $11 to $9. What is the arc elasticity of demand?
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