1.  For each of the following pairs of goods, which good would you expect to have more elastic demand and why?

a.       Required textbooks or mystery novels

b.       Beethoven recordings or classical music recordings in general

c.       Subway rides during the next six months or subway rides during the next five years

d.       Root beer or water

2.  Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston:

a.       As the price of tickets rises from $200 to $250, what is the price elasticity of demand for (i) business travelers and (ii) vacationers? (Use the midpoint method in your calculations.)

b.       Why might vacationers have a different elasticity than business travelers?

3.  Suppose that the price elasticity of demand for heating oil is 0.2 in the short run and 0.7 in the long run.

a.       If the price of heating oil rises from $1.80 to $2.20 per gallon, what happens to the quantity of heating oil demanded in the short run? In the long run? (Use the midpoint method in your calculations.)

b.       Why might this elasticity depend on the time horizon?

4.  A price change causes the quantity demanded of a good to decrease by 30 percent, while the total revenue of that good increases by 15 percent. Is the demand curve elastic or inelastic? Explain.

5.  The equilibrium price of coffee mugs rose sharply last month, but the equilibrium quantity was the same as ever. Three people tried to explain the situation. Which explanations could be right? Explain your logic.

Billy: Demand increased, but supply was totally inelastic.

Marian: Supply increased, but so did demand.

Valerie: Supply decreased, but demand was totally inelastic.

6.  The New York Times reported (Feb. 17, 1996) that subway ridership declined after a fare increase: “There were nearly four million fewer riders in December 1995, the first full month after the price of a token increased 25 cents to $1.50, than in the previous December, a 4.3 percent decline.”

a.       Use these data to estimate the price elasticity of demand for subway rides.

b.       According to your estimate, what happens to the Transit Authority’s revenue when the fare rises?

c.       Why might your estimate of the elasticity be unreliable?

7.  Consider public policy aimed at smoking.

A.      Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes currently costs $2 and the government wants to reduce smoking by 20 percent, by how much should it increase the price.

B.      If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking one year from now or five years from now?

C.      Studies also find that teenagers have a higher price elasticity than do adults. Why might this be true?