TAILIEUCHUNG - Ten Principles of Economics - Part 12

Ten Principles of Economics - Part 12. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 5 ELASTICITY AND ITS APPLICATION 115 Problems and Applications 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. heating oil during the next six months or heating oil 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 Price Quantity Demanded business travelers Quantity Demanded vacationers 150 2 100 1 000 200 2 000 800 250 1 900 600 300 1 800 400 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 your demand schedule for compact discs is as follows Price Quantity Demanded income 10 000 Quantity Demanded income 12 000 8 40 50 10 32 45 12 24 30 14 16 20 16 8 12 a. Use the midpoint method to calculate your price elasticity of demand as the price of compact discs increases from 8 to 10 if i your income is 10 000 and ii your income is 12 000. b. Calculate your income elasticity of demand as your income increases from 10 000 to 12 000 if i the price is 12 and ii the price is 16. 4. Emily has decided always to spend one-third of her income on clothing. a. What is her income elasticity of clothing demand b. What is her price elasticity of clothing demand c. If Emily s tastes change and she decides to spend only one-fourth of her income on clothing how does her demand curve change What are her income elasticity and price elasticity now 5. The New York Times reported Feb. 17 1996 p. 25 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

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