4.2. Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston:
Price 150 200 250 300
Quantity Demanded (business travelers) 2100 2000 1900 1800
Quantity Demanded (vacationers) 1000 800 600 400
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 formula in your calculations.)
b) Why might vacationers have a different elasticity from business travelers?
a.(i) Price elasticity of demand for business travelers
= (Q2-Q1)/[(Q2+Q1)/2]/(P2-P1)/[(P2+P1)/2] ...view middle of the document...
So that’s why the price elasticity of demand for them is different.
4.11. 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 1 year from now or 5 years from now?
c. Studies also find that teenagers have a higher price elasticity than do adults. Why might this be true?
Solution: a. we use mid-point method to solve this.
E= ΔQ% / ΔP%
ΔQ% = -20%
E=-0.4 = -20% / ΔP%
ΔP% = -20% / -0.4 = +50%
P=1.33 so the government should increase the price by $1.33
b. there will be a larger effect after 5 years. People need time to quit smoking. The effect will be more obvious after a long time.
c. Because the addiction to cigarettes are more serious for adults, and adults have more income to afford the smoking. So adults have a lower elasticity than do teenagers.
4.14. Several years ago, flooding along the Missouri and Mississippi rivers destroyed thousands of acres wheat.
a. Farmers whose crops were destroyed by the floods were much worse off, but farmers whose crops were not destroyed benefited from the floods. Why?
b. What information would you need about the market for wheat to assess whether farmers as a group were hurt or helped by the floods?
Solution: a. Because of the flood, the quantity of crops decreases, which shift the supply line of the crop inward. So that the EP rises. So farmers whose crops were not destroyed benefited.
b. we need to know price elasticity of demand for wheat. If it is inelastic, all of the farmers will benefit from this.