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LOS b: Calculate elasticities on a straight-line demand curve, differentiate among elastic, inelastic, and unit elastic demand, and describe the relation between price elasticity of demand and total revenue.

Suppose that a given MP3 player now costs $300, and sales are now 5,000 units per month. The manufacturer has determined that if the price is reduced by $25, the demand will increase by 250 units per month. Calculate and describe the elasticity of demand.

Elasticity is the percentage change in quantity, divided by the percentage change in price. The percentage change in quantity is 250 / ((5,000 + 5,250)/2) = 0.049 or 4.9%. The percentage change in price is -25 / ((300 + 275)/2) = -0.087 or -8.7%. 4.9 / -8.7 = -0.56. Elasticity with an absolute value of less than 1 is considered inelastic.

If the demand curve for a given product is a straight line, this indicates that:

A)	demand is unit elastic.

B)	elasticity is constant along the demand curve.

C)	demand is more elastic at higher prices.

Elasticities will be greater (in absolute value) at higher prices.

If the price of World Cup Soccer tickets increases from $40 a ticket to $50 a ticket and the quantity demanded of tickets stays the same, demand for the tickets is:

A)	perfectly inelastic.

B)	elastic, but not perfectly elastic.

C)	inelastic, but not perfectly inelastic.

Since the quantiy of tickets demanded stayed the same after the price changed, the demand curve would have to be vertical which is a perfectly inelastic demand curve.

A)	lead to an increase in total expenditures for the good.

B)	fail to reduce the quantity demanded for the good.

C)	have no impact on the demand for the good.

When demand is relatively inelastic, consumers do not reduce their quantity demanded very much when the price increases. That is, a given percentage increase in price results in a smaller percentage reduction in quantity demanded. Thus, total expenditures on the good increase. "Fail to reduce the quantity demanded for the good" is inaccurate because that would only be true if demand was perfectly inelastic.

A)	no change in the quantity demanded.

B)	a larger increase in quantity demanded.

C)	a larger decrease in the quantity demanded.

If a good has elastic demand, a small price decrease will cause a larger increase in the quantity demanded.

If quantity demanded increases 15% when the price drops 1%, demand for this good:

A)	elastic, but not perfectly elastic.

B)	perfectly elastic.

C)	inelastic, but not perfectly inelastic.

Whenever quantity demanded for a good changes by a greater percentage than price, the price elasticity of demand will be greater than 1.0 and demand for the product is considered to be elastic.

For a linear demand curve, at the price where elasticity is -2.0, reducing prices will:

A)	increase total revenue and we are not at the point of maximum total revenue.

B)	increase total revenue and we are at the point of maximum total revenue.

C)	decrease total revenue and we are not at the point of maximum total revenue.

If the price elasticity of demand is -2.0, this indicates that the percentage change in quantity demanded is twice the percentage change in price. Thus, a decrease in price will be more than offset by the increase in quantity, and total revenue will increase. We are not at the point of maximum total revenue which is where elasticity is -1.0—the point of unit elastic demand.