MCD2020 Microeconomics
Tutorial 4
Elasticity and its applications
Chapter 5
Tutorial this week will focus on the learning objectives of Topic 3, which are:
1. Define price elasticity of demand and understand how to calculate it
2. Explain the determinants of price elasticity of demand
3. Understand the relationship between price elasticity of demand and total
revenue
4. Define elasticity of supply, and understand its main determinants and how it is
calculated
5. Define cross-price elasticity of demand and income elasticity of demand,
6. understand their determinants and how they are calculated
7. Use price elasticity and income elasticity to analyse economic issues
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Q.1 Calculating elasticity – Mid-point method
The table below shows the demand for toys that Jack’s company is
producing. Calculate missing values.
Price Quantity Total % % Elasticity Descriptio
$ Revenue change in Change in n (elastic
$ Price Quantity or
inelastic)
14 0
12 1
10 2
8 3
6 4
4 5
2 6
0 7
Circle the correct word to complete the sentence on price elasticity of demand:
a) In the higher price range of the demand curve, the demand curve is less /more
price elastic than the lower price range. In the lower price range of the demand
curve, the demand curve is less / more price elastic than the higher price range.
b) The price elasticity of demand will change / remain constant along the demand
curve.
c) The slope of the demand curve will change / remain constant along the linear
demand curve.
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Q.2 Elasticity – Calculation and interpretation
Barney owns a bagel business in Melbourne City, and he wants to increase his total
revenue. He knows that when bagels are $1, he sells 250 an hour, and when he
lowers the price to $0.75, he sells 275 an hour.
a) Calculate the price elasticity of demand for Barney’s bagels. Show your work
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b) Using the price elasticity of demand you calculated for Barney’s bagels, explain
whether he should raise or lower the price to generate more revenue.
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c) A bakery moves in across the street from Barney’s shop. Explain what is likely to
happen to the price elasticity of demand for Barney’s bagels.
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Q.3 Elasticity and the slope of the demand curve
The demand for Jean’s pastry rolls can be represented by the equation:
Qd = 10 – 2P
a) Draw a sketch graph of the demand equation, and label the x and y intercepts.
b) If the price = $4.50, what is quantity demanded? Label on the graph.
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If the price = $4.00, what is the quantity demanded? Label on the graph.
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c) What is the price elasticity of demand between these two points along the demand
curve? Mid-point method?
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d) Repeat the calculations in parts b) and (c) for prices = $1.00 and $0.50. Label the
quantity demanded at each price on the graph.
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e) What is the price elasticity of demand between these two points along the demand
curve? Show your workings
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f) Interpret your elasticity coefficients in parts c) and e) as elastic or inelastic and
explain the difference
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You would note that while the slope of the linear demand cure remains the
same throughout, the elasticity changes as we move up and down the linear
demand cure
Q.4 Elasticity – Different responses to price change and different
shapes of the demand curve
Brenda’s loves cats and love to give her cats regular treats. She goes to the pet
food shop once every week to buy pet treats. Draw sketch graphs to illustrate
Brenda’s demand for food pet food in the following different situations.
a) Every week Brenda goes to the pet food shop, and buys her Kitty Treats, at the
current price of $2. If the price of Kitty Treats has increased even slightly, she
won’t buy any in that week
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b) Every time Brenda goes to the pet food shop she buys 2 kilos of Kitty Treats
irrespective of the price
c) If Brenda finds that price of Kitty Treats has risen by 5%, she decreases her
quantity demanded by 10%.
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Q.5 Elasticity –Determinants
Red Bull is one of the popular energy drinks in Australia.
For each of the following situations, ceteris paribus, explain whether
the demand for Red Bull would become more elastic or less elastic
and why.
a) Another energy drink company “V” introduces a range of new of
sports drinks to the market.
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b) A consumer spending studies show that buyers spend only a small proportion of
their budgets on Red Bull
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Q.6 Elasticity applications
The air route between Sydney and Melbourne is one of the world’s busiest routes,
and is equally popular among visitors to the country, as well as domestic
travellers. Suppose that business travellers and holiday travellers have the
following daily demand for airline tickets from Sydney to Melbourne provided by
Qantas:
Price Quantity demanded Quantity demanded
($) Business travellers Holiday- makers
(income =$12000) (income=$10000)
150 2100 1000
200 2000 800
250 1900 600
300 1800 400
a) If Qantas goal is to maximise total revenue, what price should they charge
business travellers? What about holiday travellers? Comment.
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b) As the price of a ticket rises from $200 to $250, what is the price elasticity of
demand (mid-point formula) for business travellers and holiday-makers?
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c) Why might holiday makers have a different elasticity than business travellers?
Explain using determinants of elasticity
d) Which demand curve in the diagram below better represents the demand curve
for business travellers? Explain why.
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Q.6 Cross price elasticity
Use the accompanying graph to answer the following questions.
a) A study shows the many health benefits of eating eggs for breakfast. Demand
for eggs rises by 6 units at each price. Draw a graph in the space provided below to
illustrate the shift of the demand curve
b) What is the percentage change in equilibrium price for eggs?
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c) If the quantity demanded for toast decreased by one-half of the percentage change for
eggs that you found in part b, what is the cross-price elasticity of demand for eggs and
toast?
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d) Are eggs and toast related to each other? Explain
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Independent learning: Read chapter 5 of your textbook and answer
the following question in your own time
When Anna was studying at university, she had a monthly income of $900 and bought four
items of second-hand clothing. Now she is working full-time with a monthly income of $3000.
She now buys 20 items of second-hand clothing a month.
i. Compute Anna’s income elasticity of demand using the midpoint method.
ii. What type of goods are second-hand clothes for Anna? Explain
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