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Chapter 5: Q.10 (page 130)
What is the formula for calculating elasticity?
Elasticity is computed by dividing the % variation in quantity over the % variation in price.
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Suppose you are in charge of sales at a pharmaceutical company, and your firm has a new drug that causes bald men to grow hair. Assume that the company wants to earn as much revenue as possible from this drug. If the elasticity of demand for your company鈥檚 product at the current price is 1.4, would you advise the company to raise the price, lower the price, or to keep the price the same? What if the elasticity were 0.6? What if it were 1? Explain your answer.
Suppose 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?
When someone鈥檚 kidneys fail, the person needs to have medical treatment with a dialysis machine (unless or until they receive a kidney transplant) or they will die. Sketch a supply and demand diagram, paying attention to the appropriate elasticities, to illustrate that the supply of such dialysis machines will primarily determine the price.
If the elasticity is greater than one, is demand elastic or inelastic? If the elasticity equals zero, is demand perfectly elastic or perfectly inelastic?
If demand is inelastic, will shifts in supply have a larger effect on equilibrium price or on quantity?
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