Elasticity examples

1. Online: Tax incidence (Java) <http://faculty.oxy.edu/whitney/java/stepview/ec250/d023c_TaxIncidence.html> Note: When you see the 'Draw' button, click it and then click the 'Stop' button to see the end result (because the 'Draw' function no longer works as intended).

2. Elastic v. Inelastic Demand

    (1) On Wednesday, Cineplex Odeon raised ticket prices from $6 to $6.50 in Los Angeles just as the three summer blockbusters -- "Rambo III," "Crocodile Dundee II" and "Willow" began stiff competition for ticket buyers. However, while Tuesday's pre-hike box-office receipts...totaled $5,010 for both screens showing "Willow," on Wednesday, the first day of the increases, receipts dropped to $3,294. ("Price hike: coming soon to a theater near you?" Los Angeles Times, May 28, 1988)

    (2) New York city's taxi fleets have found the fare increase granted last fall inadequate and are preparing to seek a new increase, according to Taxi News, the industry's paper. The 17.5 percent fare increase that went into effect in November has produced only about a 10 to 11 percent increase in gross revenues rather than the 17.5 percent that the Taxi and Limousine Commission had predicted, the paper said. ("Despite Fare Rise, Taxi Fleets Report New Losses Again." New York Times, 1975)

    How much does the amount of smoking respond to changes in the price of cigarettes? Economists have attempted to answer this question by studying what happens when the tax on cigarettes changes. (3) They have found that a 10 percent increase in the price causes a 4 percent reduction in the quantity demanded. (4) Teenagers are found to be especially sensitive to the price of cigarettes: A 10 percent increase in the price causes a 12 percent drop in teenage smoking. (N. Gregory Mankiw. Principles of Microeconomics, 2ed., 2001, p.73)

    Question: Which, if any, of the four examples above illustrate inelastic demand?

3. Elasticity and spending

Two drivers--Tom and Jerry--each drive up to a gas station. Without paying any attention to the price of gas, each one places an order. Tom says, "I'd like 10 gallons of gas." Jerry says, "I'd like $10 of gas." What is the value of Tom's elasticity of demand for gas? What is the value of Jerry's elasticity of demand for gas?

4. U.S. sugar quotas

    Use the letters and numerical values from the diagram to the right to help you complete the information in the table below.
    Sus = the supply curve of domestic producers
    Srow = the free-trade supply curve by the "rest of the world" (ROW), showing that we can buy as much sugar as we please at the going world price
    Sus+q = the supply of domestic producers plus the quantity allowed in under the quota (q).
 

Comparing the quota to free trade, indicate the areas in the diagram corresponding to:
    the change in U.S. consumer surplus: _________
    the change in U.S. producer surplus:  _________

Suppose that between the free-trade and quota price the arc own-price elasticity of demand for sugar is 0.35. Use this information to calculate actual numerical answers to each of the following:
    quantity of sugar consumed under free trade (C in the diagram): _________ billion pounds
    (Hint: use the arc-elasticity formula and rearrange terms to solve for C.)
    change in consumer surplus caused by the quota: $_________ billion dollars