Chapter 5: Q. 16 (page 130)
If demand is inelastic, will shifts in supply have a larger effect on equilibrium price or on quantity?
The larger effect will be on equilibrium price.
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Would you expect supply to play a more significant
role in determining the price of a basic necessity like
food or a luxury like perfume? Explain. Hint: Think
about how the price elasticity of demand will differ
between necessities and luxuries.
A city has built a bridge over a river and it decides
to charge a toll to everyone who crosses. For one year,
the city charges a variety of different tolls and records
information on how many drivers cross the bridge. The
city thus gathers information about elasticity of demand.
If the city wishes to raise as much revenue as possible
from the tolls, where will the city decide to charge a toll:
in the inelastic portion of the demand curve, the elastic
portion of the demand curve, or the unit elastic portion?
Explain.
Economists define normal goods as having a
positive income elasticity. We can divide normal goods
into two types: Those whose income elasticity is less
than one and those whose income elasticity is greater
than one. Think about products that would fall into each
category. Can you come up with a name for each
category?
What is the price elasticity of supply? Can you explain it in your own words?
The supply of paintings by Leonardo Da Vinci, who painted the Mona Lisa and The Last Supper and died in 1519, is highly inelastic. Sketch a supply and demand diagram, paying attention to the appropriate elasticities, to illustrate that demand for these paintings will determine the price.
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