elastic. So we would expect the demand by visitors in private, noncommercial vehicles to have the largest price elasticity of demand. By similar reasoning, when the price is low and the quantity demanded is high, the demand is more likely to be inelastic. So we would expect the demand by visitors on foot, bikes, and skis to have the smallest price elasticity of demand. The Relationship between Price Elasticity of Demand and Total 6.3 Revenue Learning Objective: Understand the relationship between the price elasticity of demand and total revenue. Review Questions 3.1 If demand is inelastic, an increase in price will increase revenue because the price will increase proportionally more than the quantity sold will decrease. 3.2 If revenue increases when price falls, then demand must be elastic. Problems and Applications The larger the of a good in an average consumer’s budget, the more elastic demand is. So the 3.3 price elasticity of demand would likely be greater if consumers spend 8 percent of their incomes on gasoline rather than 4 percent. Elasticity = (percentage change in quantity/percentage change in price). The article states that 3.4 consumption decreases by 3 to 5 percent in response to a 10 percent increase in price, so the range of elasticity is: (−3/10) = to (−5/10) = Demand for cigarettes is inelastic because the −0.3 −0.5. elasticity values computed are both less than 1 in absolute value. Because demand is inelastic, if price increases, revenue will also increase. The Port Authority is assuming that an increase in tolls will increase the total amount collected, 3.5 so they must be assuming that demand is inelastic. The Port Authority might have reasoned that the demand for using bridges and tunnels to cross the Hudson River was inelastic because commuting is more of a necessity than a luxury, and for many commuters, there may not be any good substitutes. We can calculate the price elasticity along between points and as follows: 3.6 a. D1 A C Percentage change in quantity demanded = Percentage change in price = So, the price elasticity of demand = Similarly, the price elasticity of demand along between points and can be calculated as D2 A B follows: Percentage change in quantity demanded = Percentage change in price = So, the elasticity of demand =
elastic. So we would expect the demand by visitors in private, noncommercial vehicles to have the largest price elasticity of demand. By similar reasoning, when the price is low and the quantity demanded is high, the demand is more likely to be inelastic. So we would expect the demand by visitors on foot, bikes, and skis to have the smallest price elasticity of demand. 6.3 The Relationship between Price Elasticity of Demand and Total Revenue Learning Objective: Understand the relationship between the price elasticity of demand and total revenue. Review Questions 3.1 If demand is inelastic, an increase in price will increase revenue because the price will increase proportionally more than the quantity sold will decrease. 3.2 If revenue increases when price falls, then demand must be elastic. Problems and Applications 3.3 The larger the of a good in an average consumer’s budget, the more elastic demand is. So the price elasticity of demand would likely be greater if consumers spend 8 percent of their incomes on gasoline rather than 4 percent. 3.4 Elasticity = (percentage change in quantity/percentage change in price). The article states that consumption decreases by 3 to 5 percent in response to a 10 percent increase in price, so the range of elasticity is: (−3/10) = −0.3 to (−5/10) = −0.5. Demand for cigarettes is inelastic because the elasticity values computed are both less than 1 in absolute value. Because demand is inelastic, if price increases, revenue will also increase. 3.5 The Port Authority is assuming that an increase in tolls will increase the total amount collected, so they must be assuming that demand is inelastic. The Port Authority might have reasoned that the demand for using bridges and tunnels to cross the Hudson River was inelastic because commuting is more of a necessity than a luxury, and for many commuters, there may not be any good substitutes. 3.6 a. We can calculate the price elasticity along D1 between points A and C as follows: Percentage change in quantity demanded = Percentage change in price = So, the price elasticity of demand = Similarly, the price elasticity of demand along D2 between points A and B can be calculated as follows: Percentage change in quantity demanded = Percentage change in price = So, the elasticity of demand =
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