Elasticity: how much buyers respond to a price change
Grade 12 Social Studies Worksheet - Challenge Me
Circle the best answer.
Read this first
One demand schedule, read two ways (example figures, made up for practice)
Price Quantity demanded $10 100 $20 60 A percent change from the starting value divides the change by where you start. The midpoint method divides the change by the average of the two values.
Ari wonders what the revenue on the card says, by either method, about demand between $10 and $20.
- Two prices cannot show anything, since the revenue test needs three prices to be compared.
- Revenue depends on the method: the start-value method gives a rise and the midpoint a fall.
- Revenue falls from $1,200 to $1,000 as the price goes down, so demand is elastic over that stretch.
- Revenue rises from $1,000 to $1,200 as the price goes up, so demand is inelastic over that stretch.
Use this
A $2 tax in three markets (example figures, made up for practice). Columns: Market, Buyers' price change, Sellers' price change. A, +$1.60, -$0.40; B, +$1.00, -$1.00; C, +$0.20, -$1.80. A tax of $2 per unit was added in each market and collected from the sellers. A plus means buyers pay more; a minus means sellers keep less.
Legislators want sellers to bear most of the tax. Milo asks which market meets that aim and what it shows.
- Market B: sellers bear half of the tax, and half is a main share, so the aim is met there.
- Market A: buyers pay $1.60 more, so the sellers are the ones who carry the larger share of the tax.
- Market C: sellers keep $1.80 less, so supply is less elastic than demand in that market.
- Markets B and C: sellers keep at least $1 less in each, so both markets meet the aim.
A senator proposes collecting the Market C tax from buyers at the register instead. What does Pia expect?
- Buyers would bear the full $2, because they are now the ones who hand over the tax at the register.
- Sellers would bear nothing, because they would no longer send the tax in to the government themselves.
- Little change: one rule gave three splits in A, B and C, so the collector does not set the split.
- The split would flip to match Market A, because a change of collector reverses the burden.
A $1 tax on two goods (example figures, made up for practice)
Good Elasticity of demand Units sold before Units sold after the tax Good Z 0.2 1,000 960 Good W 2.5 1,000 500 Both goods sold for $5 before the tax. Buyers pay the whole $1, so the price rises to $6, a rise of 20%. Tax revenue is $1 times the units sold after the tax.
The city's first aim is tax revenue. Which tax does Esme pick, and what does that choice leave undone?
- Good Z: it collects $960, but use falls only 4%, so it does little to reduce use.
- Good Z: it collects $960, and it also cuts use by 40%, so it reaches both of the city's aims.
- Good W: it cuts use by 50%, and it also brings in the most revenue of the two goods.
- Good W: it collects $500, and the bigger fall in sales makes it the better choice for revenue.
A columnist says the Good Z tax falls hardest on people who cannot avoid it. Bo tests the claim. What is the verdict?
- Fully supported: the low elasticity shows that Good Z is bought mostly by the poorest households.
- Partly supported: buyers cut use just 4%, so few avoid the tax; who they are is not on the card.
- Unsupported: the price rose 20%, which shows most buyers can pay the new price with no trouble.
- Unsupported: a fall of 4% shows that buyers can easily avoid the tax on Good Z when they wish.
Card
An analyst's estimate (made up for practice). An airline raised its fare on one route 12% and passengers fell 3%, so the analyst reports an elasticity of 0.25. In the same month a rival airline canceled many flights on that route.
How should Ren judge the analyst's elasticity of 0.25?
- As unusable: one route in one month cannot give any estimate of elasticity, so it should be dropped.
- As correct: a rival's flights are a separate matter and cannot change who flies on this route.
- As too low: the rival's cancellations raised demand, hiding a larger response to the fare.
- As too high: the cancellations would have cut demand, so the true response to the fare is smaller.
Card
Wheat (made up for practice). One farm faces a horizontal demand curve at the market price: if it asks more, buyers buy from other farms. The market for wheat as a whole has a steep demand curve.
Which statement reconciles the two curves for Kira?
- The two curves contradict each other, so one of them must have been drawn wrongly on the card.
- Farms sell less wheat than the market does, and smaller sellers face flatter curves than larger ones.
- One farm's wheat has perfect substitutes in other farms; the whole market's substitutes are weaker.
- The farm's wheat is a necessity and the market's wheat is a luxury, so the farm's curve is flatter.
Revenue per week is the price times the units sold. A manager raised the price to $10. How should Noah describe what the table shows?
- Revenue rose to $9,000 in week 1 but fell to $7,000 by month 6, as demand turned elastic.
- Revenue rose in week 1 and kept rising, since the $10 price brings in $2 more on each unit sold.
- Revenue fell in week 1 and recovered by month 6, as buyers got used to the higher price.
- Revenue rose throughout, because a loss of a few hundred units a week is small beside a $2 rise.
Percent change uses the midpoint method: the change divided by the average of the two values. Revenue is $3,000 at every price on the card. What does Tala conclude about demand across this range?
- It is elastic, since ticket sales fall by 150 and then 100 for each $1 rise, which are large falls.
- It is perfectly elastic, because the club keeps $3,000 whatever price it charges for a ticket.
- It is unit elastic: at each step the percent fall in tickets matches the percent rise in price.
- It is perfectly inelastic, because revenue does not change when the price changes.
Card
a parking plan (made up for practice). A city measured the elasticity of demand for downtown parking at 0.4 in the first month after last year's fee rise. The city now wants 20% fewer cars parked downtown.
Luz judges a plan to reach the goal with a fee rise. Which plan and caution fit best?
- A fee rise of about 50%, and the 20% drop is certain, because a measured number is exact.
- A fee rise of about 50%, since 20% ÷ 0.4 = 50%; with one month of data the drop may grow.
- A fee rise of about 8%, since 0.4 times 20% gives the percent rise in the fee that is needed.
- A fee rise of about 20%, since the quantity parked falls by the same percent as the fee rises.