EXERCISE 6: Elasticities
J. Wahl – Micro Principles
1. In the article “As the Worm Turns. . . ,” Mr. Koutinas says, “You have to understand we
don’t like buying high and then selling high. For us, it’s better that the price be lower so
we can sell more worms.” Please explain, using the concept of elasticity, why Mr.
Koutinas’s remark might make economic sense.
2. Calculate own-price elasticity for a demand curve that passes through the points (q,p) =
(100, 10) and (99, 10.1). Do the same for a demand curve that passes through (100, 10)
and (80, 10.1). Note that point elasticities can be calculated 3 different ways – using the
original point as a base, using the final point as the base, or using an average of the two
as a base. Your book uses the last method; I sometimes use the original point for reasons
that will become clear in the next problem. (Calculus usually makes the choice of base a
moot point.) For this problem, try it all three ways for comparative purposes. (If you’d
like, figure out elasticities using calculus)
3. Confirm for yourself that a straight-line demand curve with q-intercept 10 and p-intercept
10 has elasticity equal to negative infinity at the price axis, zero at the quantity axis, and -
1 at the midpoint. Also confirm for yourself that a firm facing such a demand curve
would make maximum REVENUE (not necessarily profit) if it could set price at 5.
4. JUST FOR FUN (we will talk about in class if you can’t figure this out on your own.)
Suppose the general form of the demand curve is qx = Y/2px. Using original prices and
incomes as the base, can you calculate income, own-price, and cross-price elasticities?
(Calculus makes this easy, but it can be done without calc.) Do the same for the demand
curve qx = (Y/px) - 2. (Use calc to compute elasticities, if you’d like.) PLEASE NOTE:
often, economists refer to quantity of x as “x” rather than as “qx.” If I do so (and I will)
and you would like clarification, please stop me so I can refer to this note again!