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Short-Run and Long-Run Price Elasticity

1. Estimate Short-Run and Long Run Price Elasticity of Demand for Selected Commodities, United States

Commodity Short-Run Long Run

Clothing 0.90 2.90
Household natural gas 1.40 2.10
Tobacco Products 0.46 1.89
Electricity (household) 0.13 1.89
Wine 0.88 1.17
Jewelry and watches 0.41 0.67
Gasoline 0.20 0.60

If the price increases by 10 percent by how much does the quantity of household (a) natural gas and (b) electricity change in the short run and the long run? (Hint: use the price-elasticity values).

2. Agricultural commodities are known to have a price-inelastic demand and to be necessities. How can this information allow us to explain why the income of farmers falls (a) after a good harvest? (b) In relation to the incomes in other sectors of the economy?

3. Why are tastes converging around the world? (b) What is the importance of this for U.S firms?

4. The total operating revenues of a public transportation authority are $100 million while its total operating costs are $120 million. The price of a ride is $1, and the price elasticity of demand for public transportation has been estimated to be -0.4. (a) By law, the public transportation authority adopt? Why? (b) What price per ride must the public transportation authority charge to eliminate the deficit if it cannot reduce costs?

5. A researcher estimated that the price elasticity of demand for automobiles in the United States is -1.2, while the income elasticity of demand is 3.0. Next year, U.S. auto makers intent to increase the average price of automobiles by 5 percent, and they expect consumers' disposable income to rise by 3 percent.
(a) if sales of domestically produced automobiles do expect U.S auto makers to sell next year? (b) By how much should domestic auto makers increase sales by 5 percent next year?

Solution Summary

This solution provide detailed explanations and step-by-step equations for various questions regarding price elasticity.

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