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Price Elasticity in Given Situations

1. Consider the following description of a pricing decision by a book publisher:

A publisher may have issued a monograph several years ago, when both costs and book prices were lower, and priced it at \$14.95. The book is still selling reasonably well and would continue to do so at \$19.95. Why not, then, raise the price? The only danger is miscalculation: By raising the price you may reduce sales to the point where you make less money overall, even while making more per copy.

Assume that the situation described in the last sentence happens. What does this tell us about the price elasticity of demand for that book? Briefly explain.

2. The equilibrium price of water bottles rose sharply last month, but the equilibrium quantity was the same as ever. Three people tried to explain the situation. Which explanations could be right? Explain your logic. (Draw supply and demand graphs to explain.)

MAGGIE: Demand increased, but supply was totally inelastic.
PETER: Supply increased, but so did demand.
JACK: Supply decreased, but demand was totally inelastic.

Solution Preview

1. Price elasticity of demand measures the percentage change in quantity with respect to the percentage change in price. In this case, revenue (Price x Quantity) decreased when the price was raised (and quantity ...