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1. What effect, if any, does each of the following events have on the price elasticity of demand for corporate-owned jets?
a) A decline in corporate earnings causes firms to cut their travel budgets, which in turn causes expenditures on corporate jet travel to become a larger fraction of total spending on corporate travel.
b) A new, much more fuel-efficient corporate jet is introduced.
c) Further deregulation of the commercial airlines’ industry substantially increases the variety of departure times and destinations offered by commercial airlines.
d) The cost of manufacturing corporate jets rises.
2. Assume that the demand for cosmetic or plastic surgery is price inelastic. Are the following statements true or false? Explain.
a) When the price of plastic surgery increases, the number of operations decreases.
b) The percentage change in the price of plastic surgery is less than the percentage change in quantity demanded.
c) The marginal revenue of another operation is negative.
d) Changes in the price of plastic surgery do not affect the number of operations.
e) Quantity demanded is not very responsive to changes in price.
f) If more plastic surgery is performed, expenditures on plastic surgery will decrease.
3. Fill in the blanks and answer the question:
a. The price elasticity of demand for a firm’s product is equal to –1.75 over the range of prices being considered by the firm’s manager. If the manager increases the price of the product by 9 percent, the manager predicts the quantity demanded will ________ (increase, decrease) by ________ percent.
b. The price elasticity of demand for an industry’s demand curve is equal to –1.75 for the range of prices over which supply decreases. If total industry output is expected to decrease by 14 percent as a result of the supply decrease, managers in this industry should expect the market price of the good to ________ (increase, decrease) by ________percent.
4. Use the linear demand curve shown below to answer the following questions.
a. The point elasticity of demand at a price of $500 is _________.
b. The point elasticity of demand at a price of $175 is _________.
c. Demand is unitary elastic at a price of $_________.
d. As price falls, |E| __________________ (gets larger, gets smaller, stays the same) for a linear demand curve.