Suppose that you are a staff economist with an economic consulting firm. The operator of a local harbor has commissioned your firm to do a market analysis of the demand for berths (or parking spaces) for boats. You've just completed your study of elasticities and are able to make some recommendations based on the following information. The price elasticity of demand for berths is -0.4 and the cross-price elasticity of demand for berths with respect to prices for boats is -1.2.

5.2. An increase in the price for a berth will ______________ the harbor operator's total revenue.




A. Have no effect on

B. Decrease

C. Increase

Consider the market for pizza in a large city. Identify what happens to the equilibrium price, quantity, and total consumer expenditures after each of the following events listed below, assuming that pizza is a normal good and the price elasticity of demand for pizza is -1.20. Treat each event as independent of the others.



Event 1: The price of labor goes up.

Event 2: The number of pizza restaurants increases.

Event 3: Consumer income rises.

4.1. For Event 1, the equilibrium price is expected to _______, the equilibrium quantity is expected to ______, and total consumer expenditures on pizza are expected to ________.




A. Decrease; increase; increase

B. Increase; decrease; decrease

C. Increase; decrease; increase

D. Decrease; decrease; decrease

3. According to studies by economists Frank Chaloupka and Michael Grossman, the price elasticity of demand for cigarettes for teenagers is -1.3 and for adults is -0.4 ("Price, Tobacco Control Policies and Smoking Among Young Adults," JHE, Vol. 16, no. 3 (June 1997): 359-373) . Which of the following explanations can help explain the difference in the size of the elasticities?




A. None of these explanations is satisfactory.

B. Spending on cigarettes represents a larger portion of the budget of teenagers than of adults.

C. The adult elasticity is likely to be a long-run estimate, whereas the teenage elasticity is likely to be a short-run estimate of the elasticity of demand.

D. Teenagers are more likely than adults to be addicted to smoking; hence, teens have fewer alternatives to smoking.

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