Elasticity of Demand
- Jane has been working all day, missing both her breakfast and lunch. Finally able to leave work, after being required to work a couple of overtime hours, she is starving. Jane has $20 in her pocket, so she stops at a local fast food restaurant and orders a grilled chicken sandwich and an order of fries. As she sits down to eat them, a university student approaches her and tells her that she is doing a research project for her microeconomics course and would like to ask Jane a few quick questions. Jane agrees, and the student asks what “score” (marginal utility) from 1 to 100 would she give as her satisfaction level with the first sandwich and the first fries? After eating that order, Jane is still hungry and orders a second chicken sandwich and another order of fries. Again, the student asks Jane to give her new scores. Since Jane has not eaten all day, she is hungry enough to order a third round of food and again gives “scores” to the inquisitive student.
Below is the university student’s completed experiment tally sheet of Jane’s marginal utility “scores” and the calculation of her marginal utility per dollar, given that each sandwich costs $4.00, and each order of fries costs $2.00. Her budget is $20.
The student filled in the shaded cells based on Jane’s responses, then computed the values in the remaining cells. Using this information, answer the following questions.
Student’s completed experiment tally sheet. Available budget is $20.
| Order of | mu (score) from 1 to 100 | Price of each
$4.00 |
Money spent on |
Order of | mu (score) from 1 to 100 | Price of each
$2.00 |
Money spent on |
Total Money Spent |
Total Budget Remaining |
| Chicken Sandwich | mu | mu/$ | Chicken Sandwich | Fries | mu | mu/$ | Fries | ||
| 1st | 100 | 25 | $4.00 | 1st | 50 | 25 | $2.00 | $6.00 | $14.00 |
| 2nd | 72 | 18 | $4.00 | 2nd | 20 | 10 | $2.00 | $12.00 | $8.00 |
| 3rd | 60 | 15 | $4.00 | 3rd | 6 | 3 | $2.00 | $18.00 | $2.00 |
| 4th | 4th | ||||||||
| Utility | 232 | Utility | 76 |
Total spent on chicken sandwiches: $12
Total spent on fries: $6.00
Total money spent: $18.00
Total budget remaining: $2.00
Marginal utility per dollar for chicken sandwiches of the last item purchased: 15 mu/$
Marginal utility per dollar for fries of the last item purchased: 3 mu/$
Total utility for both: 308
a. Is Jane maximizing her utility? Explain your reasoning and show any calculations.
b. If Jane is not maximizing her utility, remembering the law of diminishing marginal utility, would she be better off to buy one less chicken sandwich and one more order of fries? You will need to enter a number for marginal utility, based upon the law of diminishing marginal utility, for an additional order of fries. Be sure to explain your reasoning and show your calculations.
c. If Jane is not maximizing her utility with the original purchase combination, remembering the law of diminishing marginal utility, would she be better off buying just one more order of fries? You will need to enter a number for marginal utility, based upon the law of diminishing marginal utility, for an additional order of fries. Be sure to explain your reasoning and show your calculations.
d. If Jane is not maximizing her utility with the original purchase, remembering the law of diminishing marginal utility, would she be better off buying one less order of fries and one more chicken sandwich? You will need to enter a number for marginal utility, based upon the law of diminishing marginal utility, for an additional chicken sandwich. Be sure to explain your reasoning and show your calculations.
- Remembering the learning activity in Unit 3, the Gondwanaland chairman of production reported that the gosum berry growers could meet a demand of 700 barrels of gosum berries per month at a price of $70 per barrel.
Then the growers were plagued with a gosum berry bug infestation that reduced output, causing production to fall to only 600 barrels. This resulted in a price increase to $84 per barrel. The following table shows the chairman’s report:
| Month | Monthly barrels of gosum berries demanded | Price per barrel |
| June | 700 | $70 |
| July | 600 | $84 |
a. Using the midpoint method, show your work and calculate the price elasticity of demand for Gondwanaland gosum berries. Explain what this price elasticity of demand means?
b. Complete the table below by calculating what the monthly total revenue is for June, what the monthly total revenue is for July, and the change in total monthly revenue for these two months. How have these numbers changed?
| Month | Monthly barrels of gosum berries demanded | Price per barrel | Monthly total revenue
(Enter Totals Below) |
| June | 700 | $70 | (Enter monthly total revenue here) |
| July | 600 | $84 | (Enter monthly total revenue here) |
| Change in monthly total revenue:
(Enter change in monthly total revenue here.) |
c. Using your answer to part a. above, how could you have predicted the change in monthly total revenue that you found in part b. above?
- The Gondwanaland chairman of production reported that the new Altair chariots (most modern, horse-drawn family chariot) had a PRICE elasticity of 3 and an INCOME elasticity of 2. The supply of these Altair chariots is elastic. Evaluate the following statements and identify whether each statement is true or false and explain how you used the appropriate elasticity to help you determine your answer a. If there is a 20% increase in the price of the Altair chariot, Gondwanaland can predict the quantity demanded to fall by an astounding 60%.
b. An increase in Gondwanaland consumers’ incomes will cause prices to rise, but the total quantity demanded will also increase.
