question # 2 and 14 450EXERCISESChapter 20 Elasticity: Demand and SupplyUse the following hypothetical demand schedule for moviesto do exercises 1-4.Quantity Demanded100806040vigu 2010Price$5$ 10$15$ 20$25$30Elasticity1. a. Determine the price elasticity of demand at eachquantity demanded using the arc or midpointformula: Percentage change in quantitydemanded = (Q₂ Q₁)/Q, divided by percentagechange in price = (P₂ - P₁) /P₁.b. Redo exercise la using price changes of $10 ratherthan $5.2. Plot the price and quantity data given in the demandschedule of exercise 1. Put price on the vertical axis andquantity on the horizontal axis. Indicate the price elas-ticity value at each quantity demanded. Explain whythe elasticity value gets smaller as you move down thedemand curve.3. What would a 10 percent increase in the price of movietickets mean for the quantity demanded of a movie the-ater if the price elasticity of demand was 0.1, 0.5, 1.0,and 5.0?a. Bread and butterb. Bread and potatoesc. Socks and shoes4. Using the demand curve plotted in exercise 1, illustratewhat would occur if the income elasticity of demandwas 0.05 and income rose by 10 percent. If the incomeelasticity of demand was 3.0 and income rose by 10 per-cent, what would occur?5. Pick a good whose demand is price elastic. List five sub-stitutes and five complements. Which is easier to comeup with, the list of substitutes or the list of comple-ments? Explain.6. Are the following pairs of goods substitutes or comple-ments? Indicate whether their cross-price elasticities arenegative or positive.d. Tennis rackets and golf clubse. Bicycles and automobilesf. Foreign investments and domestic investments8. Cars made in Japan and cars made in the UnitedStates7. Explain how consumers will react to a job loss. Whatwill be the first goods they will do without? What is theincome elasticity of demand for those goods?8. Calculate the income elasticity of demand from the fol-lowing data (use the arc or average).Income$15,000$20,000a. Explain why the value is a positive number.b. Explain what would happen to a demand curve asincome changes if the income elasticity was 2.0.Compare that outcome to the situation that wouldoccur if the income elasticity of demand was 0.2.9. a. Use the following figure to show what occurs toprice and quantity when supply decreases anddemand is perfectly elastic.b. Use the figure to show what occurs to price andquantity when supply increases and demand is per-fectly inelastic.Perfectly InelasticDemandABD₂сQuantity Demanded20,00030,000S₁S₂Perfectly ElasticDemand10. Explain why a 40 percent across-the-board tax increaseon businesses might harm consumers.11. The price elasticity of the demand for gasoline is -0.02.The price elasticity of demand for gasoline at Joe's 66station is -1.2. Explain what might account for the dif-ferent elasticities.12. The cross-price elasticity of the demand for cell phonesand DVDs is 1.2. Explain. The cross-price elasticity ofthe demand for the iPod and DVDs is -1.4. Explain.13. Using the following equation for the demand for a goodor service, calculate the price elasticity of demand(using the point form), cross-price elasticity with goodx, and income elasticity.Q=8-2P+0.101 + PQis quantity demanded, P is the product price, Pxis the price of a related good, and I is income. Assumethat P= $10, I = 100, and P, = 20.14. Plot the following price and quantity. Then calculateprice elasticity of demand at P = 8, P = 4, and P = 2.PQ1087654321desdChapter 20 Elasticity: Demand and Supply0468101214161845115. The FICA tax is the Social Security tax plus Medicare.It is levied on both the employer and employee. Until2011, each paid an equal 7.65 percent of the employee'ssalary. In 2011 the share levied on the employee wasreduced. Illustrate who actually pays the tax when priceelasticity of demand is elastic and price elasticity of sup-ply is inelastic.16. Who would pay a tax imposed on the supplier whenthe price elasticity of supply is inelastic and the priceelasticity of demand is elastic?

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