GE273.U4.

ProblemSet1-Instructor
ANSWERS TO UNIT 4 PROBLEM SET
Problem 4.4, page 126: Award up to 100 points.
a) According to the graph, the tax on cigarettes is equal to $1.25 per pack.
b) According to the graph, producers receive $3.25 per pack after paying the tax.
c) The government collects $22.5 billion in tax revenue.

Problem 2.5, page 196: Award up to 100 points.

a) The demand for cheese and toothpaste is inelastic because they have fewer substitutes than
soft drinks and canned soup.
b) Use the elasticities to predict the change in the quantity demanded for each product following
a 10 percent price increase:
Soft drinks A 10% price increase will reduce quantity demanded 31.8%.
Canned soup A 10% price increase will reduce quantity demanded 16.2%.
Cheese A 10% price increase will reduce quantity demanded 7.2%.
Toothpaste A 10% price increase will reduce quantity demanded 4.5%.

Problem 3.11, page 198: Award up to 100 points.

a) Using the midpoint formula, calculate the price elasticity of demand for each bridge.
For the Route 22 Bridge:
Percentage change in quantity demanded =
Percentage change in price =

433,691 519,337
100 17.9%
476,514

$1.00 $0.50
100 66.7%
$0.75

Therefore, the price elasticity of demand =

17.9%
0.27 (inelastic demand)
66.7%

For the Interstate 78 Bridge:

Percentage change in quantity demanded =

656,257 728,022
100 10.4%
692,139.5

Percentage change in price = 66.7%.

Therefore, the price elasticity of demand =

10.4%
0.16 (inelastic demand)
66.7%

b) How much total revenue did the commission collect from these bridges in November?

GE273.U4.ProblemSet1-Instructor
Total revenue in November was (519,337 + 728,022) $0.50 = $623,679.50.
Revenue from the Route 22 bridge = $259,668.50
Revenue from the Interstate 78 bridge = $364,011
c) How much total revenue did the commission collect from these bridges in December?
In December, total revenue increased to (433,691 + 656,257) $1 = $1,089,948.
Revenue from the Route 22 bridge = $433,691
Revenue from the Interstate 78 bridge = $656,237
The analysis indicates that a higher price causes total revenue to increase when demand
is inelastic.
Problem 4.4, page 199: Award up to 100 points.
To find the cross-price elasticity, divide the percentage change in the quantity demanded of buns
by the percentage change in the price of hot dogs. At the initial price of buns ($1.20), the quantity
demanded rises from 10,000 to 12,000, so this is the change in quantity demanded that should
be used.
Percentage change in quantity demanded = (12,000-10,000) / (11,000) = 18.2%
Percentage change in price of hot dogs = (1.8-2.2) / (2) = -20%
Cross-Price Elasticity = (18.2) / (-20) = -0.91

Problem 4.7, page 199: Award up to 100 points.

The most likely order is:
Product with the lowest income elasticity: bread
Product with the second-lowest income elasticity: Pepsi
Product with the second-highest income elasticity: personal computer
Product with the highest income elasticity: Mercedes-Benz automobile
For normal goods that are considered necessities (such as food and clothing), income elasticity is
positive and less than 1. For normal goods that are considered luxuries, income elasticity is
positive and greater than 1. These items are ranked from most necessary to most luxurious.