Economics: Elasticities McQ Answers

Exercises 1-6 page 96-97

1. The short-run price elasticity of demand is –0.2 = %ΔQd/%ΔP. Since %ΔP = 28%, the quantity falls by 5.6% = –0.2(28%) in the short run; in the long run, quantity falls by 19.6%.

2. In the short run, quantity supplied decreases by 30(.3) =9%. Revenue falls by about 39%. In the long run, quantity supplied decreases by 30(2) = 60%. Revenue falls by about 90%. If prices rise by 15%, in the short run, quantity supplied rises by (15)(.3) = 4.5%, and revenue rises by about 19.5%. In the long run, quantity rises by (15)(2) = 30%, and revenues rise by about 45%.

3. When tastes for hard liquor fall, the effect is larger on quantity. When the government taxes hard liquor, the effect is larger on price.

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4. Method 1, a law requiring all rents be cut by one-fourth, will create a price ceiling below the current equilibrium rent. So if a renter was paying $1,000 per month, she

now pays $750 per month. Price ceilings cause a shortage which is more pronounced in the long run.

Method 2, a subsidy to builders of homes, reduces the cost of building homes and shifts the supply curve down to the right. This will result in lower prices and an increase in the number of rental units.

Method 3 which provides renters with a subsidy will shift the demand curve for apartments to the right resulting in higher rents and a greater number of apartments. The upshot is subsidies to either renters or builders will increase the number of units available for rent; in both of these cases, the price received by builders of apartments will rise while the price paid by renters falls. A price ceiling keeps rents below the current equilibrium price but reduces the quantity of apartments. The long-run effects of all of these plans will result in greater changes in the quantity of apartments available and smaller changes in rent since both supply and demand curves are more