price are (Q 1 ,P 1 ); at point 2 they are (Q 2 ,P 2 ). Then the formula for calculating the price
elasticity of demand is:(46-5) Price elasticity of demand =As before, when reporting a price elasticity of demand calculated by the midpoint
method, we drop the minus sign and report the absolute value.Q 2 − Q 1
(Q 1 + Q 2 )/2
P 2 − P 1
(P 1 + P 2 )/2
464 section 9 Behind the Demand Curve: Consumer Choice
Module 46 AP Review
Check Your Understanding
- In each of the following cases, state whether the income effect,
the substitution effect, or both are significant. In which cases do
they move in the same direction? In opposite directions? Why?
a. Orange juice represents a small share of Clare’s spending.
She buys more lemonade and less orange juice when the
price of orange juice goes up. She does not change her
spending on other goods.
b. Apartment rents have risen dramatically this year. Since rent
absorbs a major part of her income, Delia moves to a smaller
apartment. Assume that rental housing is a normal good.
c. The cost of a semester-long meal ticket at the student
cafeteria rises, representing a significant increase in living
costs. As a result, many students have less money to spend
on weekend meals at restaurants and eat in the cafeteria
instead. Assume that cafeteria meals are an inferior good.
2. The price of strawberries falls from $1.50 to $1.00 per carton, and
the quantity demanded goes from 100,000 to 200,000 cartons.
Use the midpoint method to find the price elasticity of demand.
3. At the present level of consumption, 4,000 movie tickets, and at
the current price, $5 per ticket, the price elasticity of demand
for movie tickets is 1. Using the midpoint method, calculate the
percentage by which the owners of movie theaters must reduce
the price in order to sell 5,000 tickets.
4. The price elasticity of demand for ice-cream sandwiches is 1.2 at
the current price of $0.50 per sandwich and the current
consumption level of 100,000 sandwiches. Calculate the change in
the quantity demanded when price rises by $0.05. Use Equations
46-1 and 46-2 to calculate percent changes and Equation 46-3 to
relate price elasticity of demand to the percent changes.
Solutions appear at the back of the book.
Tackle the Test: Multiple-Choice Questions
d. transportation
e. entertainment- If a decrease in price from $2 to $1 causes an increase in
quantity demanded from 100 to 120, using the midpoint
method, price elasticity of demand equals
a. 0.17.
b. 0.27.
c. 0.40.
d. 2.5.
e. 3.72. - Which of the following is likely to have the highest price
elasticity of demand?
a. eggs
b. beef
c. housing
d. gasoline
e. foreign travel - Which of the following statements is true?
I. When a good absorbs only a small share of consumer
spending, the income effect explains the demand curve’s
negative slope.
II. A change in consumption brought about by a change in
purchasing power describes the income effect.
III. In the case of an inferior good, the income and
substitution effects work in opposite directions.
a. I only
b. II only
c. III only
d. II and III only
e. I, II, and III - The income effect is most likely to come into play for which of
the following goods?
a. water
b. clothing
c. housing