Check Your Understanding

1. Question

   After Chelsea’s income increased from $12,000 to $18,000 a year, her purchases of music downloads increased from 10 to 40 music downloads a year. Calculate Chelsea’s income elasticity of demand for music downloads using the midpoint method.

   By the midpoint method, the percent increase in Chelsea’s income is . Similarly, the percent increase in her consumption of music downloads is . Chelsea’s income elasticity of demand for music downloads is therefore .

2. Question

   As the price of margarine rises by 20%, a manufacturer of baked goods increases its quantity of butter demanded by 5%. Calculate the cross-price elasticity of demand between butter and margarine. Are butter and margarine substitutes or complements for this manufacturer?

   The cross-price elasticity of demand is . Since the cross-price elasticity of demand is positive, the two goods are substitutes.

3. Question

   Using the midpoint method, calculate the price elasticity of supply for web-design services when the price per hour rises from $100 to $150 and the number of hours supplied increases from 300,000 hours to 500,000. Is supply elastic, inelastic, or unit-elastic?

   By the midpoint method, the percent change in the number of hours of web-design services supplied is . Similarly, the percent change in the price of web-design services is . The price elasticity of supply is . Since elasticity is greater than 1, supply is elastic.