Because better weather makes farmland more productive, farmland in regions with good weather conditions is more expensive than farmland in regions with bad weather conditions. Over time, however, as advances in technology have made all farmland more productive, the price of farmland (adjusted for overall inflation) has fallen. Use the concept of elasticity to explain why productivity and farmland prices are positively related across space but negatively related over time.
Explain why the following might be true: A drought around the world raises the total revenue that farmers receive from the sale of grain, but a drought only in Kansas reduces the total revenue that Kansas farmers receive.
Several years ago, flooding along the Missouri and Mississippi rivers destroyed thousands of acres of wheat.
a. Farmers whose crops were destroyed by the floods were much worse off, but farmers whose crops were not destroyed benefited from the floods. Why?
b. What information would you need about the market for wheat in order to assess whether farmers as a group were hurt or helped by the floods?
Beachfront resorts have an inelastic supply, and automobiles have an elastic supply. Suppose that a rise in population doubles the demand for both products (that is, the quantity demanded at each price is twice what it was).
a. What happens to the equilibrium price and quantity in each market?
b. Which product experiences a larger change in price?
c. Which product experiences a larger change in quantity?
d. What happens to total consumer spending on each product?
Consider public policy aimed at smoking.
a. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes currently costs $2 and the government wants to reduce smoking by 20 percent, by how much should it increase the price?
b. If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking one year from now or five years from now?
c. Studies also find that teenagers have a higher price elasticity than do adults. Why might this be true?
Two drivers—Tom and Jerry—each drive up to a gas station. Before looking at the price, each places an order. Tom says, “I’d like 10 gallons of gas.” Jerry says, “I’d like $10 worth of gas.” What is each driver’s price elasticity of demand?
Economists have observed that spending on restaurant meals declines more during economic downturns than does spending on food to be eaten at home. How might the concept of elasticity help to explain this phenomenon?
The New York Times reported (Feb. 17, 1996, p. 25) that subway ridership declined after a fare increase: “There were nearly four million fewer riders in December 1995, the first full month after the price of a token increased 25 cents to $1.50, than in the previous December, a 4.3 percent decline.”
a. Use these data to estimate the price elasticity of demand for subway rides.
b. According to your estimate, what happens to the Transit Authority’s revenue when the fare rises?
c. Why might your estimate of the elasticity be unreliable?
Emily has decided always to spend one-third of her income on clothing.
a. What is her income elasticity of clothing demand?
b. What is her price elasticity of clothing demand?
c. If Emily’s tastes change and she decides to spend only one-fourth of her income on clothing, how does her demand curve change? What are her income elasticity and price elasticity now?
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