Page 506 - Krugmans Economics for AP Text Book_Neat

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:

Q 2 − Q 1
(46-5) Price elasticity of demand = (Q 1 + Q 2 )/2
P 2 − P 1
(P 1 + P 2 )/2

As before, when reporting a price elasticity of demand calculated by the midpoint
method, we drop the minus sign and report the absolute value.

Module 46 AP Review

Solutions appear at the back of the book.
Check Your Understanding

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