Page 515 - Krugmans Economics for AP Text Book_Neat

consumption fell very little because there
were no close substitutes for gasoline and
because driving their cars was necessary
for people to carry out the ordinary tasks
of life. Over time, however, Americans
changed their habits in ways that enabled
them to gradually reduce their gasoline
consumption. The result was a steady de-
cline in gasoline consumption over the Mike Thompson, Detroit Free Press. Reprinted by Permission.
next decade, even though the price of
gasoline did not continue to rise, con-
firming that the long-run price elasticity
of demand for gasoline was indeed much
larger than the short-run elasticity.

fyi

Responding to Your Tuition Bill
College costs more than ever—and not just be- students at two-year colleges was significantly study found that enrollments at two-year col-
cause of overall inflation. Tuition has been rising more responsive to price than for students at leges are much more responsive to changes in
faster than the overall cost of living for years. four-year colleges. The result: students at two- the unemployment rate (an increase in the un-
But does rising tuition keep people from going year colleges are more likely to forgo getting a employment rate leading to an increase in en-
to college? Two studies found that the answer degree because of tuition costs than students at rollments) than enrollments at four-year
depends on the type of college. Both studies as- four-year colleges. colleges. So is the cost of tuition a barrier to
sessed how responsive the decision to go to A 1999 study confirmed this pattern. In com- getting a college degree in the United States?
college is to a change in tuition. parison to four-year colleges, it found that two- Yes, but more so at two-year colleges than at
A 1988 study found that a 3% increase in tu- year college enrollment rates were significantly four-year colleges.
ition led to an approximately 2% fall in the num- more responsive to changes in state financial Interestingly, the 1999 study found that for
ber of students enrolled at four-year institutions, aid (a decline in aid leading to a decline in en- both two-year and four-year colleges, price sen-
giving a price elasticity of demand of 0.67 rollments), a predictable effect given these stu- sitivity of demand had fallen somewhat since
(2%/3%). In the case of two-year institutions, dents’ greater sensitivity to the cost of tuition. the 1988 study. One possible explanation is that
the study found a significantly higher response: Another piece of evidence suggests that stu- because the value of a college education has
a 3% increase in tuition led to a 2.7% fall in en- dents at two-year colleges are more likely to be risen considerably over time, fewer people forgo
rollments, giving a price elasticity of demand of paying their own way and making a trade-off college, even if tuition goes up. (See source
0.9. In other words, the enrollment decision for between attending college and working: the note on copyright page.)

Module 47 AP Review

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

1. For each case, choose the condition that characterizes demand: d. Producers in an industry find they can increase their total
elastic demand, inelastic demand, or unit-elastic demand. revenues by working together to reduce industry output.
a. Total revenue decreases when price increases. 2. For the following goods, is demand elastic, inelastic, or
b. When price falls, the additional revenue generated by the unit-elastic? Explain. What is the shape of the demand curve?
increase in the quantity sold is exactly offset by the revenue a. demand by a snake-bite victim for an antidote
lost from the fall in the price received per unit. b. demand by students for blue pencils
c. Total revenue falls when output increases.
module 47 Interpreting Price Elasticity of Demand 473