APIB Economics

Welker
Unit 1.2 - Elasticity
Practice activity
Key terms:
PED = price elasticity of demand.
PES = price elasticity of supply
XED = cross-price elasticity of demand
YED = income elasticity of demand
Calculate: Means to solve for
Interpret: means to explain the value of elasticity (<1, >1 or =1)
Explain: means to explain why you think the value is <1, >1 or =1.
Answer each of the following questions. Show calculations where necessary.
1. Assume a fall in the price of Pepsi from $2 per litre to $1.75 per litre causes the quantity
of Coke sold to fall from 6,000 litres to 5,500 litres. Calculate, interpret and explain the
XED for Coke and Pepsi.
2. Due to rising unemployment, bike sales are rising across the USA. The bike industry
estimates that, all else equal, a 1% fall in average income leads to a 1.5% increase in
the sale of bicycles. Calculate, interpret and explain the YED for bicycles.
3. The PED coefficient is always negative. Why?
The law of demand states ceteris paribus, there is an inverse relationship between price
and quantity demanded. Due to this INVERSE relationship, the PED coefficient will
always be negative.
4. The PES for aluminum is 0.1 in the short-run, but 2.1 in the long-run. What are the
factors that explain the change in PES over time for aluminum specifically.
5. When Ryan Air began flying between London and Paris the price of air travel between
the two cities fell from an average of 100 euros each way to just 60 euros each way. As
a result, the EuroStar high speed rail line saw its annual ticket sales fall from 800,000
to 720,000 tickets. Calculate, interpret and explain the XED for air travel and train travel
between London and Paris.
6. As the Chinese economy grows, car sales are rising exponentially. In the last decade,
the number of cars on Chinese roads has increased ten-fold, as the per capital income
in China has risen from $1,000 to $4,000. Calculate, interpret and explain the YED for
cars in China.
7. Due to the strong value of the Swiss franc, Swiss ski areas have had to reduce the
prices they charge for lift tickets to try and attract foreign tourists to their resorts. Last
season, the average price of a day of skiing fell from 50 CHF to 45 CHF. At the same
time, sales of ski equipment in Switzerland increased 7%. Calculate, interpret and
explain the XED for ski lift tickets and skis in Switzerland.
8. Migros, a large Swiss grocery chain, saw the sale of its M-Budget brand toilet
paper increase by 22% in 2009, while the per capita income in Switzerland fell due to
recession by 2%. Calculate, interpret and explain the YED for M-Budget toilet paper in
Switzerland.
9. Starbucks estimates that if it changes the price of its popular drink, the caramel

machiatto, at all, then its revenues from the sales of this drink will fall. What is the PED
for caramel machiatos? What is the PED for this drink?

10. 3D cinema has led to an increase in the demand for movie tickets in Zurich. As a result,
the price of a movie ticket has risen from 17 CHF to 19 CHF, and movie theaters, by
offering showings earlier in the day and later into the evening, have increased the
number of movies available by 15%. Calculate the PES of movies in Zurich. If demand
continues to grow, what will happen to theaters ability to respond to higher prices over
time? How will this affect the PES over time?