1. If Bob’s Burritos sells 300 burritos per day when the price of a burrito is $5.50 and 600 burritos per day
when the price is $3.50, then according to the midpoint formula the price elasticity of demand is _______.
2. In the figure below, a price increase from $4 to $8 will ____________ [increase, not change, decrease]
the total revenue of producers (or the total expenditures of consumers); a price increase from $10 to $14
will ____________ [increase, not change, decrease] total revenue (or total expenditures of consumers).
3. If the (own) price elasticity for Apple’s iPhone is 0.6 (Ed = 0.6), then a 5% increase in the price of its
iPhone will __________ (increase, not change, decrease) iPhone sales by __________ percent and will
__________ (increase, not change, decrease) its total revenues.
4. Suppose that (i) in the milk market, the demand for milk is inelastic, and, (ii) in the energy drink market,
the demand for energy drinks is elastic.
a) Suppose that dairy farmers are very unhappy with the low equilibrium price of milk and the low
revenues (income) from milk production. Suppose that, as a result, dairy farmers decide to reduce the
supply of milk by dumping 25% of their milk production out onto the ground instead of selling it on the
market. Illustrate and explain the effects of this action in the milk market and determine whether or not
dairy farmers achieve their objective of increasing their revenues (incomes). Hint: Explicitly illustrate and
compare the change in revenue caused by the increase in the market equilibrium price and the change in
revenue caused by the decrease in the market equilibrium quantity.
b) Suppose that energy drink producers are very unhappy with the low equilibrium price of energy drinks
and the low revenues (incomes) from energy drink production. Suppose that energy drink producers decide
to follow the strategy of dairy farmers and reduce the supply of energy drinks by dumping 25% of their
energy drink production on the ground instead of selling it on the market. Illustrate and explain the effects
of this action in the energy drink market and determine whether or not energy drink producers achieve their
objective of increasing their revenues (incomes). (Same hint as above.) Compare the results of the dairy
farmers’ actions with the energy drink producers’ actions.