Question

2. (20 points) For each of the following pairs of goods, identify which one you would expect to have more own-price elastic demand. Please explain your reasoning. (a) (5 points) Computers (generally) vs. Apple MacBook Pro laptops. (b) (5 points) Stereo headphones (generally) vs. hearing aids. For each of the following goods, identify whether you would expect demand to be more (own- price) elastic in the short run or the long run. As above, please briefly explain your reasoning. (c) (5 points) Retail gasoline in the suburbs of Chicago. (d) (5 points) Air conditioning units in Miami Beach, Florida. Problem 2 courtesy of Luke Stein. Used with permission.

Answer 1

2. a. The correct answer for this pair should be apple macbook laptops. This is because people willing to buy these laptops will be highly influenced by the changes in prices of it. For instance, if the price of apple laptops decreases, a large number of new customers might shift towards buying them since apple laptops are popular among consumers.

On the other hand, demand for computers (in general) will always be there, varying slightly with respect to its price. This is because owning a computer has become a necessity for a large section of our population.

b. The correct answer should be stereo headphones. This is because stereo headphones are purchased by people out of choice. The change in their price is likely to effect the quantity demanded as compared to the change in prices of hearing aids. This is because hearing aids are a necessity.

c. The own price elasticity of gasoline is likely to be high in the short run as compared to the long run. This is because the quantity demanded is likely to be affected by the changes in the price level in the immediate period. For instance, if the price of gasoline incteases today, people will demand less of it for a week or so and then change their behaviour on the basis of furtur alterations in the price of gasoline. On the other hand, the elasticity in the long run is expected to be constant due to factors like addition of new consumers etc.

d. The elasticity of air conditioning units in Miami Beach is more elastic on the long run. This is beacuse in the short run, or the period of increased tourism, the demand is likely to stay constant irrespective of the price. however, in the long run, the change in prices is going to affect the demand considerably more.