From the equilibrium based on the data in Table 6.1, let us compute some elasticities, using the midpoint formula that we developed in Chapter 4. Suppose that the price of jazz falls to $16 per outing, from the initial price of $20. Income remains at $200.
(a) First compute Neal's new equilibrium - by computing a new MU/P schedule for jazz and reallocating his budget in a utility-maximizing fashion.
(b) What is his price elasticity of demand for jazz at this set of prices? [Hint: Once you compute the new quantity of jazz purchased you can compute the percentage change in quantity demanded. You also know the percentage change in the price of jazz, so you can now compute the ratio of these two numbers.]
(c) What is the cross-price elasticity of demand for snowboarding, with respect to the price of jazz, at this set of prices? [Hint: Calculate the percentage change in the number of snowboard visits to Whistler, relative to the percentage change in the price of jazz.]
Table 6.1
