Ch 4: A Measure of Response

Suppose an economist wants to calculate how responsive the quantity demanded of good X is in response to a change in the price of good Y. Which of the formulas below would be a correct formula to use if we wanted to calculate the cross-price elasticity of demand for good X and good Y?

%ΔPY​/%ΔQX ​​ This shows how the quantity of X will respond to a change in the price of good Y.

When the price of spicy sauce was $10, people bought 100 jars. When the price increased to $12, people only bought 40 jars. What is the price elasticity of demand for spicy sauce?

3 Explanation: A price elasticity of demand of 3 indicates people are very responsive to changes in price for this good, as this is an elastic price elasticity. When price increased, the quantity demanded changed by 3 times as much as the price increase.

total revenue

A firm's output multiplied by the price at which it sells that output.

When Eric's income was $500 per week he bought 10 fish tacos per week, but when his income increased to $600 per week he started buying 15 fish tacos per week. What is Eric's income elasticity of demand for fish tacos? Round your answer to the nearest tenth place. A. 2.5 B. 4 C. 0.1 D. 0.4 E. 2

A. 2.5 Explanation: Using the formula for income elasticity of demand we get: Income elasticity of demand = (Q2-Q1/Q1)/(Y2-Y1/Y1) = (15-10/10)/($600-$500/$500)= (5/10)/(100/500) = .5/.2 = 2.5

The price of lemons increased 10%. How much did the quantity of lemons increase if the price elasticity of supply of lemons is 2, and how is that elasticity interpreted? A. 20%; elastic B. 2%; elastic C. 0.5%; inelastic D. 2%; inelastic E. 200%; inelastic

A. 20%; elastic Explanation: The price elasticity of supply is greater than 1 which means that it is elastic. A price elasticity of 2 tells us that the quantity supplied increases by twice as much as the change in price.

In response to a change in price, the quantity supplied of sparkling lemonade increased by 10%. If the price elasticity of supply is 0.5, how much did price change, and how is this elasticity interpreted? A. 20%; inelastic B. 1/2%; elastic C. 50%; elastic D. 5%; elastic E. 50%; inelastic

A. 20%; inelastic Explanation: The price elasticity of supply is less than 1 which means that it is inelastic. A price elasticity of 0.5 tells us that the quantity supplied increases by half as much as the change in price.

Which of the following describes a good that is likely to have the most elastic demand? A. A luxury with many substitutes B. A necessity with a few substitutes C. A broadly defined good, such as "food" D. Goods that make up a small share of the budget E. Goods that have to be bought under a short time constraint

A. A luxury with many substitutes Explanation: Luxuries and goods with many close substitutes have more elastic price elasticities

Eric wants to calculate how responsive the quantity of football tickets (FB) are to the price of airline tickets (AT). He used the following formula, but he made a mistake in his calculations. %ΔQAT/%ΔPFB What is the mistake he made in this formula? A. He is calculating how the quantity demanded of airline ticket responds to a change in price of football tickets instead. B. He is calculating the price elasticity of demand for airline tickets. C. He is calculating the income elasticity of demand for airline tickets instead. D. He is calculating the price elasticity of demand for football tickets. E. He has reversed the numerator and the denominator.

A. He is calculating how the quantity demanded of airline ticket responds to a change in price of football tickets instead. Explanation: He is calculating how the quantity demanded of airline tickets responds to the price of football tickets.

What does income elasticity of demand describe? A. How much the quantity bought of a good changes when buyers' incomes change B. How responsive sellers are to a change in the price of another good. C. How much the quantity bought of a good changes when the price of another good changes D. How much the quantity bought of a good changes when its price changes E. How much labor supplied changes in response to a change in wages

A. How much the quantity bought of a good changes when buyers' incomes change

Holly, Brian, Fred, Tracy, and Melanie have income elasticities for veggie burgers as given below: Person: Income elasticity of demand: Tracy 3 Brian 1 Fred -0.5 Holly 0.1 Melanie -2 What kind of good does each person consider veggie burgers? A. Tracy and Brian consider this a normal luxury. Holly considers this a normal necessity, and Fred and Melanie consider this inferior. B. Fred, Tracy, and Brian consider this a normal luxury, Holly considers this a normal necessity, and Melanie considers them inferior. C. Tracy considers this a normal luxury, Holly considers this a normal necessity, and Brian, Fred, and Melanie consider this inferior. D. Brian and Tracy consider this to be a normal luxury, Fred and Holly consider this to be a normal necessity, and Melanie considers them to be inferior. E. Fred, Tracy, and Brian consider this to be a normal luxury, Melanie considers this a normal necessity, and Holly considers this to be inferior.

A. Tracy and Brian consider this a normal luxury. Holly considers this a normal necessity, and Fred and Melanie consider this inferior. Explanation: Tracy has an elastic and positive income elasticity, so she considers them a normal luxury. Holly has an inelastic positive income elasticity so she considers them normal necessities. Melanie's negative income elasticity indicates she considers them inferior.

An economist calculated the cross-price elasticity of demand for nicknacks and gizmos and got −0.5. What can she conclude about the relationship between these two goods based on this elasticity? A. they are complements B. they are substitutes C. they are necessities D. they are unrelated goods E. they are normal goods

A. they are complements Explanation: When the price of gizmos increases, the law of demand says we will buy fewer gizmos. According to this cross price elasticity, when the price of gizmos increases by 1%, people buy 1/2% less nicknacks. Since they are buying less of both, they are complements.

Which of the following is a possible change in total revenue that occurs if you increase the price of a good with unit elasticity? A. 10% B. 0% C. 5% D. -1% E. 1%

B. 0% Explanation: Unit elasticity means that an increase in price results in an equal decrease in quantity. As a result, total revenue doesn't change if the price increases on a good with a unit elastic demand.

When Pam's income increased by 10%, her quantity demanded of hotel rooms increased by 5%. What kind of good does Pam consider hotel rooms? A. An inferior good B. A normal necessity C. A normal luxury D. Complementary with plane tickets E. Substitutes for log cabins

B. A normal necessity Explanation: Pam's income elasticity of demand is 0.5. Because this is positive, she considers this a normal good, and because it is inelastic she considers them a necessity.

The income elasticity of demand for healthcare in Artland is 2.5. In 2001 the quantity demanded of healthcare decreased by 25%. What change in national income in Artland causes this decrease in healthcare? A. Artland's national income increased 25%. B. Artland's national income decreased by 10%. C. Artland's national income increased by 2.5%. D. Artland's national income decreased 25%. E. Artland's national income increased by 10%.

B. Artland's national income decreased by 10%. Explanation: An income elasticity of demand of 2.5 indicates that a 1% decrease in income results in a 2.5% decrease in quantity, so a −25% decrease in quantity must be caused by a −10% decrease in income.

Burgin's income elasticity for gizmos is −5. What happens when Burgin's income increases by 10%? A. He will buy $50 worth of gizmos more B. He will buy 50% fewer gizmos C. He will buy 5 more gizmos D. He will buy 50% more gizmos E. He will buy 5% fewer gizmos

B. He will buy 50% fewer gizmos Explanation: An income elasticity of −5 indicates that for every 1% increase in income, Burgin buys 5% fewer gizmos. Therefore, if his income increases by 10%, he will buy 50% fewer gizmos.

Farmers can easily grow raspberries or strawberries in the same soil using the same inputs and achieve the same output per acre in pounds. All else equal, what is the value of the relative price elasticity of supply of raspberries over two days or two years? A. relatively elastic in two days; relatively inelastic in two years B. relatively inelastic in two days; relatively elastic in two years C. relatively more elastic in two days than in 2 years D. relatively more inelastic in two years than in two days E. relatively inelastic in two days; relatively inelastic in two years

B. relatively inelastic in two days; relatively elastic in two years Explanation: In the short run, farmers would not be able to respond to price, but in the long run they would be able to respond.

When Pam's income increased by 10%, she bought 5% fewer containers of yogurt. What kind of good does Pam consider yougurt? A. Complementary with peaches B. A normal luxury C. An inferior good D. Substitute for eggs e. A normal necessity

C. An inferior good Explanation: When Pam's income increases, her demand for this good decreased. The definition of an inferior good is a good that experiences a decrease in demand when consumer incomes increase.

Fernanda's cross-price elasticity of demand for pawpaws, in response to a change in the price of crackers is −2. If the price of crackers increases by 50%, how will her purchase of pawpaws change? A. She will buy 100% more pawpaws B. She will buy 2% more pawpaws C. She will buy 100% fewer pawpaws D. She will buy 2 fewer pawpaws (Choice E) E. She will buy 25 fewer pawpaws

C. She will buy 100% fewer pawpaws Explanation: Rearranging the cross-price elasticity formula we can find how much the quantity changes when price changes: %ΔQpawpaws=cross-price elasticity of demand×%ΔPcrackers

When is demand inelastic? A. When buyers have a lot of time to shop around B. When it makes up a large share of a person's budget C. When there are few substitutes for a good D. When a market is narrowly defined E. When a good is a luxury

C. When there are few substitutes for a good Explanation: The availability of substitutes makes the demand for a good more elastic. When there are few substitutes for a good, the demand for that good is more inelastic.

When the price of bananas increases by 20%, the quantity demanded of apples increases by 30%. What is the value of the cross-price elasticity of demand? A. 0 B. -1.5 C. 2/3 D. 1.5 E. -2/3

D. 1.5 To find the cross-price elasticity of apples in response to a change in the price of bananas, we apply this formula: Ed apples, bananas= %ΔQA/%ΔPB = 30%/20% = 1.5

Farmer Brown bought 20 cans of shark repellent when the price was $100 and 15 cans of shark repellant when the price was $150. Which of the following statements is true based on this information? A. Farmer Brown has an inelastic demand for shark repellant, which means he considers it a luxury. B. Farmer Brown has an elastic demand for shark repellant, which means he considers it a luxury. C. Farmer Brown has an elastic demand for shark repellant, which means he considers it a necessity. D. Farmer Brown has an inelastic demand for shark repellant, which means he considers it a necessity. E. Farmer Brown has a perfectly inelastic demand for shark repellant, which means he considers it a necessity.

D. Farmer Brown has an inelastic demand for shark repellant, which means he considers it a necessity. Explanation: Farmer Brown's price elasticity of demand is 0.5 and an elasticity less than 1 indicates an inelastic demand. People have inelastic demand for necessities.

Holly, Brian, Fred, Tracy, and Melanie have income elasticities for veggie burgers as given below: Person: Income elasticity of demand: Tracy 2 Brian 1 Fred -0.75 Holly 0.1 Melanie -1.5 Who would respond the least in their purchase of veggie burgers in response to an increase in income? A. Tracy B. Brian C. Fred D. Holly E. Melanie

D. Holly Explanation: Holly's demand is the most inelastic, so she would respond the least. It is the magnitude of the elasticity that matters for how much demand changes, not the sign of the elasticity.

Which of the following questions can be answered using income elasticity of demand? A. If the price of a good increases, will total revenue increase or decrease? B. How will sellers respond to an increase in the price of a good? C. Is this good a complement or a substitute for another good? D. Is this good a normal good or inferior good? E. If the price of a good decreases, will total revenue increase or decrease?

D. Is this good a normal good or inferior good?

If the price elasticity of demand for apples is 3, then what will be the impact on total revenue if price increases? A. Total revenue will fall to zero B. Total revenue triples C. Total revenue will increase D. Total revenue will decrease E. Total revenue will not change

D. Total revenue will decrease

Which of the following goods would most likely have an income elasticity of −2? A. Books in a society that values education B. Airplane tickets in a society that values travel C. Rice in a country where it is a staple food consumed by most people D. Used cars in a society that values new goods

D. Used cars in a society that values new goods Explanation: If a society values new goods more than used goods, they are likely to decrease their purchases as incomes increase.

Quinn's Cupcake shop has a price elasticity of supply of 3.75. Which of the following statements is the correct interpretation of this price elasticity of supply? A. For every 1% increase in price, Quinn will be willing to sell 3.75 more cupcakes B. For every $3.75 increase in price, Quinn will be willing to sell 1% more cupcakes C. For every $3.75 increase in price, Quinn will be willing to sell 1 more cupcake D. For every 3.75% increase in price, Quinn is willing to sell 1 more cupcake E. For every 1% increase in price, Quinn will be willing to sell 3.75% more cupcakes

E. For every 1% increase in price, Quinn will be willing to sell 3.75% more cupcakes Explanation: Price elasticity of supply measures the percentage change in quantity that a seller is willing to sell in response to a percentage change in price.

What information is given by the price elasticity of supply of popcorn? A. How responsive popcorn sellers are to changes in the price of unpopped corn kernels B. How responsive popcorn buyers are to changes in the price of popcorn seasonings C. How responsive buyers of popcorn are to changes in the price of popcorn D. How responsive popcorn buyers are to changes in income E. How responsive sellers of popcorn are to changes in the price of popcorn

E. How responsive sellers of popcorn are to changes in the price of popcorn Explanation: The price elasticity of supply measures the percentage change in quantity supplied in response to the percentage change in price. For example, a price elasticity of supply of 4 means that for every 1% increase in the price of popcorn, popcorn sellers increase their quantity supplied by 4%.

The government of Maxistan is interested in reducing the amount of gasoline that people buy. The government knows that the cross-price elasticity of gasoline in response to a change in the price of cars is −5. If they want to reduce the quantity demanded of gasoline by 50%, how much will the price of cars have to change? A. Increase by 1% B. Increase by 5% C. Increase 50% D. Decrease by 1% E. Increase by 10%

E. Increase by 10% Explanation: A cross-price elasticity of demand of −5 means that for every 1% increase in the price of cars, the quantity of gasoline demanded decreases by 5%. Therefore if they want the gasoline consumption to decrease by 50%, which is 10 times that amount, then the price of cars must also increase by 10 times that amount.

What measure is used to determine how responsive a producer is to price changes? A. Cross price elasticity of demand B. Income elasticity of demand C. Input price elasticity of supply D. Price elasticity of demand E. Price elasticity of supply

E. Price elasticity of supply

Which of the following would be an indication that a firm has an elastic demand for its goods? A. Total revenue doesn't change when it raises its price B. Consumer spending increases when it raises its price C. Consumer spending decreases when it lowers its price D. Total revenue doesn't change when it lowers its price E. Total revenue increases when it lowers its price

E. Total revenue increases when it lowers its price Explanation: If a firm lowers its price and its total revenue increases in response, that must mean that the quantity demanded increased more than the price decreased. When the change in quantity demanded is greater than the change in price, demand is elastic.

Price elasticity of demand is a concept used to describe what concept in economics? A. whether quantity demanded increases or decreases when price increases B. how responsive sellers are to a change in the price of a good C. how responsive output is to a change in government spending D. the magnitude of the change in quantity due to a change in income E. the magnitude of the change in quantity due to a change in price

E. the magnitude of the change in quantity due to a change in price

cross-price elasticity of demand

It equals the percentage change in the quantity demanded of one good or service at a specific price divided by the percentage change in the price of a related good or service. eA,B = % change in quantity demanded of good A/% change in price of good B

arc elasticity

Measure of elasticity based on percentage changes relative to the average value of each variable between two points.

unit price elastic

Situation in which the absolute value of the price elasticity of demand is equal to 1.

price elastic

Situation in which the absolute value of the price elasticity of demand is greater than 1.

price inelastic

Situation in which the absolute value of the price elasticity of demand is less than 1.

perfectly elastic

Situation in which the price elasticity of demand is infinite.

perfectly inelastic

Situation in which the price elasticity of demand is zero,

When the price of jackfruit decreased 50%, total revenues earned by jackfruit sellers decreased. What can be concluded based on this information?

The demand for jackfruit is inelastic

income elasticity of demand

The percentage change in quantity demanded at a specific price divided by the percentage change in income the produced the demand change, all other things unchanged. eY = % change in quantity demanded/% change in income

price elasticity of demand

The percentage change in quantity demanded of a particular good or service divided by the percentage change in the price of that good or service, all other things unchanged. eD = % change in quantity demanded / % change in price

Elasticity

The ratio of percentage change in a dependent variable to a percentage change in an independent variable. e y,x = % change in y / % change in x

price elasticity of supply

The ratio of the percentage change in quantity supplied of a good or service to the percentage change in its price, all other things unchanged.

The greater the ______________ _________ of the elasticity number, the more elastic the demand is.

absolute value

If the price elasticity of demand is unit elastic how does quantity demanded change in response to a 25% increase in price? a. Quantity demanded increases by 50% b. Quantity demanded decreases by 50% c. Quantity demanded decreases by 25% d. Quantity demanded doesn't change e. Quantity demanded increases by 25%

c. Quantity demanded decreases by 25% Explanation: Unit elastic means that a change in quantity demanded will equal the magnitude of change price, so a 25% increase in price decreases the quantity demanded 25%

Demand for necessities tends to be ______ price elastic then the demand for luxuries.

less

Demand tends to be ______ elastic in the long run than in the short run.

more

The larger proportion of households' budgets the good is accounted for, the ______ elastic the demand tends to be.

more

As the price rises and we move upward and leftward along a linear demand curve, the demand becomes...

more price elastic.

Positive income elasticity indicates a ____________ ________, while a negative income elasticity indicates an __________ ________.

normal good; inferior good

The more and/or closer substitutes for a good are available, the more...

price elastic the demand for that good is.

A positive cross-price elasticity of demand indicates that the two goods are __________, while a negative cross-price elasticity indicates that they are ___________.

substitutes; compliments