Ch2 Econ achieve

Elasticity of demand =

% change in quantity demanded / % change in price

The demand curve shows: (i) a buyer's willingness to pay for a product at each quantity. (ii) the marginal benefit a buyer gains from a product. (iii) the marginal cost of producing a product. (iv) the relationship between the price of a product and a buyer's willingness to pay for it at each price. (i), (ii), (iii) and (iv) are all correct.

(i), (ii) and (iv) are correct.

If income rises by 20% and the quantity demanded of an item falls by 20%, the income elasticity of demand for this item is:

-1

The price of product A falls by 50%. As a result, the quantity demanded of product B rises by 50%. The cross-price elasticity of demand between product A and product B is _____, and they are _____.

-1; complements

If the price of Product E decreasing by 2% causes its quantity demanded to increase by 14% and the quantity demanded for Product F to increase by 17%, what is the cross-price elasticity of demand? Round your answer to one decimal place. What is the relationship between these goods?

-8.5 Complements

Each month Jamie buys exactly 15 McWraps, regardless of the price. Jamie's price elasticity of demand for McWraps is:

0

Because of declining stocks in the Caspian Sea, Beluga caviar prices recently increased by a whopping 25% (to about $700 per ounce). As a result, purchases of Beluga caviar decreased by 5%. The price elasticity of demand for Beluga caviar is:

0.2

The price elasticity of demand for an item is impacted by:

1. Whether the item is a Necessity or not 2. Time available to adjust to price changes 3. Number of available substitutes

If Good C increases in price by 50% a pound, and this causes the quantity demanded for Good D to increase by 60%, what is the cross-price elasticity of the two goods? Round your answer to one decimal place. What is the relationship between the two goods?

1.2 Substitutes

Jonathan's income falls by 15%. He decides to cut down his purchases of restaurant meals by 20%. His income elasticity of demand for restaurant meals is:

1.33

A Smoothie King manager has estimated that the price elasticity of demand for exotic fruit smoothies is 2. If the store increases menu prices by 5%, she can expect the quantity of exotic fruit smoothies sold to decrease by _____ and total revenue to _____.

10%; fall

Delilah's income rises by 8%. She decides to increase the number of comic books she purchases by 20%. Her income elasticity of demand for comic books is:

2.5

Butter producers know that the price elasticity of demand for butter is 0.2. If they want to increase sales by 4%, they will have to lower price by:

20%

Consider the following statement: "An increase in the cost of oil will cause the price of a plane ticket to increase. This increase in price will cause a decrease in demand for airline travel and a leftward shift in the demand curve." What is the flaw of this reasoning? A. An increase in the price of a ticket will not cause a decrease in demand, but rather a decrease in quantity demanded. B. The increase in the cost of oil will cause a decrease in the price of a plane ticket. C. A decrease in demand will shift the curve rightward, not leftward. D. The cost of oil affects supply and not demand so prices of tickets will remain the same.

A. An increase in the price of a ticket will not cause a decrease in demand, but rather a decrease in quantity demanded.

If the price elasticity of demand for air travel is 4: A. a 20% decrease in the price of air travel will increase quantity demanded by 80%. B. the demand for air travel is inelastic. C. a 10% increase in the price of air travel will increase quantity demanded by 40%. D. a 20% increase in the price of air travel will increase quantity demanded by 80%.

A. a 20% decrease in the price of air travel will increase quantity demanded by 80%.

Your university hopes to raise more revenue by increasing student housing fees. This plan will work only if the percent: A. rise in price is larger in magnitude than the percent decline in quantity demanded. B. rise in price is smaller in magnitude than the percent decline in quantity demanded. C. decrease in price is smaller in magnitude than the percent decline in quantity demanded. D. decrease in price is larger in magnitude than the percent increase in quantity demanded.

A. rise in price is larger in magnitude than the percent decline in quantity demanded.

Which of the following statements about the price elasticity of demand is correct? A. The absolute value of the elasticity of demand ranges from zero to one. B. Demand is more elastic in the long run than it is in the short run. C. Demand is more elastic the smaller the percentage of the consumer's budget the item takes up. D. The elasticity of demand for a good in general is equal to the elasticity of demand for a specific brand of the good.

B. Demand is more elastic in the long run than it is in the short run.

The law of demand says that, holding everything else constant, when the price of a good increases, the amount buyers buy will decrease, and when the price of a good decreases, the amount buyers buy will increase. To hold everything else constant means to use the ceteris paribus condition. If we change one of these things we were holding constant, which is the most likely result? A. producers will not know how much of a good to make B. demand for the good will either increase or decrease C. a price ceiling will need to be implemented D. consumers will not change their purchasing behaviors

B. demand for the good will either increase or decrease

Demand for soft drinks outside an airport is more elastic than inside of the airport because: A. necessities have less elastic demand. B. fewer choices mean more inelastic demand. C. specific brands tend to have more elastic demand than categories of goods. D. more choices make demand more elastic.

B. fewer choices mean more inelastic demand.

If an increase in the price of coconut oil brings about an increase in total revenue, then the percent rise in price is _____ in magnitude than the percent decline in quantity demanded. A. equal B. larger C. smaller D. not comparable

B. larger

If the price of emergency visits to the dentist rose, we would expect: A. a large decline in the number of emergency visits to the dentist. B. only a slight decline in the number of emergency visits to the dentist. C. the number of emergency visits to the dentist to increase. D. the total income of dentists to fall dramatically.

B. only a slight decline in the number of emergency visits to the dentist.

You have been appointed head of marketing for Barry's Younique Yachts. Barry, the CEO, is interested in determining whether offering his yachts at a lower price would increase the firm's revenue. He asks you for advice. Using your knowledge of elasticity, you should tell Barry A. that he should reduce his prices. Yachts are a necessity and therefore have a low price elasticity of demand. Thus, reducing prices would increase revenue. B. that he should reduce his prices. Yachts are luxury goods and therefore exhibit a high price elasticity of demand. Thus, reducing prices would increase revenue. C. that he should increase his prices. Demand for yachts is perfectly inelastic, so a price increase will cause total revenue to increase. D. that he should increase his prices. Demand for yachts is likely to be elastic because they are so much fun to drive. Thus, increasing prices would increase revenue.

B. that he should reduce his prices. Yachts are luxury goods and therefore exhibit a high price elasticity of demand. Thus, reducing prices would increase revenue.

After North Carolina State University raised its tuition by 12%, a survey was conducted to determine how many students would transfer to another university as a result. Only about 1 in 300 students indicated they would transfer. Based on this information, the price elasticity of demand for education at this university is: A. 1. B. highly elastic. C. highly inelastic D. 0.

C. Highly inelastic

Determine which statement about the absolute value of the price elasticity of demand is correct. A. The price elasticity of demand for laundry detergent in general is likely to be greater than the price elasticity of demand for Gain laundry detergent. B. The price elasticity of demand for gasoline is less than the price elasticity of demand for cereal because because more people eat cereal than use gasoline. C. The price elasticity of demand for Gain laundry detergent is likely to be greater than the price elasticity of demand for laundry detergent in general. D. The price elasticity of demand for gasoline is greater than the price elasticity of demand for cereal because because more people eat cereal than use gasoline.

C. The price elasticity of demand for Gain laundry detergent is likely to be greater than the price elasticity of demand for laundry detergent in general.

Which statement best characterizes the relationship between the elasticity of demand, price, and total revenue? A. When demand is elastic and price falls, total revenue falls. B. When demand is inelastic and price falls, total revenue rises. C. When demand is elastic and price falls, total revenue rises. D. When demand is inelastic and price falls, total revenue does not change.

C. When demand is elastic and price falls, total revenue rises.

Andrew, a college student, loves drinking coffee late at night to study for exams. Having a small income, he is used to buying cheap, bad tasting coffee that he needs to grind and brew himself. The coffee tastes putrid but, with enough cream and sugar, Andrew is able to tolerate it. Occasionally, he does go out to Starbucks when he has spare money. After graduation, Andrew gets a job working at a database firm as a programmer. His income is now a healthy $75,000 a year and he decides he's had enough bad tasting coffee. He ends up buying coffee daily from Starbucks even though it costs significantly more. Andrew's demand for Starbucks coffee changed as a result of A. a change in expectations. B. a change in the number of consumers. C. a change in income. D. a change in a related good or service. E. a change in technology.

C. a change in income.

If the price of steel increases drastically, the quantity of steel demanded by the building industry will fall significantly over the long run because A. profits will fall by a greater amount in the long run than in the short run. B. buyers of steel are less sensitive to a price change if they have more time to adjust to the price change. C. buyers of steel are more sensitive to a price change if they have more time to adjust to the price change. D. sales revenue in the building industry will fall sharply.

C. buyers of steel are more sensitive to a price change if they have more time to adjust to the price change.

You just took an Uber from home to campus for the first time and were willing to pay $13 for the trip. It was so much easier than driving yourself that you are willing to pay $21 for the same trip tomorrow. Determine if you have violated the law of demand based on your choices, and why or why not that is the case. Your decisions... A. do not violate the law of demand because the law of demand states that quantity demanded increases as price increases. B. do violate the law of demand because the law of demand states that quantity demanded decreases as price increases. C. do not violate the law of demand because your preference for the product changed after you experienced the good. D. do violate the law of demand because you have chosen to buy the same amount of the product at two different prices.

C. do not violate the law of demand because your preference for the product changed after you experienced the good.

You are a pricing analyst at Panaviewic in the HD TV group. Your supervisor asks you to forecast the demand curves for 42‑inch HD TVs over both a one‑month and a one‑year time horizon. You present your supervisor with a graph. Using the concept of elasticity, shift the points to label each demand curve with the correct time horizon. Your supervisor asks you to explain the implications of your forecasted demand curves on monthly and future pricing decisions. What is your response? A. Customers will be more responsive to price increases over a shorter period of time but will become less responsive over the longer term. B. Customers will not respond to price changes in either case. C. The TVs should be priced at $0. D. Customers will be less responsive to price increases over a shorter period of time but will become more responsive over the longer term.

D. Customers will be less responsive to price increases over a shorter period of time but will become more responsive over the longer term.

Which of these scenarios does NOT illustrate the law of demand? A. When Kit-Kats are cheaper, Mary opts to buy more Kit-Kats. B. Darren buys two pairs of jeans when they are $40 each but only one pair when it is $60. C. Layla buys less tea when the price of tea rises. D. Freya buys more doughnuts when the price of doughnuts rises.

D. Freya buys more doughnuts when the price of doughnuts rises.

Jane goes to an all-you-can-eat restaurant and makes three trips to the buffet. After finishing food from her third trip, she feels sick and throws up. Which of these economic explanations BEST matches Jane's situation? A. Jane's marginal benefit from eating the third plate was positive but less than that of the second plate. B. Jane's marginal benefit from her third trip to the buffet was larger than her marginal benefit from her second trip. C. Jane was charged extra for the third plate at the buffet. D. Jane's marginal benefit from eating the third plate was negative.

D. Jane's marginal benefit from eating the third plate was negative.

The wireless communications company Telefon has been testing the effect of a reduction in the price of its monthly service. When the company lowered its rate from $36 to $30 per month, it found that the number of users tripled. This suggests that the: A. demand for cell phone service is inelastic in this price range. B. demand curve for cell phone service shifted to the right. C. supply curve for cell phone service shifted to the left. D. demand for cell phone service is elastic in this price range.

D. demand for cell phone service is elastic in this price range.

The price elasticity of demand along a linear demand curve: A. is equal to the rate of change of the slope. B. is greater than the absolute value of the slope. C. is less than the absolute value of the slope. D. increases in absolute value as the price rises.

D. increases in absolute value as the price rises.

Two products have a cross-price elasticity of demand of 1.5. Based on this value of cross-price elasticity, which products are they most likely to be? A. a brand of tea and a brand of sugar B. a brand of hot dog and a brand of hot dog bun C. a brand of juice and a brand of computer D. two competing brands of soft drinks

D. two competing brands of soft drinks

elastic, inelastic, or unit elastic demand. When Ruko, a device used to stream movies at home, increases prices by 39 percent, total revenue decreases by 57 percent.

Elastic

Determine whether each statement describes the income effect, the substitution effect, or neither. Assume that all other variables are held constant. a. The price of lobster doubles, making Henri feel less wealthy. As a result, Henri buys fewer lobsters.

Income effect

Elastic, unit elastic, or inelastic? When Bluebox, a streaming service for foreign television shows and movies, increases its prices by 51 percent, total revenue increases by 34 percent

Inelastic

The price elasticity of demand for canned fruit is calculated as 0.75. Given this, demand is:

Inelastic

If a consumer has more time to search for a low-cost alternative for an item, their demand curve for that item will be (more/ less elastic)

More elastic

Determine whether each statement describes the income effect, the substitution effect, or neither. Assume that all other variables are held constant. Model Planes Incorporated reduces production of its wooden plane product line.

Neither

For most consumers, the newest iPhone is a _______ good. For most consumers, a 10-year-old used car is an ________ good. For most consumers, dental services are a _______ good.

Normal; inferior; normal

Determine whether each statement describes the income effect, the substitution effect, or neither. Assume that all other variables are held constant. The price of chicken falls by $0.75 a pound. Since chicken is now relatively less expensive than ground beef, Mary buys more chicken and less beef

Substitution effect

If Tesla cars become less expensive, what will happen in the market for other electric cars?

The demand for other electric cars will fall.

You are the manager of Frito-Lay's Cheese Puffs account, and you notice that when the price of Cheetos increases, there is an increase in demand for Cheese Puffs. What is the economic relationship between these goods that explains this behavior?

The increase in the price of Cheetos causes an increase in the demand for Cheese Puffs; therefore, these goods are substitutes.

Suppose the price elasticity of demand for lemons is 1.8. If a fall frost destroys one-third of the nation's lemon crop, how will that affect total revenue from lemons, all other things equal?

Total revenue will fall

Elastic, unit elastic, or inelastic? When Cinema Supreme decreases ticket prices by 12 percent, total revenue does not change.

Unit elastic

A downward-sloping demand curve implies:

an inverse relationship between price and quantity demanded.

The law of demand says that

as the price of a good increases, buyers are willing and able to purchase less.

Diminishing marginal benefit implies that:

buying an additional unit of an item yields a smaller benefit than the previous unit purchased.

If the price of herring increases by 8%, and the quantity demanded falls by 20%, demand is _____. This increase in price will therefore lead to a _____ in total revenue.

elastic; decrease

If demand is _____, a higher price yields _____ total revenue.

elastic; lower

The Rational Rule for Buyers:

entails that buyers compare the benefit of buying an additional unit of an item to the cost of that item.

A normal good is a good:

for which higher income causes an increase in demand.

You manage a restaurant, and lately revenues have been rather poor. One of your servers suggests that raising food prices will increase revenues, but your chef suggests that decreasing food prices will increase revenues. You aren't sure who is right, but you know that your server believes that the demand for your food is _____, and your chef believes that the demand for your food is _____.

inelastic; elastic

If demand is _____, a higher price yields _____ total revenue.

inelastic; higher

Diminishing marginal benefit:

is seen in the downward slope of a demand curve.

In general, the long-run price elasticity of demand for a good tends to be _____ the short-run price elasticity of demand for it.

larger than

Paint and paintbrushes are complements. A decrease in the price of paintbrushes will cause the demand for:

paint to increase.

If a certain item has many substitutes, its demand curve will be:

relatively flat

If an item is a necessity rather than a luxury, its demand curve will be:

relatively steep

Taking the absolute value of the income elasticity of demand is incorrect because it would:

remove the ability to tell whether the product is an inferior good or a normal good.

Taking the absolute value of the cross-price elasticity of demand is incorrect because it would:

remove the ability to tell whether the two products are substitutes or complements

On a hot sweltering day, you feel thirsty and buy an ice-cold soft drink, which you gulp down. Whether you buy a second drink or not will depend on

the marginal benefit from the second soft drink and if it will outweigh the price of the soft drink.

Consumer surplus is equal to the difference between

the maximum price a buyer is willing to pay and the market price

When asked to write the definition of the "Law of Demand" on an exam, Chris wrote, "When the price of a good increases, consumers will decrease the amount that they purchase." Chris' professor deducted one point for this response. The professor most likely deducted one point because Chris forgot to include

the phrase "holding everything else constant."

Demand is best described as

the quantity of a good or a service that people are willing and able to purchase at different possible prices

Consumer surplus is shown graphically as the area

under the demand curve and above the market price

Suppose the percent change in the quantity demanded for water for any price change is zero. The demand curve for water is _____, and the price elasticity of demand is perfectly _____.

vertical; perfectly inelastic