Chapter 5 ECO 215

Refer to Table 5-2. Using the midpoint method, if the price falls from $200 to $150, the absolute value of the price elasticity of demand is

2.8

Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 0.75. Which of the following events is consistent with a 10 percent decrease in the quantity of the good demanded?

A 13.33 percent increase in the price of the good

Your younger sister needs $50 to buy a new bike. She has opened a lemonade stand to make the money she needs. Your mother is paying for all of the ingredients. She currently is charging 25 cents per cup, but she wants to adjust her price to earn the $50 faster. If you know that the demand for lemonade is elastic, what is your advice to her?

Lower the price to increase total revenue.

Refer to Table 5-4. Using the midpoint method, which of the three supply curves represents the least elastic supply?

Supply curve A

You and your college roommate eat three packages of Ramen noodles each week. After graduation last month, both of you were hired at several times your college income. You still enjoy Ramen noodles very much and buy even more, but your roommate plans to buy fewer Ramen noodles in favor of foods she prefers more. When looking at income elasticity of demand for Ramen noodles, yours would

be positive, and your roommate's would be negative.

Suppose that two supply curves pass through the same point. One is steep, and the other is flat. Which of the following statements is correct?

The steeper supply curve represents a supply that is inelastic relative to the supply represented by the flatter supply curve.

Which of the following is not a determinant of the price elasticity of demand for a good?

The steepness or flatness of the supply curve for the good

income elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income

total revenue

the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold

If the price of walnuts rises, many people would switch from consuming walnuts to consuming pecans. But if the price of salt rises, people would have difficulty purchasing something to use in its place. These examples illustrate the importance of

the availability of close substitutes in determining the price elasticity of demand.

Refer to Table 5-3. Using the midpoint method, the income elasticity of demand for good Y is

−2.33, and good Y is an inferior good.

Refer to Figure 5-6. Using the midpoint method, what is the price elasticity of supply between points A and B?

2.33

When the price of good A is $50, the quantity demanded of good A is 500 units. When the price of good A rises to $70, the quantity demanded of good A falls to 400 units. Using the midpoint method, the price elasticity of demand for good A is

0.67, and an increase in price will result in an increase in total revenue for good A.

Refer to Figure 5-3. At a price of $70 per unit, sellers' total revenue equals

1050

elasticity

a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both goods are considered to be normal goods by a majority of consumers. Suppose that a large income tax increase decreases the demand for both goods by 10 percent.

decrease in both the aged cheddar cheese and bread markets.

For which of the following goods is the income elasticity of demand likely highest?

diamonds

Suppose the cross-price elasticity of demand between peanut butter and jelly is −2.50. This implies that a 20 percent increase in the price of peanut butter will cause the quantity of jelly purchased to

fall by 50 percent

When the price of candy bars is $1.00, the quantity demanded is 500 per day. When the price falls to $0.80, the quantity demanded increases to 600. Given this information and using the midpoint method, we know that the demand for candy bars is

inelastic

Suppose researchers at the University of Wisconsin discover a new vitamin that increases the milk production of dairy cows. If the demand for milk is relatively inelastic, the discovery will

lower both price and total revenues.

For which pairs of goods is the cross-price elasticity most likely to be positive?

pens and pencils

price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

cross-price elasticity of demand

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good

price elasticity of supply

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

Suppose demand is perfectly elastic, and the supply of the good in question decreases. As a result,

the equilibrium quantity decreases, and the equilibrium price is unchanged.

You are in charge of the local city-owned aquatic center. You need to increase the revenue generated by the aquatic center to meet expenses. The mayor advises you to increase the price of a day pass. The city manager recommends reducing the price of a day pass. You realize that

the mayor thinks demand is inelastic, and the city manager thinks demand is elastic.