Chapter 5 Questions
A good has a price elasticity of demand of 1.5. Which of the following is the good or service most likely to be associated with this numeric value? A. Correct! A BMW automobile B. Eggs C. Any type of Secondary Education D. Doctor's Visits
A. A BMW automobile Elasticity that is greater than 1 implies elastic good. From the four choices, BMW is more likely to have greater number of substitutes relative to the other options. BMW is a luxury good, which likely has an elastic demand. Doctors visits is a necessity (fewer substitutes) so is likely to have a more inelastic demand. Eggs has no close substitutes, since eggs are not easily substituted in most recipes and so has more inelastic demand. Secondary education has a broad market definition that includes community college and four year colleges as varied as Berea, UK, and UL, meaning it has a more inelastic demand.
Which of the following is likely to have the more elastic demand? A. Goods with narrow market definitions B. Necessities C. Goods with short time horizons D. Goods without close substitutes
A. Goods with narrow market definitions Narrowly defined markets tend to have more elastic demand than broadly defined markets because it is easier to find close substitutes for narrowly-defined goods. ie: food (broad category) has a fairly inelastic demand b/c there are no good substitutes for it
John Calipari has seen that revenues increase from selling basketball tickets when prices are raised. He has asked you why this is the case. You tell him, that the Wildcats face _____________demand for basketball tickets. A. Inelastic B. Elastic C. Unit Elastic D. Perfectly Elastic E. Perfectly Inelastic
A. Inelastic The Wildcats face inelastic demand, when price increases total revenue increases, that is, quantity demanded will face a smaller percentage decrease than the percentage increase in price.
The UK Bookstore assumes that T-shirts and books are substitutes. Which of the following measures would confirm their assumption? A. A positive income elasticity B. A positive cross-price elasticity of demand C. A negative income elasticity D. A negative cross-price elasticity of demand
B. A positive cross-price elasticity of demand Substitutes are characterized by positive cross-price elasticities, that is the percentage change in quantity of books sold should be positive when the percentage change in price of T-shirts is positive, that is the price of T-shirts and quantity demanded of Books move in the same direction (and vice versa).
Two Keys knows that if they raise the price of Bud Light on Tuesday nights by 10% that there will be a 15% decrease in Bud Lights sold. Two Keys also knows that if they raise the price of Miller Lite on Thursday by 10% there will be a 8% decrease in Miller Lites sold. If Two Keys wants to increase profit, which of the following should they do? A. Decrease the price of Bud Light on Tuesday and decrease the price of Miller Lite on Thursday B. Decrease the price of Bud Light on Tuesday and increase the price of Miller Lite on Thursday C. Increase the price of Bud Light on Tuesday and increase the price of Miller Lite on Thursday D. Increase the price of Bud Light on Tuesday and decrease the price of Miller Lite on Thursday
B. Decrease the price of Bud Light on Tuesday and increase the price of Miller Lite on Thursday Determine which of the two goods is elastic/inelastic. The numbers provided indicate the elasticity for Bud Light in Tuesday is 1.5 (15/10) = elastic. Decreasing the price of a good thats elastic will lead to higher revenues. Similarly, the elasticity for Miller Lite on Thursdays is inelastic (8/10=0.8). For any business wanting to raise revenue should increase the price of a good that has an inelastic demand.
Which of the following is not a determinant of Price Elasticity of Supply? A. Ease of acquiring and utilizing inputs B. Definition of market C. Ability to store output D, Time required to produce the good
B. Definition of market The definition of market is a determinant of the elasticity of demand. The missing determinant of the elasticity of supply is availability of infrastructure facilities.
Woodford Reserve sells some quantity of bourbon at a price of $40. If Woodford Reserve increases their price by $1 and people no longer buy their Bourbon, what kind of price elasticity of demand does Woodford Reserve face? A. Inelastic Demand B. Unit Elastic Demand C. Perfectly Elastic Demand D. Elastic Demand E. Perfectly Inelastic Demand
C. Perfectly Elastic Demand In this situation Woodford is facing perfectly elastic demand, since when the price is raised they go from facing some positive demand for their product to facing zero demand for their product.
When the Chik-fil-a at Bowman's Den increases the price of Chik-in sandwiches from $4 to $5 the number of sandwiches sold in a day decreases from 150 to 100. What is the price elasticity of demand. (Use the midpoint method(also called arc elasticity)) Is the consumer response inelastic or elastic? A. Price elasticity of demand is .56, the consumer response is inelastic B. Price elasticity of demand is .56, the consumer response is elastic C. Price elasticity of demand is 1.8, the consumer response is elastic D. Price elasticity of demand is 1.8, the consumer response is inelastic
C. Price elasticity of demand is 1.8, the consumer response is elastic Since the elasticity is greater than 1 the good is elastic. The math is as follows:
Which of the following describes inelastic demand? A. Price elasticity of demand equals 1 B. Price elasticity of demand equals infinity C. Price elasticity of demand is less than 1 D. Price elasticity of demand equals 0 E. Price elasticity of demand is greater than 1
C. Price elasticity of demand is less than 1 Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price, ceteris paribus. The smaller the number the less responsive the demand is to changes in price.