chapter 6
If 50 units are sold at a price of $20 and 80 units are sold at a price of $15, what is the absolute value of the price elasticity of demand? Use the midpoint formula.
1.62
Which of the pairs listed will have a negative crossminus−price elasticity?
a and b
If a 5 percent increase in income leads to a 10 percent increase in quantity demanded for airline travel, then airline travel is
a luxury
Which of the following items is likely to have the highest income elasticity of demand?
a vacation
Consider the market for Amazon DVDs. The price elasticity of demand for this product would become more elastic if it
had more close substitutes
If tolls on a toll road can be raised significantly before commuters will consider using a free alternative, then an increase in tolls will result in
increase in total revenue
Consider the demand for cigarettes. Suppose the government decreases the cost of cigarettes by lowering cigarette taxes. How will this affect the demand for cigarettes over time? If the cost of cigarettes decreases, then the quantity of cigarettes demanded will
increase, and this effect will likely become larger (in absolute value) over time.
Studies show that the income elasticity of demand for wine is approximately five. What does this mean?
A one percent increase in income leads to a five percent increase in wine consumption.
Consider the two demand curves illustrated in the figure to the right. Which of the two is relatively more elastic.. ?
D1
Consider the demand curve illustrated in the figure to the right. Is demand elastic or inelastic?
Demand is elastic at all prices above $7.00 and inelastic at all prices below $7.00. At what price is total revenue maximized? Total revenue is maximized when price equals 7
Which of the following statements about the price elasticity of demand is correct?
Demand is more elastic in the long run than it is in the short run.
For this consumer's household, is the cross-price elasticity of demand between lettuce and other green vegetables positive or negative
POSITIVE
Consider the market for a new CD, where the price is initially $6.00 and 36 thousand copies are sold, as indicated in the figure to the right at point A. The music company is considering lowering the price to $5.00, at which price 40 thousand copies would be sold. What is total revenue at the initial price (at point A)?
Revenue is initially 216 What would total revenue be at the lower price (at point B)? Revenue would be 200 Given this change in total revenue, is the price elasticity of demand between these prices elastic or inelastic? The price elasticity of demand (in this range of prices) is inelastic
Which of the following goods would have the most inelastic demand?
bread
Which of the pairs listed will have a positive cross−price elasticity?
c and d
If a firm wanted to know whether the demand for its product was elastic, unit elastic, or inelastic, then the firm could
change price a little bit and observe what happens to total revenue.
Over the past 30 years, the price of oil has been relatively unstable, fluctuating between $11.00 and well over $100 per barrel.
the price elasticity of supply for oil is inelastic.
If a 12 percent increase in the price of Cheerios causes a 27 percent reduction in the number of boxes of cereal demanded, the price elasticity of demand for Cheerios is
-2.25 ELASTIC
Suppose the price of salt increases by 20 percent and, as a result, the quantity of pepper demanded increases by 5 percent. The cross-price elasticity of demand between salt and pepper is
-4/20 -0.2 in this example, pepper and salt are complements If so, then the cross-price elasticity of demand between pepper and salt would be positive
Two managers have the following conversation. Manager 1: "The only way we can increase the revenue LOADING... we receive from selling our frozen pizzas is by cutting the price." Manager 2: "Cutting the price of a product never increases the amount of revenue you receive. If we want to increase revenue, we have to increase price." Do you agree with the reasoning of Manager 2?
. I disagree. Cutting the price will increase the revenue if the demand is price elastic.
Suppose the price of salt increases by 25 percent and, as a result, the quantity of pepper demanded increases by 4 percent. The cross-price elasticity of demand between salt and pepper is
0.16 substitutes negative
Calculate the income elasticity if an 8 percent increase in income leads to a 4 percent increase in quantity demanded for organic produce.
0.5
Suppose income increases by 10 percent and, as a result, the quantity of a particular brand of automobile demanded increases by 7 percent. The income elasticity of demand for this fbrand of car is
7/10 .7 this brand of automobile is normal good If so, then the income elasticity of demand for this truck is less than 1 but greater than 0
Suppose the cross price elasticity of demand between grapefruit fruit and orange juice is approximately 6. What does this mean?
A 1 percent decrease in the price of grapefruit juice leads to a 6 percent decrease in orange juice consumption
Suppose the value of the price elasticity of demand is −3. What does this mean?
A 1 percent increase in the price of the good causes quantity demanded to decrease by 3 percent.
Based on resale prices for tickets for the 2013 Super Bowl in New Orleans, faceminus−value prices for the most expensive tickets to the 2014 game are expected to more than double, with significant price increases for lesserminus−valued tickets as well. Evidence indicates that sports teams are more interested in maximizing attendance instead of ticket revenue, since greater attendance means more spending on items such as parking and concessions. Higher ticket prices in secondary markets seem to verify that teams are charging less than they could be if their goal was to maximize ticket revenue. Source: Patrick Rishe, "Super Bowl XLVIII Pricing: A Lesson In Demand Elasticity," Forbes, September 19, 2013. Refer to the Article Summary. How would sports teams know if they were operating on the elastic portion of the demand curve for tickets?
If they increased ticket prices and the total revenue from ticket sales decreased.
For this consumer's household, which product has the higher price elasticity of demand : bread or lettuce
LETTUCE
Consider a demand curve that has a constant elasticity value of 0. What happens to quantity demanded and total revenue when price increases?
The quantity demanded does not change but total revenue increases
The publisher of a magazine gives his staff the information in the table to the right. He tells the staff, 'Our costs are currently $150,000 more than our revenues each month. I propose to eliminate this problem by raising the price of the magazine to $3.00 per issue. This will result in our revenue being exactly equal to our cost.' Which of the following statements is correct?
The publisher's analysis is correct only if the demand is perfectly inelastic.
suppose gas has few close substitutes available if so, then an increase in the price of gas will likely
decrease the quantity of gasoline demanded by a relatively small amount.
A service station owner in Staten Island, New York, was worried that raising the price of gasoline would cause the quantity demanded to fall by so much that he would be in a worse situation than if he did not raise the price. If raising the price of gasoline would cause the owner to receive less total revenue from the sale of gasoline, the demand for gasoline is
elastic
MIT economist Jerry Hausman has estimated the price elasticity of demand for Post Raisin Bran cereal to be −2.5 and the price elasticity of demand for all types of breakfast cereals to be −0.9. The price elasticity of demand for Post Raisin Bran cereal is-------and the price elasticity of demand for all types of breakfast cereals is ----
elastic inelastic
Consider firms that introduce new products, such as DVDs in 2001. When firms introduce new products, how do they typically determine the price elasticity of demand for those products? Firms with new products often
estimate price elasticity of demand by experimenting with different prices.
If the price elasticity of demand for canned soup is estimated at −1.62. What happens to sales revenue if the price of canned soup rises?
falls
According to a study of the price elasticities of products sold in supermarkets, the price elasticity of demand for toothpaste is estimated at minus− 0.45. Which of the following could explain why the price elasticity of demand for toothpaste is so low?
few close substitutes for toothpaste
Based on resale prices for tickets for the 2013 Super Bowl in New Orleans, faceminus−value prices for the most expensive tickets to the 2014 game are expected to more than double, with significant price increases for lesserminus−valued tickets as well. Evidence indicates that sports teams are more interested in maximizing attendance instead of ticket revenue, since greater attendance means more spending on items such as parking and concessions. Higher ticket prices in secondary markets seem to verify that teams are charging less than they could be if their goal was to maximize ticket revenue. Source: Patrick Rishe, "Super Bowl XLVIII Pricing: A Lesson In Demand Elasticity," Forbes, September 19, 2013. Refer to the Article Summary. The idea that sports teams could charge more for tickets and still increase revenue indicates that tickets are being priced in the ________ portion of their demand curve.
inelastic
Between 1950 and 2006, the price of wheat fell dramatically from $15.81 per bushel to $3.40 per bushel.
inelastic the amount by which the price of wheat rises will be smaller the more inelastic the income elasticity of wheat.
If a good has a negative income elasticity of demand, this indicates that the good is
inferior
Why might the price elasticity of demand for Post Raisin Bran cereal be more elastic than the price elasticity of demand for all types of breakfast cereals? Post Raisin Bran cereal
is defined more narrowly
The demand for all carbonated beverages is likely to be ________ the demand for Dr. Pepper.
less elastic than
If demand is inelastic, the absolute value of the price elasticity of demand is
less than 1
Compare the price elasticity of demand for sugar with the price elasticity of demand for food. The price elasticity of demand for sugar is likely
more inelastic because pencils tend to represent a smaller fraction of a consumer's budget.
An article in the Dallas Morning News discussed the market for green cars such as hybrid gasoline, electric cars, and diesel cars. One factor the article mentioned as affecting the market for green cars was the increasing gas mileage of conventional gasoline-powered cars. Source: Terry Box and Troy Oxford, "Green Cars Still a Small Part of New-Car Sales," Dallas Morning News, May 26, 2013. This factor is likely to cause the demand for green cars to become
more price elastic
With the increased usage of cell−phone services, what has happened to the price elasticity of demand for land−line telephone services?
more price elastic
Last year, Sefton purchased 60 pounds of potatoes to feed his family of five when his household income was $30,000. This year, his household income fell to $20,000 and Sefton purchased 80 pounds of potatoes. All else constant, Sefton's income elasticity of demand for potatoes is
negative, so Sefton considers potatoes to be an inferior good.
Price of elasticity of demand
percentage change in quantity demanded ------------------------ percentage in price
According to an article in the Wall Street Journal, unlike airlines, even elite hotels don't have sophisticated systems that can react quickly to changes in demand. Even if they could, many hoteliers say people don't respond that much to lower rates. 'We've tested this, cutting our rates by $50 [per night], and we didn't see an appreciable response in occupancy,' says Jim Schultenover, a vice president for Ritzminus−Carlton. Source: Jesse Drucker, "In Times of Beltminus−Tightening, We Seek Reasonable Rates", Wall Street Journal, April 6, 2001. Based on the information above, the demand for hotel rooms
price inelastic
If a 35 percent increase in price of golf balls led to an 42 percent decrease in quantity demanded, then the demand for golf balls is
relatively elastic
If, for a given percentage increase in price, quantity demanded falls by a proportionately smaller percentage, then demand is
relatively inelastic
Compare the price elasticity of demand for water with the price elasticity of demand for wine. The price elasticity of demand for wine is likely
relatively more inelastic because water is a necessity
Economist X. M. Gao and two colleagues have estimated that the cross-price elasticity of demand between beer and spirits is 0.15. If so, then beer and spirits are
substitutes Gao and colleagues have estimated that the cross-price elasticity of demand between beer and wine is 0.31. If the price of wine increases by 10 percent, then the quantity of beer demanded will increase by 3 percent estimated income of demad for beer to be -0.09 If so, then beer is inferior good
What information must economists have to estimate the price elasticity of demand? To estimate the price elasticity of demand, economists need to know
the demand curve for a product.
The price elasticity of supply is affected by
the passage of time shorter
How is the price elasticity of demand measured? The price elasticity of demand is measured as
the percentage change in the quantity demanded divided by the percentage change in price.
Suppose a professional basketball game is to be played at a suburban arena, which increases demand for parking on the night of the game.
the supply of parking will be more inelastic and the price of parking will increase by a relatively large amount the night of the game.
If demand is perfectly inelastic, the absolute value of the price elasticity of demand is
zero
Rank these three items in terms of the elasticity of the demand for them at any given price, from most elastic to least elastic: hot beverages, coffee and Peets' Coffee.
Peets' Coffee, coffee, hot beverages
