Chapter 6- Elasticity
An increase in the price of a substitute for iPads will lead to __________ in the quantity demanded of iPads so the cross-price elasticity of demand will be __________.
an increase, positive
Prior to the 1997 federal tobacco settlement a pack of cigarettes sold for $2.48. The terms of the settlement required a decrease in teenage smoking of 60 percent. If the elasticity of cigarette demand for teenagers is about 1.3 then the price of cigarettes should rise to __________ in order to achieve the target reduction of 60 percent.
$3.62
The income elasticity for peanut butter is -3. This defines peanut butter as what type of good?
An inferior good
Consider the markets for BP supreme-grade gasoline, all BP grades of gasoline, and all gasoline. For which of these three markets will demand be most elastic? Demand will be most elastic for
BP supreme-grade gasoline, then for all BP grades of gasoline, and then for all gasoline.
What are the key determinants of the price elasticity of demand for a product? The key determinants of the price elasticity of demand for a product are:
availability of close substitutes, passage of time, necessities versus luxuries, definition of the market, and share of the good in the consumer's budget.
If the cross-price elasticity of demand between two products is -3.0, then the two products are:
complements
Personal computers and computer display monitors are:
complements
If the income elasticity of SUVs is greater than 1, what is the good considered?
luxury
Economists avoid confusion over units in the computation of elasticity by using:
percentage changes
What is the cross-price elasticity of demand for two goods that are unrelated?
zero
Suppose Nationwide increases the insurance premium they charge for their auto policies by 22 percent. In response, the demand for State Farm auto policies in a small town increases from 3,000 to 3,750. What is the cross-price elasticity of demand for State Farm auto policies in this town? Using the midpoint formula, the cross-price elasticity of demand for State Farm auto policies is In this instance, auto insurance from Nationwide and auto insurance from State Farm are
1.010 substitutes (3,750-3000)=750 750/[(3750+3000)/2] = 22.222 (22.222%/22%)= 1.010
Which of the following goods is probably the most highly income elastic? Salt, Private education, or Food
Private education
Suppose a professional basketball game is to be played at a suburban arena, which increases demand for parking on the night of the game. If the suburban area has the ability to create additional parking during periods of peak demand, then
The supply of parking will be more elastic and the price of parking will increase by a relatively small amount the night of the game.
A perfectly inelastic supply curve:
indicates the quantity supplied does not respond to a change in price
The disappearance of the family farm can be partially attributed to the fact that the elasticity of demand for wheat is __________, while at the same time, the income elasticity for wheat is __________.
inelastic, low
Along a linear demand curve, the slope __________ while the price elasticity of demand __________.
is constant, changes from one point to another
If prices rise the quantity supplied will be greater:
the longer the time that elapses
What is the formula for the price elasticity of demand? The formula for the price elasticity of demand is
the percentage change in quantity demanded divided by the percentage change in price.
The formula for the price elasticity of supply is
the percentage change in quantity supplied divided by the percentage change in price.
On the lower part of a linear demand curve below the midpoint, the demand is ________ and raising the price causes total revenue to _________.
inelastic; increase
Why isn't elasticity just measured by the slope of the demand curve?
The measurement of slope is sensitive to the units chosen for quantity and price.
If a 20 percent increase in the price of Red Bull energy drinks results in a decrease in quantity demanded of 25 percent, we say the demand for Red Bull is __________ in this range.
elastic
If the supply of Good B is perfectly elastic and price falls the quantity supplied will:
fall to zero Perfectly elastic supply means that any decline in price results in zero units being supplied if the price falls.
The more substitutes that exist for a particular product, the __________ the price elasticity of demand.
greater
Which determinant is the most important?
The availability of close substitutes
If a 20 percent increase in the price of Red Bull energy drinks results in a decrease in the quantity demanded of 25 percent, the price elasticity of demand is:
-1.25
Suppose that after hurricane Irene, the average income in Cape Charles, Virginia decreased by 18 percent. In response to this change in income, suppose the quantity of steak demanded in Cape Charles (holding the price of steak constant) decreased by 2 percent. What is the income elasticity of demand for steak in Cape Charles? In this instance, steak in Cape Charles is
0.11 -2/-18 = 0.11 normal and a necessity
If an increase of 11 percent in the price of frozen pizzas results in a 15 percent increase in the quantity of frozen pizzas supplied, the price elasticity of supply for frozen pizzas is _______ Is the supply of pizzas elastic or inelastic?
1.36 and elastic [.15/.11]= 1.36
The current price of wheat is $1.00 per bushel, and the price elasticity of demand for wheat is known to be 0.50. A bad harvest causes the supply of wheat to decrease and as a result the price of wheat rises by 20%. What will be the percentage change in quantity demanded for wheat and will farm revenues rise or fall?
10%, rise The percentage change in quantity demanded for wheat will decline by 10% and farm revenues will rise. The elasticity of demand is the percentage change in quantity divided by the percentage change in price. An elasticity of demand coefficient of 0.50 indicates that the quantity demanded will fall by .50 x 20% = 10%. Since wheat is inelastic we know that farm revenues will rise as a result.
True or False? The drug insulin is one example of a product that would have a perfectly elastic demand curve.
False
If the price elasticity of supply is 0.4, then a 20% increase in price will __________ the quantity supplied by __________ %.
If the price elasticity of supply is 0.4, then a 20% increase in price will increase the quantity supplied by 8.0%. The percentage change in quantity supplied is equal to the elasticity of supply multiplied by the percentage change in price. Quantity supplied will move in the same direction as price since suppliers will be willing to supply more units at higher prices, ceteris paribus. So, 0.40 x 20% = 8.0%.
Suppose gasoline has few close substitutes available. If so, then an increase in the price of gasoline will likely
decrease the quantity of gasoline demanded by a relatively small amount. Explanation: If a product has more substitutes available, it will have more elastic demand. If a product has fewer substitutes available, it will have less elastic demand. Since gasoline has few close substitutes, its demand will be relatively inelastic, and a price increase will decrease the quantity demanded by a relatively small amount.
As you move up a linear demand curve, the price elasticity of demand in absolute value
increases.
At current prices of a highly addictive drug the demand for the drug is highly price:
inelastic
When you compute a price elasticity of demand the answer is always:
negative
The price elasticity of supply always has a:
positive value
The __________ is a measure of responsiveness of the change in quantity demanded of a good to the change in its price.
price elasticity of demand
Compare the demand for water with the demand for wine. The demand for wine is likely
relatively more elastic because wine is a luxury.
