chapter 6

Jaycee Jeans sold 40 pairs of jeans at a price of $40. When it lowered its price to $20, the quantity sold increased to 60 pairs. Calculate the absolute value of the price elasticity of demand. Use the midpoint formula.

0.6

Suppose a hurricane decreased the supply of oranges so that the price of oranges rose from $120 a ton to $180 a ton and quantity sold decreased from 800 tons to 240 tons. What is the absolute value of the price elasticity of demand?

2.69

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.

Suppose the value of the price elasticity of supply is 4. What does this mean?

A 1 percent increase in the price of the good causes quantity supplied to increase by 4 percent.

Refer to Figure 6-6. As price falls from PA to PB, the quantity demanded increases the most along D1; therefore

D1 is more elastic than D2 or D3.

Jonah lives in a small town where there is only one Mexican restaurant. Which of the following is likely to be true about the price elasticity of demand for meals at the Mexican restaurant?

Demand is likely to be relatively inelastic.

Which of the following goods would have the most inelastic demand?

bread

Which of the following products comes closest to having a perfectly inelastic demand?

cholesterol medication in general

Price elasticity of demand measures

how responsive quantity demanded is to a change in price.

The demand for gasoline in the short run is

inelastic because there are no good substitutes for gasoline.

Opera Estate Girls' School is considering increasing its tuition to raise revenue. If the school believes that raising tuition will increase revenue it is assuming that the demand for attending the school is

inelastic.

If demand is inelastic, the absolute value of the price elasticity of demand is

less than one.

Last year, Joan bought 50 pounds of hamburger when her household income was $40,000. This year, her household income was only $30,000 and Joan bought 60 pounds of hamburger. Holding everything else constant, Joan's income elasticity of demand for hamburger is

negative, so Joan considers hamburger to be an inferior good.

Refer to Figure 6-1. A perfectly elastic demand curve is shown in

panel c

Total revenue equals

price per unit times quantity sold

When there few close substitutes available for a good, demand tends to be

relatively inelastic.

When demand is elastic, a fall in price causes total revenue to rise because

the increase in quantity sold is large enough to offset the lower price

Perfectly inelastic demand is represented by a demand curve which is ________, and relatively inelastic demand is represented by a demand curve which is ________.

vertical; downward sloping

If demand is perfectly inelastic, the absolute value of the price elasticity of demand is

zero.