ECO Chapter 6

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

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.

Which of the following items is likely to have the highest income elasticity of demand?

A vacation home in the Swiss Alps

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

If the cross-price elasticity of demand for computers and software is negative, this means the two goods are

Complements.

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 statements about the price elasticity of demand is correct?

Demand is more elastic in the long run than it is in the short run.

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

A demand curve that is horizontal indicates that the commodity

Has a large number of substitutes.

Income elasticity measures

How a good's quantity demanded responds to change in buyers' incomes.

The demand for gasoline in the short run is

Inelastic because there are no good substitutes for gasoline.

Jenna runs a small boutique in Capitola. She tells one of her suppliers that she is willing to pay $6 for a pair of wool hand warmers and not a dime more. On the basis of this information, what can you conclude about her price elasticity of demand for wool hand warmers?

It is perfectly elastic

Seth is a competitive body builder. He says he has to have his 12-oz package of protein powder to "feed his muscles" every day. On the basis of this information, what can you conclude about his price elasticity of demand for protein powder?

It is perfectly inelastic

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

Less than one.

If firms do not increase their quantity supplied when price changes, then supply is

Perfectly inelastic.

For people who live near a bus route, a subway station, or a commuter rail line, public transportation provides a substitute to driving their own cars. So, for these people, the cross-price elasticity of demand between gasoline and public transportation is

Positive

Suppose at the going wage rate of $20 per hour, firms can hire as many hours of janitorial services as it desires. If any firm tries to lower the wage rate to $19, it will not be able to hire any janitor. What does this indicate about the supply curve for janitorial services?

Supply is perfectly elastic.

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.

When demand is unit-elastic, a change in price causes total revenue to stay the same because

The percentage change in quantity demanded exactly offsets the percentage change in price.

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

Zero

Consider the following pairs of items: a. shampoo and conditioner b. iPhones and earbuds c. a laptop computer and a desktop computer d. beef and pork e. air-travel and weed killer Which of the pairs listed will have a negative cross-price elasticity?

a and b only

As high gasoline prices persisted into the first part of 2011, consumers began driving less and using public transportation more. Over time, this caused the demand curve for gasoline to become ________ and the quantity of gasoline demanded to ________.

more elastic; fall

Total revenue equals

price per unit times quantity sold.

The price elasticity of supply is equal to

the percentage change in quantity supplied divided by the percentage change in price

Cross-price elasticity of demand is calculated as the

Percentage change in quantity demanded of one good divided by percentage change in price of a different good.

Suppose a 4 percent increase in price results in a 2 percent increase in the quantity supplied of a good. Calculate the price elasticity of supply and characterize the product.

0.5; The product is inelastic.

List the five key determinants of price elasticity of demand and explain how each determinant indicates if demand tends to be elastic or inelastic.

1. Availability of close substitutes: 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. 2. Passage of time: The more time that passes, the more elastic the demand for a product becomes. 3. Luxuries versus necessities: The demand curve for a luxury is more elastic than the demand curve for a necessity. 4. Definition of the market: The more narrowly a market is defined, the more elastic demand will be. 5. Share of a good in a consumer's budget: The demand for a good will tend to be more elastic the larger the share of the good in the average consumer's budget.

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.

Which of the following would result in a higher absolute value of the price elasticity of demand for a product?

A wide variety of substitutes are available for the good.

If a firm lowered the price of the product it sells and found that total revenue did not change, then the demand for its product is

Unit-elastic.

Price elasticity of demand measures

how responsive quantity demanded is to a change in price.

Price elasticity of supply is used to gauge

How responsive suppliers are to price changes.

With the increased usage of cell phone services, what has happened to the price elasticity of demand for land-line telephone services?

It has become more price elastic.

Which of the following statements is true about the price elasticity of demand along a downward sloping linear demand curve?

It is elastic at high prices and inelastic at low prices.

The price elasticity of an upward-sloping supply curve is always

Positive

The cross-price elasticity of demand between an unlimited texting option and an unlimited call minutes option offered from a cell phone provider would be

Positive if subscribers consider the services substitutes for each other.

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 decrease in price, quantity supplied decreases by a proportionately smaller percentage, then supply is

Relatively inelastic.

If, for a given percentage increase in price, quantity demanded falls by a proportionately smaller percentage, then demand is

Relatively inelastic.

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

Relatively inelastic.

If the demand for a life-saving drug was perfectly inelastic and the price doubled, the quantity demanded would

Remain constant.

If the market for a product is narrowly defined, then there are likely to be many substitutes for the product and the demand for the product is relatively elastic

TRUE

Necessities tend to have more inelastic demands than luxuries.

TRUE

Suppose the supply curve for digital cameras shifts to the right. This will cause a relatively large decrease in the price of digital cameras if both demand and supply are inelastic.

TRUE

The price elasticity of supply is calculated as the change in supply divided by the change in price.

TRUE

When there are few substitutes available for a good, demand tends to be relatively inelastic.

TRUE

Over longer periods of time, increases in oil prices provide firms with incentives to explore and recover oil. What does this indicate about the long run price elasticity of supply for oil?

The elasticity coefficient is likely to be higher in the long run than in the short run.

Bringing oil to the market is a relatively long and costly process. The whole process from exploration to pumping significant amounts of oil can take years. What does this indicate about the price elasticity of supply for oil?

The elasticity coefficient is likely to be low and supply is highly inelastic.

If the cross-price elasticity of demand between Breeze Detergent and Faber Detergent is a relatively large positive number, then it indicates that

The two brands of detergent are close substitutes.

Consider the following pairs of items: a. shampoo and conditioner b. iPhones and earbuds c. a laptop computer and a desktop computer d. beef and pork e. air-travel and weed killer Which of the pairs listed will have a cross-price elasticity of zero?

e only

If, for a given percentage increase in price, quantity supplied increases by a proportionately larger percentage, then supply is

elastic.