Economics Exam 2 CH 5

If the absolute value of E is equal to 1, than this variable is:

unit elastic (The change in the response variable, was the same as the change in the trigger variable)

If the absolute value of E is greater than one, than this variable is:

elastic (the change in the response variable was bigger than the change in the trigger variable)

Supply is usually more elastic in the long run than in the short run because

firms cannot easily change the size of their factories over short periods of time.

Suppose that when the price of good X falls from $60 to $48, the quantity demanded of good Y falls from 10 units to 8 units. Using the midpoint method, the cross-price elasticity of demand is

1.0, and X and Y are substitutes. (Using the midpoint method, the cross-price elasticity of demand is 1.00 and X and Y are substitutes. To compute the percent change in quantity of good Y, (8-10) / [(8 +10)/2] = -0.22. To compute the percent change in price of good X, (48-60) / [(48+60)/2] = -0.22. Dividing the percent change in quantity of good Y by the percent change in price of good X yields a cross-price elasticity of demand of 1.00. When two goods have a positive cross-price elasticity, they are substitutes.)

Which of the following could be the price elasticity of demand for a good for which a decrease in price would increase revenue?

1.67 (A decrease in price results in an increase in revenue when demand is elastic-a price elasticity greater than 1)

If the price elasticity of demand for a good is 0.75, then an 8 percent decrease in price results in a

6 percent increase in the quantity demanded. (The Law of Demand states that as the price decreases, the quantity demanded increases.)

Which of the following would likely have the least elastic supply? a. beachfront land b. computers c. candles d. furniture

Beachfront Land (The price elasticity of supply depends on the flexibility of the sellers to change the amount of the good they produce. It is almost impossible to produce more beachfront land, so it has the least elastic supply of the goods listed.)

Katerina teaches harp lessons. If the demand for harp lessons is elastic, Katerina could increase her total revenue by:

Decreasing the price of her harp lessons (When demand is elastic, reducing the price results in higher total revenue.)

Which of the following is likely to have the most price elastic demand? -Soap -Body wash -Dove moisturizing body wash -Moisturizing body wash

Dove moisturizing body wash (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)

Which of the following is likely to have the most price elastic demand? -Toilet Paper -Water -Vegetables -Flowers

Flowers (Necessities tend to have inelastic demands, whereas luxuries have elastic demands)

If the absolute value of E is less than one, than this variable is:

Inelastic (the change in the response variable was smaller than the change in the trigger variable)

Which of the following statements helps to explain why government drug interdiction increases drug-related crime?

Interdiction results in an increase in the amount of money needed to buy the same amount of drugs. (One of the reasons why government drug interdiction increases drug-related crime is that by decreasing the supply and driving up the price of drugs, interdiction results in an increase in the amount of money needed to buy the same amount of drugs.)

For a particular good, a 15 percent increase in price causes a 10 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?

There are no close substitutes for this good (The price elasticity of demand is computed by dividing the percent change in quantity by the percent change in price. For this good, the price elasticity of demand equals 10/15 = 0.67, which is inelastic. Goods with no close substitutes tend to have less elastic demand because it is more difficult for consumers to switch from that good to another.)

If the price elasticity of demand for a good is 2.0, then a 5 percent increase in price results in a

a 10 percent decrease in the quantity demanded (The price elasticity of demand is the absolute value of the percent change in the quantity demanded divided by the percent change in the price. A 10 percent decrease in the quantity demanded divided by a 5 percent increase in price leads to an absolute value of elasticity equal to 2)

If the price elasticity of demand for a good is 0.45, then which of the following events is consistent with a 9 percent decrease in the quantity of the good demanded?

a 20 percent increase in the price of the good (The price elasticity of demand is the absolute value of the percent change in the quantity demanded divided by the percent change in the price. A 9 percent decrease in the quantity demanded divided by a 20 percent increase in price leads to an absolute value of elasticity equal to 0.45.)

A perfectly elastic demand implies that buyers of wheat would

b. not buy any wheat, at all, with any increase in price above the demand curve. (With perfectly elastic demand, any increase in price above that represented by the demand curve will result in a quantity demanded of zero.)

Because the demand for corn tends to be inelastic, the development of a new, pest-resistant strain of corn would tend to

decrease the total revenue of corn farmers. (A new, pest-resistant strain of corn increases the amount of corn that can be produced, so the supply curve shifts to the right. The demand curve does not shift. When supply shifts to the right and demand remains constant, the equilibrium price of corn decreases and the equilibrium quantity increases. When the price decreases for a good with inelastic demand, total revenue decreases.)

Refer to the Figure. For prices below $50, demand is price

inelastic, and total revenue will rise as price rises. (Along a linear demand curve, demand is price elastic for the top half of the curve and inelastic for the bottom half of the curve. When demand is inelastic, total revenue rises as price rises)

In the market for oil in the short run, demand and supply are

inelastic, so a shift in supply leads to a large change in price.

What is elasticity?

the percent change in a response variable divided by the percent change in a trigger variable

A concert venue sells 15,000 tickets to a show, regardless of the market price. For this firm, the price elasticity of supply is

zero (If all of the tickets sell, regardless of the price, then the sellers have perfectly inelastic supply. With perfectly inelastic supply, elasticity equals zero.)