Economics Final

Which of the following goods will least likely suffer a decline in demand during a recession?

Toothpaste

How would the following changes in price affect total revenue? That is, would total revenue increase, decrease, or remain unchanged? a. Price falls and demand is inelastic. b. Price rises and demand is elastic. e. Price rises and demand is inelastic. f. Price falls and demand is elastic. g. Price falls and demand is of unit elasticity.

(a) Total revenue decreases (b) Total revenue decreases (e) Total revenue increases (f) Total revenue increases (g) No change

Investigate how demand elasticities are affected by increases in demand. Shift each of the demand curves in Figures 6.2a, 6.2b, and 6.2c to the right by 10 units. For example, point a in Figure 6.2a would shift rightward from location (10 units, $2) to (20 units, $2) while point b would shift rightward from location (40 units, $1) to (50 units, $1). After making these shifts, apply the midpoint formula to calculate the demand elasticities for the shifted points. Are they larger or smaller than the elasticities you calculated in Problem 1 for the original points? In terms of the midpoint formula, what explains the change in elasticities?

1.29; 1/3 = .3333; 2/3 = .6667; smaller; everything in the midpoint formula stays the same except the reference point for quantity, which increases—that increase reduces the elasticity.

The supply of product X is inelastic (but not perfectly inelastic) if the price of X rises by:

7 percent and quantity supplied rises by 5 percent.

The income elasticities of demand for movies, dental services, and clothing have been estimated to be +3.4, +1, and +.5, respectively. Interpret these coefficients. What does it mean if an income elasticity coefficient is negative?

All are normal goods—income and quantity demanded move in the same direction. These coefficients reveal that a 1 percent increase in income will increase the quantity of movies demanded by 3.4 percent, of dental services by 1 percent, and of clothing by 0.5 percent. A negative coefficient indicates an inferior good—income and quantity demanded move in the opposite direction.

Which type of goods is most adversely affected by recessions?

Goods for which the income elasticity coefficient is relatively high and positive.

Research has found that an increase in the price of beer would reduce the amount of marijuana consumed. Is cross elasticity of demand between the two products positive or negative? Are these products substitutes or complements? What might be the logic behind this relationship?

If the cross elasticity is negative, this implies that an increase in the price of one good results in a decrease in the quantity purchased of another good. This implies that the goods are compliments; as the price of one good increases, it reduces the consumption of other goods (purchased less). The cross elasticity of the two products above is negative. Thus, the products appear to be complementary. As one drinks beer, one also smokes

Suppose the cross elasticity of demand for products A and B is +3.6 and for products C and D is -5.4. What can you conclude about how products A and B are related? Products C and D?

The cross elasticity relates the percentage change in quantity to the percentage change in price of a different good. If the cross elasticity is positive this implies that and increase in the price of one good results in an increase in the quantity purchased of another good. This implies the goods are substitutes, as the price of one good increases substitute into the other good (purchase more). This implies that goods A and B are substitutes and that goods C and D are compliments. For reference, if the cross elasticity is negative this implies that and increase in the price of one good results in a decrease in the quantity purchased of another good. This implies that the goods are compliments; as the price of one good increases, reduce the consumption of the other good (purchase less).

What effect would a rule stating that university students must live in university dormitories have on the price elasticity of demand for dormitory space? What impact might this in turn have on room rates?

The ruling would make the price elasticity of demand more inelastic than if there were no such rule, assuming that there is not another equivalent university nearby to which students could transfer. Although universities are nonprofit organizations, the rule would certainly allow them to raise rates without worrying so much about students moving out to live elsewhere.

Suppose the income elasticity of demand for toys is +2.00. This means that:

a 10 percent increase in income will increase the purchase of toys by 20 percent.

A supply curve that is parallel to the horizontal axis suggests that:

a change in demand will change the equilibrium quantity but not price.

A supply curve that is a vertical straight line indicates that:

a change in price will have no effect on the quantity supplied.

If a firm's demand for labor is elastic, a union-negotiated wage increase will:

cause the firm's total payroll to decline.

If the demand for farm products is price inelastic, a good harvest will cause farm revenues to:

decrease

The price elasticity of demand for beef is about 0.60. Other things equal, this means that a 20 percent increase in the price of beef will cause the quantity of beef demanded to:

decrease by approximately 12 percent.

If the demand for product X is inelastic, a 4 percent increase in the price of X will:

decrease the quantity of X demanded by less than 4 percent.

Suppose Kate's Bakery currently faces a linear demand curve for her cake and is charging a very high price per cake and doing very little business. Kate now decides to lower cake prices by 5 percent per week for an indefinite period of time. What can we can expect in each successive week in terms of revenue?

demand elasticity will decrease along the demand in each successive week, revenue will first increase then decrease.

Suppose Aiyanna's Pizzeria currently faces a linear demand curve and is charging a very high price per pizza and doing very little business. Aiyanna now decides to lower pizza prices by 5 percent per week for an indefinite period of time. We can expect that each successive week:

demand will become less price elastic.

What is the formula for measuring the price elasticity of supply? Suppose the price of apples goes up from $20 to $22 a box. In direct response, Goldsboro Farms supplies 1,200 boxes of apples instead of 1,000 boxes. Compute the coefficient of price elasticity (midpoints approach) for Goldsboro's supply. Is its supply elastic, or is it inelastic?

elasticity of supply = percentage change in quantity supplied percentage change in price Es = 1.91; supply is elastic

If the supply of product X is perfectly elastic, an increase in the demand for it will increase:

equilibrium quantity, but equilibrium price will be unchanged.

Price elasticity of demand is generally:

greater in the long run than in the short run.

The larger the positive cross elasticity coefficient of demand between products X and Y, the:

greater their substitutability.

If the demand for bacon is relatively elastic, a 10 percent decline in the price of bacon will:

increase the amount demanded by more than 10 percent.

If the price elasticity of demand for a product is 2.5, then a price cut from $2.00 to $1.80 will:

increase the quantity demanded by about 25 percent.

If the income elasticity of demand for lard is -3.00, this means that:

lard is an inferior good.

Suppose that the price of product X rises by 20 percent and the quantity supplied of X increases by 15 percent. The coefficient of price elasticity of supply for good X is:

less than 1 and therefore supply is inelastic.

Supply curves tend to be:

more elastic in the long run because there is time for firms to enter or leave the industry.

A firm can sell as much as it wants at a constant price. Demand is thus:

perfectly elastic.

Suppose that a 10 percent increase in the price of normal good Y causes a 20 percent increase in the quantity demanded of normal good X. The coefficient of cross elasticity of demand is:

positive and therefore these goods are substitutes.

Other things the same, if a price change causes total revenue to change in the opposite direction, demand is:

relatively elastic.

Gigantic State University raises tuition for the purpose of increasing its revenue so that more faculty can be hired. GSU is assuming that the demand for education at GSU is:

relatively inelastic.

The demand for a necessity whose cost is a small portion of one's total income is:

relatively price inelastic.

Compared to coffee, we would expect the cross elasticity of demand for:

tea to be positive, but negative for cream.

We would expect:

the demand for Coca-Cola to be more price elastic than the demand for soft drinks in general.

Suppose that the price of peanuts falls from $3 to $2 per bushel and that, as a result, the total revenue received by peanut farmers changes from $16 to $14 billion. Thus:

the demand for peanuts is inelastic.

The Illinois Central Railroad once asked the Illinois Commerce Commission for permission to increase its commuter rates by 20 percent. The railroad argued that declining revenues made this rate increase essential. Opponents of the rate increase contended that the railroad's revenues would fall because of the rate hike. It can be concluded that:

the railroad felt that the demand for passenger service was inelastic and opponents of the rate increase felt it was elastic.

It takes a considerable amount of time to increase the production of pork. This implies that:

the short-run supply curve for pork is less elastic than the long-run supply curve for pork.

The price of old baseball cards rises rapidly with increases in demand because:

the supply of old baseball cards is price inelastic.

Suppose the supply of product X is perfectly inelastic. If there is an increase in the demand for this product, equilibrium price:

will increase, but equilibrium quantity will be unchanged.