Elasticity

Elasticity allows economists to measure

the responsiveness of one variable to changes in another variable

Which of these questions is the best example of elasticity?

How much will a change in price or quantity impact consumer and producer behavior?

Which of the following questions would be asked by an economist studying elasticity?

How responsive are consumers and producers to changes in price

The price elasticity of demand measures the

Responsiveness of quantity demanded to a change in price

In a market with relatively inelastic demand, if the supply curve shifts due to a fall in production costs, the equilibrium price will ________ by ________ than equilibrium quantity.

decrease, more

When a 10% increase in income causes a 4% increase in quantity demanded of a good

income elasticity of 0.4 and good is a normal good

When income increases and demand for a good falls, the good is considered a

inferior good

If wages increase by 10%, a(n) ________ worker is likely to supply 7% more labor because elasticity of labor supply is assumed to be ________.

adult, inelastic

Suppose the price of apples increase by 20%, resulting in consumers to purchase 15% more pears. Given this information, it appears that

cross price of pears .75

A 10% decrease in the price of potato chips leads to a 30% increase in the quantity of soda demanded. It appears that

cross-price elasticity of demand for soda is -3

Teenage workers are assumed to have ________ labor supply; therefore a 5% increase in wages would result in ________ percentage change in quantity of labor supplied.

Elastic, greater

You are the manager of a restaurant and would like to increase revenue. The servers suggest decreasing the price of drinks and food. The servers' recommendation is based on the assumption that

demand for drinks and food is elastic.

A person who takes life-saving prescription drugs most likely has a(n) ________demand for that drug. Therefore an increase in the price of the drug will result in ________ total revenue for the drug company.

inelastic, increased

If a small change in price creates a large change in demand, then we would say that the demand is

elastic

A smoker who is willing to pay whatever it takes to support a smoking habit likely has ________ demand.

inelastic

The size of the change in the quantity demanded of a good or service due to change in its price is measured by the elasticity of demand. When the percentage change in the quantity demanded for a good or service is less than the percentage change in price, the demand for that good or service is ________ and price elasticity is ________.

inelastic; less than 1

If the elasticity of demand for a company's product is estimated to be 1.72, what would you advise the company to do if their objective is to increase revenue?

lower the price

Suppose you are in charge of sales at a pharmaceutical company, and your firm has a new drug that causes bald men to grow hair. Assume that the company wants to earn as much revenue as possible from this drug. If the elasticity of demand for your company's product at the current price is 1.4, what would you advise the company to do?

lower the price

When income increases and the demand for a good increases, the good is considered a

normal good

Using the midpoints method, calculate the price elasticity of demand of Good Z using the following information: When the price of good Z is $10 (P1), the quantity demanded of good Z is 85 units (Q1). When the price of good Z rises to $15 (P2), the quantity demanded of good Z falls to 60 units (Q2).

percent change in quantity = [Q2 - Q1 / (Q2 + Q1) / 2] X 100= [(60 - 85) / (60 + 85) / 2] X 100 = (-25 / 72.5) X 100 = -34.483Percent change in price = [P2 - P1 / (P2 + P1) / 2] X 100= [(15 - 10) / (15 + 10) / 2] X 100 = (5 / 12.5) X 200 = 40We know that Price Elasticity of Demand = (percent change in quantity) / (percent change in price)= -34.483 / 40 = 0.8621 the price elasticity of demand for good Z = 0.86

When the demand for a good or service does NOT vary when there is a change in price, the good is ________?

perfectly inelastic

The price elasticity of demand measures the

responsiveness of quantity demand to a change in price

Which of the following factors does NOT influence the price elasticity of demand of a product?

slope of the supply curve

When a 5% increase in income causes a 3% drop in quantity demanded of a good

the income elasticity is .6 and the good is an inferior good

Suppose there is a major technological advance in the production of a good that causes production costs to fall. If demand for the product is relatively inelastic, what will happen in the market?

the price decrease will be relatively greater than the increase in quantity

You are the manager of the public transit system. You are informed that the system faces a deficit, but you cannot cut service, which means you cannot cut costs. Your only hope is to increase revenue by increasing fares. You are advised that the estimated price elasticity of demand for the first few months after a price change is about −0.3. Select the statement that best describes the results of raising the fare in the short run.

total revenue rises immediately after the fare increases, since demand over the immediate period is price inelastic

You are the manager of the public transit system. You are informed that the system faces a deficit, but you cannot cut service, which means you cannot cut costs. Your only hope is to increase revenue by increasing fares. You are advised that the estimated price elasticity of demand, several years after the price change, will be about −1.5. Select the statement that best describes the results of raising the fare in the long run.

total revenue rises immediately since demand will remain price inelastic