Homework - chapter 5

Rank the following in order from the least elastic demand to most elastic.

(1) Allergy medicine that is prescribed by a physician (2) Any over-the-counter allergy medicine (3) Sudafed Cold and Allergy Medicine

Which of the following statements about the effects of a government setting maximum prices is true?

A maximum price will cause a shortage of a good to be produced only if the maximum price is below the equilibrium price.

Which of the following statements about the effects of rent control is true?

A maximum price will cause a shortage of a good to be produced only if the maximum price is below the equilibrium price.

Many major U.S. cities have adopted rent controls for some housing. An effective rent control is what kind of price control?

A price ceiling with a maximum price below equilibrium price

If population increases in a city with effective rent controls (and nothing else changes), which of the following describes what will happen in the market for rental housing?

An increase in demand, but no change in quantity supplied.

You are running a small business and are thinking about ways to increase your profits. Assume you are facing an elastic demand. Would you raise or lower your price?

I do not know because I cannot tell how much costs would change in relationship to revenues.

If the income elasticity of a good is 0.8, what do we know about the good?

It is a normal good.

A firm has a choice of raising or lowering its price. If the firm wishes to increase its revenues (the price time the quantity sold), what should it do?

Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold.

Who is likely to be in favor of a price ceiling on a good?

The consumers of the good who can still purchase it after the ceiling is imposed

A change in supply will have a (greater, lesser, the same) effect on price for a relatively more inelastic demand curve than a relatively more elastic one.

a greater

A change in supply will have a (greater, lesser, the same) effect on quantity for a relatively more elastic demand curve than a relatively less elastic one.

a greater

Which of the following is likely to have the largest elasticity of supply?

a producer of vanilla ice cream

If the government is trying to raise as much revenue as possible, which of the following goods would be the most likely to be subject to a government-imposed tax?

bottles of alcohol, such as whiskey and gin

A government may impose a price ceiling if which of the following is true?

consumers can persuade legislators that lower prices are needed

If the country enters a period of prosperity, resulting in consumer incomes increasing by 4% and the income elasticity of a good is 0.8, what will happen to the demand for that good as a result? (hint: 4% x 0.8)

demand will increase by 3.2%

If government is trying to raise as much revenue as possible, than the supplier of ______________ are more likely to have a tax imposed on their production.

gasoline

An increase in an effective minimum legal price will do what to prices and quantities actually sold in a market? Prices will ______________ and the quantities actually sold will ______________.

increase; decrease

An increase in an effective maximum legal price will do what to prices and quantities actually sold in a market? Prices will ______________ and the quantities actually sold will ______________.

increase; increase

When will a minimum wage be an effective price control? When it is a ______________.

minimum "price" that is above equilibrium price

If a man spends approximately 45% of his income on air travel and his sister only spends about 24% of her income on air travel (and that is the only difference), would the man's demand for air travel be less or more elastic than his sister's?

more

The price elasticity of demand will be ______________ if demand is elastic.

more than one

Assume that as your income increases, your consumption of burgers decreases. We can assumer that your income elasticity of demand for burger is what?

negative

An example of price controls given in your text concerns minimum wage increases. On a supply and demand diagram (with wages on the vertical axis and number of worker on the horizontal), would minimum wage be considered a price ceiling or a price floor?

price floor

When price decreases, quantity increases. Price elasticity of demand measures how much ______________.

the quantity increases when price decreases