Intro to Microeconomics (First Exam) (Chapter 6)

Ariel always spends 10% of her income on purses. Assume that her income increases by some percentage while the price of purses remains constant (and that all purses cost the same). What is her income elasticity of demand for purses?

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A recent study determined the following elasticities for Volkswagen Beetles: Price elasticity of demand=2 Income elasticity of demand=1.5 The supply of Beetles is elastic. Based on this information, are the following statements true or false? Explain your reasoning. Question 1). A 10% increase in the price of a Beetle will reduce the quantity demanded by 20%. a) False: the percentage change in price is twice as large as the percentage change in quantity demand, so a 10% increase in price results in a 5% decrease in the quantity demanded. b) False: a 1% increase in price results in a 2% increase in quantity demand, so a 10% increase in price results in a 20% increase in quantity demanded. c) True: a 1% increase in price results in a 2% decrease in quantity demand, so a 10% increase in price results in a 20% decrease in quantity demanded. d) True: a 1% increase in price is the same as a 2% decrease in income, so a 10% increase in price results in a leftward shift in the demand curve, resulting in a 20% decrease in quantity demanded. Question 2) An increase in consumer income will increase the price and quantity of Beetles sold. a) True: once producers recognize the increase in consumer income, they will expect higher profits and shift the supply curve such that a new equilibrium is reached with a higher price and quantity. b) False: even though income elasticity is typically reported as an absolute value, the negative sign is still there, so a 1% increase in income in this case would lead to a 1.5% reduction in quantity demanded of Beetles. c) True: the positive income elasticity means an increase in income will lead to an increase in quantity demanded at every price, shifting the demand curve to the right. At the new equilibrium, both price and quantity will be higher. d) False: the positive income elasticity means an increase in income will lead to an increase in quantity demanded, but the subsequent increase in price will lead to a lower quantity demanded. The new quantity could be higher or lower than the original quantity.

Question 1 : c) True: a 1% increase in price results in a 2% decrease in quantity demand, so a 10% increase in price results in a 20% decrease in quantity demanded. Question 2: c) True: the positive income elasticity means an increase in income will lead to an increase in quantity demanded at every price, shifting the demand curve to the right. At the new equilibrium, both price and quantity will be higher.

If a 25% price increase for Product A causes a 10% decrease in its quantity demanded, but no change in the quantity demanded for Product B, what is the cross-price elasticity of these goods? Round your answer to one decimal place. Question 1) Cross price elasticity is ___________________ Question 2) What is the relationship between these goods? a) substitutes b) complements c) no relationship

Question 1) 0 Question 2) c) no relationship

If the price of Product E decreasing by 2% causes its quantity demanded to increase by 14% and the quantity demanded for Product F to increase by 17% , what is the cross-price elasticity of demand? Round your answer to one decimal place. Question 1) Cross price elasticity is _________________ Question 2) What is the relationship between these goods? a) substitutes b) no relationship c) complements

Question 1) -8.5 Question 2) c) complements

If Good C increases in price by 30% a pound, and this causes the quantity demanded for Good D to increase by 40%, what is the cross-price elasticity of the two goods? Round your answer to one decimal place. Question 1) Cross price elasticity is ____________________ Question 2) What is the relationship between the two goods? a) no relationship b) substitutes c) complements

Question 1) 1.3 Question 2) b) substitutes

For each scenario, calculate the cross-price elasticity between the two goods and identify how the goods are related. Please use the midpoint method when applicable, and specify answers to one decimal place. Question 1) A 20% price increase for Product A causes a 10% decrease in its quantity demanded, but no change in the quantity demanded for Product B. a) cross-price elasticity between A and B: ____________ b) relationship between A and B: ______________ Question 2) Product C increases in price from $5 a pound to $11 a pound. This causes the quantity demanded for Product D to increase from 10 units to 18 units. a) cross-price elasticity between C and D: _______________ b) relationship between C and D: ________________ Question 3) When the price of Product E decreases 9% , this causes its quantity demanded to increase by 14% and the quantity demanded for Product F to increase 12% a) cross-price elasticity between E and F: _________________ b) relationship between E and F: ___________________

Question 1) a) 0 b) no relationship Question 2) a) 0.8 b) substitutes Question 3) a) -1.3 b) complements

Question 1) Over longer periods of time, demand tends to become a) perfectly inelastic. b) less elastic. c) more elastic. Question 2) When there are fewer substitutes, demand tends to be a) more elastic. b) perfectly inelastic. c) less elastic.

Question 1) c) more elastic. Question 2) c) less elastic.

Label each scenario with the term that best describes it. Use the midpoint method when applicable: perfectly inelastic supply, perfectly elastic supply, elastic supply, unit-elastic supply, and inelastic supply Question 1) Marcel Duchamp was a famous artist prior to his death, and was known for his Dada artwork, including works such as "Soft Toilet". All of his original sculptures and paintings go on sale. Question 2) Paul owns a Tim Horton's, a famous donut and coffee franchise. He is willing to sell as many maple glazed donuts as customers want at a price of $1.00 each, but he refuses to sell any donuts for any price lower than $1.00 Question 3) The price of facial tissues rises from $2.85 per box to $3.15. As a result, P&G increases production from 15 million boxes to 25 million boxes of facial tissue. Question 4) With the school semester starting for both high school and college, Papermate chooses to increase production of pens from 38 million to 42 million after global prices of writing instruments increase from $1.90 a package to $2.10a package. Question 5) Bright Ideas increases its production of lightbulbs by 15% after a 400% increase in the price of fluorescent bulbs.

Question 1) perfectly inelastic supply Question 2) perfectly elastic supply Question 3) elastic supply Question 4) unit-elastic supply Question 5) inelastic supply

Label the scenarios as examples of elastic, inelastic, or unit elastic demand. Question 1) When Ruko, a device used to stream movies at home, increases prices by 51%, total revenue decreases by 67%. Question 2) When Cinema Supreme increases ticket prices by 19%, total revenue does not change. Question 3) When Bluebox, a DVD rental kiosk, increases its prices by 57%, total revenue increases by 22%.

Question 1: Elastic Question 2: Unti Elastic Question 3: Inelastic

In each of the following cases, is the price elasticity of supply perfectly elastic; perfectly inelastic; elastic, but not perfectly elastic; or inelastic, but not perfectly inelastic? Question 1) An increase in demand this summer for luxury cruises leads to a big jump in the sales price of a cabin on Queen Mary 2. Question 2) The price of a kilowatt of electricity is the same during periods of high electricity demand as during periods of low electricity demand. Question 3) Fewer people want to fly during February than during any other month. The airlines cancel about 10% of their flights as ticket prices fall about 20% during this month. Question 4) Owners of vacation homes in Maine rent them out during the summer. Due to the soft economy this year, a 30% decline in the price of a vacation rental leads more than half of homeowners to occupy their vacation homes themselves during the summer.

Question 1: Perfectly Inelastic Question 2: Perfectly elastic Question 3: Inelastic, but not perfectly inelastic Question 4: Elastic, but not perfectly elastic

Use an elasticity concept to explain each of the following observations: luxury versus normal good, supply elasticity and competition, availibility of close substitutes, and normal versus inferior goods Question 1) During economic booms, the number of new personal care businesses, such as gyms and tanning salons, is proportionately greater than the number of other new businesses, such as grocery stores. Question 2) Cement is the primary building material in Mexico. After new technology makes cement cheaper to produce, the supply curve for the Mexican cement industry becomes relatively flatter. Question 3) Some goods that were once considered luxuries, like a telephone, are now considered virtual necessities. As a result, the demand curve for telephone services has become steeper over time. Question 4) Consumers in a less developed country like Guatemala spend proportionately more of their income on equipment for producing things at home, like sewing machines, than consumers in a more developed country like Canada.

Question 1: Luxury versus normal good Question 2: Supply elasticity and competition Question 3: Availability of close substitutes Question 4: Normal versus inferior goods

Determine whether each of the statements given is true or false. a) A Swiffer floor sweeper and a broom would have a positive cross-price elasticity of demand. b) When supply is perfectly inelastic, a change in demand has no effect on the price. c) The short-run elasticity of supply is larger than the long-run elasticity of supply because changes in equilibrium will adjust elasticity accordingly. d) When the price increases, total revenue always increases because of the price effect. e) A key consideration as to whether the price elasticity of supply is elastic or inelastic is whether the good supplied is a luxury item.

TRUE a) A Swiffer floor sweeper and a broom would have a positive cross-price elasticity of demand. FALSE b) When supply is perfectly inelastic, a change in demand has no effect on the price. FALSE c) The short-run elasticity of supply is larger than the long-run elasticity of supply because changes in equilibrium will adjust elasticity accordingly. FALSE e) A key consideration as to whether the price elasticity of supply is elastic or inelastic is whether the good supplied is a luxury item.

Gas prices recently increased by 25%. In response, purchases of gasoline decreased by 5%. According to this finding, the price elasticity of demand for gas is: a) 0.2 b) 2 c) 0.5 d) 5

a) 0.2

The U.S. government is considering reducing the amount of carbon dioxide that firms are allowed to produce by issuing a limited number of tradable allowances for carbon dioxide (CO2) emissions. In a recent report, the U.S. Congressional Budget Office (CBO) argues that "most of the cost of meeting a cap on CO2 emissions would be borne by consumers, who would face persistently higher prices for products such as electricity and gasoline . . . poorer households would bear a larger burden relative to their income than wealthier households would." What assumption about one of the elasticities you learned about in this chapter has to be true for poorer households to be disproportionately affected? a) The income elasticity of demand for energy products is between zero and one. b) The price elasticity of demand for energy products is greater than one. c) The price elasticity of supply for energy products is less than one. d) The cross-price elasticity of demand between electricity and gasoline is positive.

a) The income elasticity of demand for energy products is between zero and one.

The price elasticity of demand can be found by: a) comparing the percentage change in quantity demanded to the percentage change in price. b) measuring absolute changes in price and quantity demanded. c) examining only the slope of the demand curve. d) knowing that when price changes, quantity demanded goes in the opposite direction.

a) comparing the percentage change in quantity demanded to the percentage change in price.

The price of pretzels increases and the demand for tortilla chips decreases, so we can assume that these two goods are: a) complementary. b) unrelated. c) substitutes. d) inferior.

a) complementary.

The price elasticity of demand along a demand curve with a constant slope: a) decreases in absolute value as quantity demanded rises. b) is equal to the slope. c) is greater than the slope. d) is less than the slope.

a) decreases in absolute value as quantity demanded rises.

The income elasticity of demand for eggs has been estimated to be 0.57. If income grows by 5% in a period, all other things unchanged, demand will: a) increase by about 2.9%. b) decrease by less than 5.7%. c) increase by more than 5.7%. d) decrease by more than 5.7%.

a) increase by about 2.9%.

If the price of chocolate-covered peanuts increases and the demand for strawberry licorice twists increases, this indicates that these two goods are _____ goods. a) substitute b) normal c) inferior d) complementary

a) substitute

Suppose the price of university sweatshirts increases from $10 to $20 and the quantity supplied increases from 20 to 30. The price elasticity of supply, using the midpoint formula, is: a) 0.66. b) 0.60. c) 1.50. d) 1.66.

b) 0.60.

There are several close substitutes for Bayer aspirin but fewer substitutes for a complete medical examination. Therefore, all other things equal, you would expect the demand for: a) Bayer aspirin to be more perfectly price-inelastic. b) Bayer aspirin to be more price-elastic than is the demand for medical examinations. c) the two to be equally price-elastic. d) medical examinations to be more price-elastic than is the demand for Bayer aspirin.

b) Bayer aspirin to be more price-elastic than is the demand for medical examinations.

Suppose that an increase in the price of a good leads to an increase in total revenue. Ignoring other factors (like supply), at its current price the good must be: a) price-elastic. b) price-inelastic. c) inferior. d) perfectly price-elastic.

b) price-inelastic.

If the price of a good increases by 20% and the quantity demanded changes by 15%, then the price elasticity of demand is equal to: a) approximately 1.33 b) 1 c) approximately 0.33 d) 0.75

d) 0.75

The price of notebooks is $5, and at that price consumers demand 12 notebooks. If the price rises to $7, consumers will decrease quantity demanded to 4 notebooks. Using the midpoint formula, what is the price elasticity of demand for notebooks? a) 0.33 b) 0.17 c) 6 d) 3

d) 3

The price elasticity of demand for fresh tomatoes has been estimated to be 2.22. If a new insecticide and fertilizer treatment yields a 20% increase in the nation's fresh tomato crop, how will that affect total revenue from fresh tomatoes, all other things unchanged? a) Total revenue will fall. b) The information is insufficient to answer the question. c) Total revenue will remain unchanged. d) Total revenue will rise.

d) Total revenue will rise.

A men's tie store sold an average of 30 ties per day at $5 per tie but sold 50 of the same ties per day at $3 per tie. The price elasticity of demand, by the midpoint method, is: a) greater than 3. b) greater than 1 but less than 3. c) greater than zero but less than 1. d) equal to 1.

d) equal to 1.

A major state university in the South recently raised tuition by 12%. An economics professor at this university asked his students, "How many of you will transfer to another university because of the increase in tuition?" One student in about 300 said that he or she would transfer. Based on this information, the price elasticity of demand for education at this university is: a) 0. b) highly elastic. c) 1. d) highly inelastic.

d) highly inelastic.

If a change in price causes total revenue to change in the same direction, we can conclude that the demand is: a) price elastic. b) price unit-elastic. c) zero elastic. d) price inelastic.

d) price inelastic.