Micro Econ Chap 4 McGraw-Hill

Price elasticity formula

% change in quantity demanded / % change in price times 1/slope

If a 12 percent decrease income leads to a 3 percent decrease in the quantity of pedicures demanded, then the income elasticity of demand for pedicures is:

0.25 Reason: The income elasticity of demand is 0.25 =

The formula for the price elasticity of demand is:

P/Q × 1/slope

Total expenditure equals:

P×Q total revenue

Suppose your cousin makes cutting boards that he sells on Etsy.com. Can he increase his total revenue by increasing the price of his cutting boards?

Yes, but only if the price elasticity of demand is less than one.

If the owners of a local clothing boutique increase the price of their merchandise, then their total revenue

could fall since fewer people may be willing to shop there.

If the cross-price elasticity of demand for bike helmets with respect to the price of bikes is -0.25, then if the price of bikes increases by 10 percent, the quantity of bike helmets demanded will

decrease by 2.5 percent.

If the price elasticity of demand for beer is 1.19, and the price of beer goes up by 1 percent, then the quantity of beer demanded will _____.

go down by 1.19 percent Reason: The elasticity of demand is the percentage change in quantity demanded that results from a 1 percent change in price. In this case, quantity demanded goes down since price goes up.

If the price elasticity of demand for coffee is 0.25, and the price of coffee goes down by 1 percent, then the quantity of coffee demanded will

go up by 0.25 percent. Reason: The elasticity of demand tells you the percentage change in quantity demanded that results from a 1 percent change in price. In this case, quantity demanded goes up since price goes down.

If Sal's Pizzeria uses tomato sauce, dough and cheese to make both pizza and calzones, then the price elasticity of supply for pizza at Sal's is likely to be relatively _____.

high Reason: In general, the easier it is to shift inputs away from the production of one good towards another, the more responsive will be the quantity supplied to a change in price.

If the demand for economy-class airline tickets is elastic with respect to price, then if the price of economy-class airline tickets decreases, then total expenditure will _____.

increase Reason: If demand is elastic with respect to price, total expenditure will increase in response to a price decrease.

If the demand for first-class airline tickets is inelastic with respect to price, then if the price of first-class airline tickets increases, then total expenditure will _____.

increase Reason: If demand is inelastic with respect to price, total expenditure will increase in response to a price increase.

If demand is perfectly elastic with respect to price, then the price elasticity of demand is _____.

infinite

The price elasticity of supply will tend to be higher when _____.

it's easy to find or produce substitute inputs the time horizon is longer

The elasticity of demand for a good that has very few substitutes is usually relatively _____.

low

If the price elasticity of supply is infinite, then supply is _____.

perfectly elastic

In the figure to the right, supply is

perfectly elastic with respect to price.

If the price elasticity of demand is infinite, then demand is

perfectly elastic.

If the price elasticity of supply is zero, then supply is

perfectly inelastic

elastic

the demand for a good is elastic with respect to price if its price elasticity of demand is greater than 1

inelastic

the demand for a good is inelastic with respect to price if its price elasticity of demand is less than 1

unit elastic

the demand for a good is unit elastic with respect to price if its price elasticity of demand equals 1

price elasticity of demand

the percentage change in the quantity demanded of a good or service that results from a 1 percent change in its price

The cross-price elasticity of demand for snowboards with respect to the price of skis is

the percentage change in the quantity of snowboards demanded in response to a 1 percent change in the price of skis.

Price × quantity equals ________.

total expenditure total revenue

If quantity demanded goes down by 3 percent when price rises by 6 percent, then the price elasticity of demand is:

0.5 Reason: The price elasticity of demand is the percentage change in the quantity demanded divided by the percentage change in price (=3÷6).

If quantity demanded goes up by 10 percent when price falls by 2 percent, then the price elasticity of demand is:

5 Reason: The price elasticity of demand is the percentage change in the quantity demanded divided by the percentage change in price (=10÷2).

If the quantity of Big Macs demanded decreases by 4 percent in response to an 8 percent decrease in the price of Whoppers, then the cross-price elasticity of demand for Big Macs with respect to the price of Whoppers is:

Reason: The cross-price elasticity of demand for Big Macs with respect to the price of Whoppers is the percentage by which the demand for Big Macs changes in response to a 1 percent change in the price of Whoppers, which in this case is calculated as −4/-8 = 0.5

Suppose the demand for first-class airline tickets is inelastic with respect to price. If the price of first-class airline tickets decreases, then total expenditure will _____.

decrease Reason: If demand is inelastic with respect to price, total expenditure will decrease in response to a price decrease.

If the price of sofas goes up by 10 percent and the quantity of sofas demanded falls by 15 percent, then the total expenditure on sofas will

decrease Reason: If the percentage increase in price is less than the percentage decrease in quantity demanded, then total expenditure will decrease.

Given that there are only so many operations the world's top brain surgeon can perform every year, the price elasticity of supply for his or her services is likely to be

very low. Reason: When goods or services are produced using unique and essential inputs, the price elasticity of supply is likely to be very low.

Given that there are only so many people who can stand at the top of the Eiffel tower at any point in time, the price elasticity of supply for tickets to the Eiffel tower is likely to be

very low. Reason: When goods or services are produced using unique and essential inputs, the price elasticity of supply is likely to be very low.

If supply is perfectly inelastic with respect to price, then the price elasticity of supply is _____.

zero

If a 2 percent increase income leads to a 4 percent increase in the quantity of gasoline demanded, then the income elasticity of demand for gasoline is:

Reason: The income elasticity of demand is 2 = 4/2