Microeconomics Ch 5 Quiz (problems & application)

Suppose subway ridership in New York City declined by 4.3 percent after a fare increase of 25 cents to $1.50. Using the midpoint method, an estimate of the price elasticity of demand for subway rides is ____ True or False: According to your estimate, the Transit Authority's revenue rises when the fare increases.

0.24, true In this case, P1=$1.25 and P2=$1.50. Therefore, the percentage change in price is approximately 18.18% Since you were told that the percentage change in quantity is 4.3%, this results in an elasticity of 4.3%/18.18% =0.24

Suppose subway ridership in New York City rose by 8 percent after a fare decrease of 25 cents to $2.50. Using the midpoint method, an estimate of the price elasticity of demand for subway rides is_____ True or False: According to your estimate, the Transit Authority's revenue rises when the fare decreases.

0.84, false A price elasticity of demand less than 1 means that demand is inelastic in this case. In other words, consumers are not very sensitive to changes in price. This means the Transit Authority's revenue falls when the fare decreases.

Suppose subway ridership in New York City rose by 12 percent after a fare decrease of 25 cents to $2.25. Using the midpoint method, an estimate of the price elasticity of demand for subway rides is_____ True or False: According to your estimate, the Transit Authority's revenue rises when the fare decreases.

1.14, true

Why would a drought only in Kansas most likely reduce the total revenues that Kansas farmers receive?

A drought in Kansas is not significant enough to affect the worldwide price of grain.

The quantity of coffee sold rose sharply last month, while the price remained the same. Five people suggest various explanations: Bob: Demand increased, but supply increased at the same time. Cho: Demand increased, but supply was perfectly elastic. Eric: Demand increased, but supply was perfectly inelastic. Ginny: Supply increased, but demand was perfectly elastic. Kenji: Supply increased, but demand was unit elastic.

Bob Cho Ginny

Cups of coffee and donuts are complements. Assume both have inelastic demand. Suppose a hurricane destroys half the coffee bean crop. Show the effect of the crop destruction on the market for coffee beans. Show the effect of the price change of coffee beans you have identified on the first graph on the market for cups of coffee.

Demand Curve: No shift Supply Curve: Left shift Demand Curve: No shift Supply Curve: Left shift

Cups of coffee and cups of milk tea are substitutes. Assume both have inelastic demand. Suppose exceptionally good weather increases the harvest of the coffee bean crop. Show the effect of the huge harvest on the market for coffee beans. Show the effect of the price change of coffee beans you have identified on the first graph on the market for cups of coffee.

Demand Curve: No shift Supply Curve: Right shift Demand Curve: No shift Supply Curve: Right shift

A price change causes the quantity demanded of a good to increase by 12%, while the total revenue of that good decreases by 16%. True or False: The demand curve is elastic in this region.

False

Two drivers—Jacques and Kyoko—each drive up to a gas station. Before looking at the price, each places an order. Jacques says, "I'd like 10 gallons of gas." Kyoko says, "I'd like $10 worth of gas." Which of the following statements is correct? Check all that apply.

Kyoko's price elasticity of demand is 1.

The price of coffee fell sharply last month, while the quantity sold remained the same. Five people suggest various explanations: Larry: Demand decreased, but it was perfectly inelastic. Megan: Demand decreased, but supply was perfectly inelastic. Raphael: Demand decreased, but supply increased at the same time. Susan: Supply increased, but demand was perfectly inelastic. Alex: Supply increased, but demand was unit elastic.

Megan Raphael Susan

For each of the following pairs of goods, which good would you expect to have more elastic demand? Shoes in general or light-up shoes Chicago Symphony recordings or orchestral music recordings in general Subway rides during the next 6 months or subway rides during the next 5 years Pens in general or blue ballpoint pens

More elastic good: light-up shoes Chicago Symphony recordings Subway rides during the next 5 years blue ballpoint pens

Two drivers—Lorenzo and Neha—each drive up to a gas station. Before looking at the price, each places an order. Lorenzo says, "I'd like 10 gallons of gas." Neha says, "I'd like $10 worth of gas." Which of the following statements is correct? Check all that apply.

Neha's demand is unit elastic. Lorenzo's price elasticity of demand is perfectly inelastic (equal to 0) in this case because he wants the same quantity regardless of the price. Neha's price elasticity of demand is 1 because she spends the same amount on gas no matter what the price.

You are the curator of a museum. The museum is running short of funds, so you decide to increase revenue. When should you raise the admission price in order to increase revenue?

Only when demand is inelastic

A price change causes the quantity demanded of a good to increase by 15%, while the total revenue of that good increases by 10%. True or False: The demand curve is elastic in this region.

True

As the price of tickets rises from $200 to $250, the price elasticity of demand for business travelers is0.23 , and the price elasticity of demand for vacationers is1.29 , using the midpoint method. Therefore, the demand for airline tickets in this price range is_____ elastic for vacationers because business travelers are_____ sensitive to changes in price.

more, less

If the price of a pizza is $10, your income elasticity of demand is____ as your income increases from $20,000 to $24,000. However, if the price of a pizza is $12, your income elasticity is_____

1.86, 1.22 If the price is $10, your income elasticity of demand as your income increases from $20,000 to $24,000 is 45−32/38.5 /24,000−20,000 /22,000 =1.86

Using the midpoint method, your price elasticity of demand as the price of pizzas increases from $14 to $16 is_____ if your income is $20,000 and______ if your income is $24,000.

5.00, 3.75

Consider public policy aimed at smoking. Studies indicate that the price elasticity of demand for cigarettes is about 0.2. If a pack of cigarettes currently costs $5 and the government wants to reduce smoking by 10%, it should increase the price by___ If the government permanently increases the price of cigarettes, the effect on smoking 1 year from now will be_______ than the effect 5 years from now. Which of the following statements are consistent with this result? Check all that apply.

50%, smaller Adults are more likely to be addicted to cigarettes. Teenagers do not have as much income as adults, so they are more price sensitive.

Consider public policy aimed at smoking. Studies indicate that the price elasticity of demand for cigarettes is about 0.5. If a pack of cigarettes currently costs $5 and the government wants to reduce smoking by 30%, it should increase the price by___ If the government permanently increases the price of cigarettes, the effect on smoking 1 year from now will be______ than the effect 3 months from now. Studies also find that teenagers have a higher price elasticity of demand than do adults. Which of the following statements are consistent with this result? Check all that apply.

60%, larger Teenagers do not have as much income as adults, so they are more price sensitive. Adults are more likely to be addicted to cigarettes.

Cups of coffee and donuts are complements. Assume both have elastic demand. Suppose exceptionally good weather increases the harvest of the coffee bean crop. Show the effect of the huge harvest on the market for coffee beans. Show the effect of the price change of coffee beans you have identified on the first graph on the market for cups of coffee.

Demand Curve: No shift Supply Curve: Right shift Demand Curve: No shift Supply Curve: Right shift

The_______ in the equilibrium price of a cup of coffee causes the quantity demanded to_______ . Because the demand for cups of coffee is inelastic in this region, total expenditure on coffee_______ . Show the effect of the price change in cups of coffee you have identified on the second graph on the market for cups of milk tea. True or False: Total expenditure on cups of milk tea decreases in this case.

decrease, increase, decreases Demand Curve: Left shift Supply Curve: No shift True

The_______ in the equilibrium price of a cup of coffee causes the quantity demanded to______ . Because the demand for cups of coffee is elastic in this region, total expenditure on coffee_______ . Show the effect of the price change in cups of coffee you have identified on the second graph on the market for donuts. True or False: Total expenditure on donuts decreases in this case.

decrease, increase, increases Demand Curve: Right shift Supply Curve: No shift False

A drought around the world reduces the total revenue that farmers receive from the sale of grain if demand is_______ .

elastic

Suppose the price elasticity of demand for heating oil is 0.1 in the short run and 0.9 in the long run. If the price of heating oil rises from $1.80 to $2.20 per gallon, the quantity of heating oil demanded will______ by______ in the short run and by_____ in the long run. The change is_______ in the long run because people can respond_______ easily to the change in the price of heating oil.

fall, 2%, larger, 18%, more 1. Find percentage change in price (= 20%) 2. Find price elasticity of demand (use algebra to rearrange equation) 3. Percentage Change in Quantity = 0.1×0.2 = 2% 4. Percentage Change in Quantity = 0.9×0.2 = 18%

Suppose the price elasticity of demand for heating oil is 0.1 in the short run and 0.9 in the long run. If the price of heating oil rises from $1.90 to $2.10 per gallon, the quantity of heating oil demanded will_____ by 1% in the short run and by 9% in the long run. The change is______ in the long run because people can respond_____ easily to the change in the price of heating oil.

fall, larger, more

Suppose the price elasticity of demand for heating oil is 0.2 in the short run and 0.7 in the long run. If the price of heating oil rises from $1.20 to $1.80 per gallon, the quantity of heating oil demanded will_____ by 8% in the short run and by 28% in the long run. The change is_______ in the short run because people can respond______ easily to the change in the price of heating oil.

fall, smaller, less

The_______ in the equilibrium price of a cup of coffee causes the quantity demanded to_______ . Because the demand for cups of coffee is inelastic in this region, total expenditure on coffee________ Show the effect of the price change in cups of coffee you have identified on the second graph on the market for donuts. True or False: Total expenditure on donuts decreases in this case.

increase, decrease, increases Demand Curve: Left shift Supply Curve: No shift True

As the price of tickets rises from $250 to $300, the price elasticity of demand for business travelers is 0.30 , and the price elasticity of demand for vacationers is 2.20 , using the midpoint method. Therefore, the demand for airline tickets in this price range is____ elastic for vacationers because business travelers are_____ sensitive to changes in price.

more, less Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price. Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price. Therefore, the demand for airline tickets in this price range is more elastic for vacationers because business travelers are less sensitive to changes in price.