Chapt. 5

P X G

What is the equation for total rev.?

1. the good is a necessity

A good tends to have a small price elasticity of demand if: 1. the good is a necessity. 2. there are many close substitutes. 3. the market is narrowly defined. 4. the long-run response is being measured.

4. inelastic at some points, and elastic at others

A linear, downward-sloping demand curve is: 1. inelastic. 2. unit elastic. 3. elastic. 4. inelastic at some points, and elastic at others.

Elasticity

A measure of how much buyers and sellers respond to changes in market conditions. A measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

False- If a change in price caused the quantity demanded of a good to increase, it must mean that price decreased according to the law of demand. In order for a price decrease to decrease total revenue, the percentage change in price has to be larger than the percentage change in quantity.

A price change causes the quantity demanded of a good to increase by 12%, while the total revenue of that good decreases by 16%. T/F= The demand curve is elastic in this region.

d. price;greater

An increase in a good's price reduces the total amount consumers spend on the good if the ______ elasticity of demand is _______ than one. 1. income; less 2. income; greater 3. price; less 4. price; greater

c. the demand curve is inelastic

An increase in the supply of grain will reduce the total revenue grain producers receive if: 1. the supply curve is inelastic. 2. the supply curve is elastic. 3. the demand curve is inelastic. 4. the demand curve is elastic.

3. more;smaller

Because the demand curve for oil is ______ elastic in the long run, OPEC's reduction in the supply of oil had a _____ impact on the price in the long run than it did in the short run: 1. less; smaller 2. less; larger 3. more; smaller 4. more; larger

elastic

Demand for a good is said to be _______ if the quantity demanded responds substantially to changes in the price.

inelastic

Demand is said to be ________ if the quantity demanded responds only slightly to changes in the price.

Elasticity

Economists classify demand curves according to their_____

quantity demanded & price

Economists compute the price elasticity of demand as the percentage change in the _______ divided by the percentage change in the ______

raise

If demand is inelastic, a drought around the world would ______ the total revenue that farmers receive from the sale of grain. Raise or decrease?

3. vertical

If the price elasticity of supply is zero, the supply curve is: 1. upward sloping. 2. horizontal. 3. vertical. 4. fairly flat at low quantities but steeper at larger quantities.

1. each farmer is a price taker

In competitive markets, farmers adopt new technologies that will eventually reduce their revenue because: 1. each farmer is a price taker. 2. farmers are short-sighted. 3. regulation requires the use of best practices. 4. consumers pressure farmers to lower prices.

2. zero; one

Over time, technological advances increase consumers' incomes and reduce the price of smartphones. Each of these forces increases the amount consumers spend on smartphones if the income elasticity of demand is greater than _______ and the price elasticity of demand is greater than________: 1. zero; zero 2. zero; one 3. one; zero 4. one; one

True

T/F= A good with close substitutes tends to have more elastic demand because it is easier for consumers to switch from that good to others. For example, butter and margarine are easily substitutable. A small increase in the price of butter, assuming the price of margarine is held fixed, causes the quantity of butter sold to fall by a large amount. By contrast, because eggs are a food without a close substitute, the demand for eggs is less elastic than the demand for butter. A small increase in the price of eggs does not cause a sizable drop in the quantity of eggs sold.

True

T/F= As a family's income rises, the percent of its income spent on food declines, indicating an income elasticity less than one. By contrast, luxuries such as jewelry and recreational goods tend to have large income elasticities because consumers feel that they can do without these goods altogether if their incomes are too low.

True

T/F= Because a demand curve reflects the many economic, social, and psychological forces that shape consumer preferences, there is no simple, universal rule for what determines a demand curve's elasticity. Based on experience, however, we can state some rules of thumb about what influences the price elasticity of demand

True

T/F= Because quantity demanded and income move in the same direction, normal goods have positive income elasticities

True

T/F= Because the price elasticity of demand measures how much quantity demanded responds to changes in the price, it is closely related to the slope of the demand curve.

True

T/F= Demand is considered elastic when the elasticity is greater than one, which means the quantity moves proportionately more than the price.

True

T/F= Demand is considered inelastic when the elasticity is less than one, which means the quantity moves proportionately less than the price

True

T/F= Economists compute the price elasticity of supply as the percentage change in the quantity supplied divided by the percentage change in the price

True

T/F= Goods tend to have more elastic demand over longer time horizons. When the price of gasoline rises, the quantity of gasoline demanded falls only slightly in the first few months. Over time, however, people buy more fuel-efficient cars, switch to public transportation, and move closer to where they work. Within several years, the quantity of gasoline demanded falls more substantially.

True

T/F= If demand is unit elastic (a price elasticity exactly equal to one), total revenue remains constant when the price changes.

True

T/F= In practice, the demand for basic foodstuffs such as wheat is usually inelastic because these items are relatively inexpensive and have few good substitutes. When the demand curve is inelastic, a decrease in price causes total revenue to fall.

True

T/F= In some markets, the elasticity of supply is not constant but varies over the supply curve

True

T/F= Narrowly defined markets tend to have more elastic demand than broadly defined markets because it is easier to find close substitutes for narrowly defined goods. For example, food, a broad category, has a fairly inelastic demand because there are no good substitutes for food. Ice cream, a narrow category, has a more elastic demand because it is easy to substitute other desserts for ice cream. Vanilla ice cream, an even narrower category, has a very elastic demand because other flavors of ice cream are almost perfect substitutes for vanilla.

True

T/F= Necessities such as food tend to have small income elasticities because consumers choose to buy some of these goods even when their incomes are low.

True

T/F= Necessities tend to have inelastic demands, whereas luxuries have elastic demands. When the price of a doctor's visit rises, people do not dramatically reduce the number of times they go to the doctor, although they might go somewhat less often. By contrast, when the price of sailboats rises, the quantity of sailboats demanded falls substantially. The reason is that most people view doctor visits as a necessity and sailboats as a luxury. Whether a good is a necessity or a luxury depends not on the good's intrinsic properties but on the buyer's preferences. For avid sailors with little concern about their health, sailboats might be a necessity with inelastic demand and doctor visits a luxury with elastic demand.

True

T/F= Over short periods of time, firms cannot easily change the size of their factories to make more or less of a good. Thus, in the short run, the quantity supplied is not very responsive to changes in the price. Over longer periods of time, firms can build new factories or close old ones. In addition, new firms can enter a market, and old firms can exit. Thus, in the long run, the quantity supplied can respond substantially to price changes.

True

T/F= Slope is defined as "rise over run," which here is the ratio of the change in price ("rise") to the change in quantity ("run").

True

T/F= Supply is said to be inelastic if the quantity supplied responds only slightly to changes in the price.

True

T/F= Supply is usually more elastic in the long run than in the short run

True

T/F= Supply of a good is said to be elastic if the quantity supplied responds substantially to changes in the price

True

T/F= The elasticity of demand in any market depends on how we draw the boundaries of the market.

True

T/F= The flatter the demand curve passing through a given point, the greater the price elasticity of demand. The steeper the demand curve passing through a given point, the smaller the price elasticity of demand.

True

T/F= The income elasticity of demand measures how much the quantity demanded responds to changes in consumers' income. The cross-price elasticity of demand measures how much the quantity demanded of one good responds to changes in the price of another good.

False

T/F= The law of supply states that higher prices do not raise the quantity supplied.

True

T/F= The price elasticity of demand determines whether total revenue rises or falls

False

T/F= The price elasticity of demand for any good does not measure how willing consumers are to buy less of the good as its price rises.

True

T/F= The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. If quantity demanded moves proportionately less than the price, then the elasticity is less than one and demand is said to be inelastic. If quantity demanded moves proportionately more than the price, then the elasticity is greater than one and demand is said to be elastic.

True

T/F= The price elasticity of demand measures how much the quantity demanded responds to changes in the price. Demand tends to be more elastic if close substitutes are available, if the good is a luxury rather than a necessity, if the market is narrowly defined, or if buyers have substantial time to react to a price change.

True

T/F= The price elasticity of supply depends on the flexibility of sellers to change the amount of the good they produce. For example, beachfront land has an inelastic supply because it is almost impossible to produce more of it. Manufactured goods, such as books, cars, and televisions, have elastic supplies because firms that produce them can run their factories longer in response to higher prices.

True

T/F= The price elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price. If quantity supplied moves proportionately less than the price, then the elasticity is less than one and supply is said to be inelastic. If quantity supplied moves proportionately more than the price, then the elasticity is greater than one and supply is said to be elastic.

True

T/F= The price elasticity of supply measures how much the quantity supplied responds to changes in the price. This elasticity often depends on the time horizon under consideration. In most markets, supply is more elastic in the long run than in the short run.

True

T/F= The tools of supply and demand can be applied to many different kinds of markets. This chapter uses them to analyze the market for wheat, the market for oil, and the market for illegal drugs.

True

T/F= Total revenue, the total amount paid for a good, equals the price of the good times the quantity sold. For inelastic demand curves, total revenue moves in the same direction as the price. For elastic demand curves, total revenue moves in the opposite direction as the price.

True

T/F= When demand is elastic (a price elasticity greater than one), price and total revenue move in opposite directions: If the price increases, total revenue decreases.

True

T/F= When demand is inelastic (a price elasticity less than one), price and total revenue move in the same direction: If the price increases, total revenue also increases.

True

T/F= When studying how some event or policy affects a market, we can discuss not only the direction of the effects but also their magnitude

True

T/F= Whether the cross-price elasticity is positive or negative depends on whether the two goods are substitutes or complements. Sub. will have positive cross-price: An increase in hot dog prices induces people to grill more hamburgers instead. Because the price of hot dogs and the quantity of hamburgers demanded move in the same direction. Complements have negative cross-price: computers and software. In this case, the cross-price elasticity is negative, indicating that an increase in the price of computers reduces the quantity of software demanded.

True

T/F= bus rides, are inferior goods: Higher income lowers the quantity demanded. Because quantity demanded and income move in opposite directions, inferior goods have negative income elasticities.

True

T/F= consumers usually buy more of a good when its price is lower, when their incomes are higher, when the prices of its substitutes are higher, or when the prices of its complements are lower

True

T/F= key determinant of the price elasticity of supply is the time period being considered.

True

T/F= most goods are normal goods: Higher income raises the quantity demanded.

True

T/F= price elasticity of supply measures the responsiveness of quantity supplied to changes in price

True

T/F= the demand for basic foodstuffs such as wheat is usually inelastic because these items are relatively inexpensive and have few good substitutes.

3. the supply curve is more elastic

The ability of firms to enter and exit a market over time means that, in the long run: 1.the demand curve is more elastic. 2. the demand curve is less elastic. 3. the supply curve is more elastic. 4. the supply curve is less elastic.

3. Lilliput has lower income, and the income elasticity of demand is 0.5

The citizens of Lilliput spend a higher fraction of their income on food than do the citizens of Brobdingnag. The reason could be that: 1. Lilliput has lower food prices, and the price elasticity of demand is zero. 2. Lilliput has lower food prices, and the price elasticity of demand is 0.5 3. Lilliput has lower income, and the income elasticity of demand is 0.5 4. Lilliput has lower income, and the income elasticity of demand is 1.5

2,3, and 4

The price of coffee fell sharply last month, while the quantity sold remained the same. Five people suggest various explanations: 1. Van: Demand decreased, but it was perfectly inelastic. 2. Amy: Demand decreased, but supply was perfectly inelastic. 3. Carlos: Demand decreased, but supply increased at the same time. 4. Deborah: Supply increased, but demand was perfectly inelastic. 5. Felix: Supply increased, but demand was unit elastic.

1,2, and 4

The quantity of coffee sold rose sharply last month, while the price remained the same. Five people suggest various explanations: 1. Rajiv: Demand increased, but supply increased at the same time. 2. Simone: Demand increased, but supply was perfectly elastic. 3. Yakov: Demand increased, but supply was perfectly inelastic. 4. Ana: Supply increased, but demand was perfectly elastic. 5. Charles: Supply increased, but demand was unit elastic.

2 and 4

Two drivers—Kevin and Maria—each drive up to a gas station. Before looking at the price, each places an order. Kevin says, "I'd like 10 gallons of gas." Maria says, "I'd like $10 worth of gas." Which of the following statements is correct? 1.Kevin's price elasticity of demand is 1. 2. Maria's price elasticity of demand is 1. 3. Kevin's price elasticity of demand is between 0 and 1. 4. Kevin's price elasticity of demand is 0.

3 and 4

Two drivers—Rajiv and Simone—each drive up to a gas station. Before looking at the price, each places an order. Rajiv says, "I'd like 10 gallons of gas." Simone says, "I'd like $10 worth of gas." Which of the following statements is correct? 1. Simone's demand is perfectly elastic. 2. Simone's demand is perfectly inelastic. 3. Simone's demand is unit elastic. 4. Rajiv's demand is perfectly inelastic.

unit elasticity

When the demand has the elasticity be exactly one, the percentage change in quantity equals the percentage change in price

symphony- Chicago Symphony recordings have more elastic demand than orchestral music recordings in general. Chicago Symphony recordings are a narrower market than orchestral music records, so it is easy to find close substitutes for them. If the price of Chicago Symphony recordings were to rise, people could substitute other orchestral recordings, such as the New York Philharmonic. But if the price of all orchestral recordings were to rise, substitution would be more difficult. Thus, the quantity demanded of orchestral recordings is less responsive to price than the quantity demanded of Chicago Symphony recordings.

Which one has more elastic demand? Chicago Symphony recordings or orchestral music recordings in general

Mansions- Mansions have more elastic demand than rental homes do because mansions are a luxury good, while rental homes are a necessity with no close substitutes. If the price of mansions were to rise, homeowners could substitute with smaller houses. But if the price of rental homes were to rise, tenants would have little choice but to pay the higher rent. Thus, the quantity demanded of rental homes is less responsive to price than the quantity demanded of mansions.

Which one has more elastic demand? Mansions or rental homes

Novels- Mystery novels have more elastic demand than required textbooks do because mystery novels have close substitutes, while required textbooks are a necessity with no close substitutes. If the price of mystery novels were to rise, readers could substitute other types of novels or buy fewer novels altogether. But if the price of required textbooks were to rise, students would have little choice but to pay the higher price. Thus, the quantity demanded of required textbooks is less responsive to price than the quantity demanded of mystery novels.

Which one has more elastic demand? Required textbook or mystery novels

Root beer- Root beer has more elastic demand than water. Root beer has close substitutes, while water is a necessity with no close substitutes. If the price of water were to rise, consumers would have little choice but to pay the higher price. But if the price of root beer were to rise, consumers could easily switch to other soft drinks. So the quantity demanded of root beer is more responsive to changes in price than the quantity demanded of water.

Which one has more elastic demand? Root beer or water

Strawberries- Strawberries have more elastic demand than fruit in general. Strawberries are a narrower market than fruit, so it is easier to find close substitutes for them. If the price of strawberries were to rise, people could substitute other fruit, such as raspberries. But if the price of fruit in general were to rise, substitution would be more difficult. Thus, the quantity demanded of fruit is less responsive to price than quantity demanded of strawberries.

Which one has more elastic demand? Strawberries or fruit in general

Next 5 years- Subway rides during the next 5 years have more elastic demand than subway rides during the next 6 months. Goods have a more elastic demand over longer time horizons. If the fare for a subway ride were to rise temporarily, consumers could not switch to other forms of transportation without great expense or great inconvenience. But if the fare for a subway ride were to remain high for a long time, people would gradually switch to alternative forms of transportation. As a result, the quantity demanded of subway rides during the next 6 months is less responsive to changes in the price than the quantity demanded of subway rides during the next 5 years.

Which one has more elastic demand? Subway rides during the next 6 months or subway rides during the next 5 years

2. A drought in Kansas is not significant enough to affect the worldwide price of grain. Can sub. grain for Canadian grain. A worldwide drought could increase the total revenue of farmers if demand for grain is inelastic. The drought reduces the supply of grain. If demand is inelastic, the reduction of supply causes a large increase in price. Total farm revenue would increase as a result. If there is a drought only in Kansas, Kansas's production is not a large enough proportion of the total farm product to have much impact on the price. As a result, price does not change (or changes by only a slight amount), while the output of Kansas farmers declines, thus reducing their total revenue.

Why would a drought only in Kansas most likely reduce the total revenues that Kansas farmers receive? 1. A drought in Kansas would significantly raise the worldwide price of grain 2. A drought in Kansas is not significant enough to affect the worldwide price of grain. 3. A drought in Kansas is not significant enough to affect the worldwide price of grain.

2. only when demand is inelastic- In order to determine whether you should raise or lower the price of admissions, you need to know whether the demand is elastic or inelastic. If demand is elastic with price elasticity greater than 1, a decline in the price of admissions will increase total revenue. If demand is inelastic with price elasticity less than 1, an increase in the price of admissions will cause total revenue to rise.

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? 1. Always 2. Only when demand is inelastic 3. Only when demand is elastic

the price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price.

price elasticity of supply

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

income elasticity of demand

measures how the quantity demanded changes as consumer income changes. It is calculated as the percentage change in quantity demanded divided by the percentage change in income

corss-price elasticity of demand

measures how the quantity demanded of one good responds to a change in the price of another good. It is calculated as the percentage change in quantity demanded of good one divided by the percentage change in the price of good two

total revenue

the amount paid by buyers and received by sellers of a good. the amount a firm receives for the sale of its output