Chapter 5: Elasticity: A Measure of Responsiveness

What is the cross-price elasticity of demand for two goods that are unrelated?

Zero

Prior to the 1997 federal tobacco settlement a pack of cigarettes sold for $2.48. The terms of the settlement required a decrease in teenage smoking of 60 percent. If the elasticity of cigarette demand for teenagers is about 1.3 then the price of cigarettes should rise to __________ in order to achieve the target reduction of 60 percent

$3.62

Using the initial value formula, the value of price elasticity of supply between points s and t equals:

2.0

Which of these demand curves shows a perfectly inelastic demand?

The demand curve on the left

If the cross-price elasticity of demand between two products is -3.0, then the two products are:

complements

If a 20 percent increase in the price of Red Bull energy drinks results in a decrease in quantity demanded of 25 percent, we say the demand for Red Bull is __________ in this range.

elastic

If the supply of Good B is perfectly elastic and price falls the quantity supplied will:

fall to zero

The more substitutes that exist for a particular product, the __________ the price elasticity of demand.

greater

A perfectly inelastic supply curve

indicates the quantity supplied does not respond to a change in price

At current prices of a highly addictive drug the demand for the drug is highly price:

inelastic

If the price elasticity of demand is 0.33 then demand is __________ over that price range.

inelastic

The income elasticity for peanut butter is -3. This defines peanut butter as what type of good?

inferior good

Economists avoid confusion over units in the computation of elasticity by using:

percentage changes

Economists avoid confusion over units in the computation of elasticity by using:

percentage changes. Using percentage changes eliminates the problem of the elasticity coefficient differing simply due to changing the unit of measurement. For example, we would have a different elasticity for the same price change simply by using dollars instead of cents. Using the percentage change avoids this problem.

If prices rise the quantity supplied will be greater:

the longer the time that elapses

The price elasticity of supply always has a:

positive value

The current price of wheat is $1.00 per bushel, and the price elasticity of demand for wheat is known to be 0.50. A bad harvest causes the supply of wheat to decrease and as a result the price of wheat rises by 20%. What will be the percentage change in quantity demanded for wheat and will farm revenues rise or fall?

10% rise The elasticity of demand is the percentage change in quantity divided by the percentage change in price. An elasticity of demand coefficient of 0.50 indicates that the quantity demanded will fall by .50 x 20% = 10%. Since wheat is inelastic we know that farm revenues will rise as a result.

If the income elasticity of SUVs is greater than 1, what is the good considered?

A luxury

An increase in the price of a substitute for iPads will lead to __________ in the quantity demanded of iPads so the cross-price elasticity of demand will be __________.

an increase, positive

When you compute a price elasticity of demand the answer is always:

negative

Personal computers and computer display monitors are:

complements

If the price elasticity of supply is 0.4, then a 20% increase in price will __________ the quantity supplied by __________ %.

increase, 8.0 The percentage change in quantity supplied is equal to the elasticity of supply multiplied by the percentage change in price. Quantity supplied will move in the same direction as price since suppliers will be willing to supply more units at higher prices, ceteris paribus. So, 0.40 x 20% = 8.0%.

The __________ is a measure of responsiveness of the change in quantity demanded of a good to the change in its price.

price elasticity of demand