Chapter 5 - The Elasticity of Demand

T or F: A good is said to be elastic if a small change in price causes a large change in quantity demanded. A good is said to be elastic if a small change in price causes a large change in quantity demanded.

True

In general, a steeper supply curve is more likely to be ________. a. price elastic b. price inelastic c. unit price elastic d. none of the answer choices

b. price inelastic

perfectly inelastic demand curve

vertical line

Midpoint Method

(Q2-Q1)/[(Q2+Q1)/2] / (P2-P1)/ [(P2+P1)/2] or (change in quantity) / (midpoint average) / (change in price) / (midpoint averge)

T or F: Cross price elasticity looks at how a change in the price of one good impacts the quantity demanded of another good.Cross price elasticity looks at how a change in the price of one good impacts the quantity demanded of another good.

True

income elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in consumers' income, calculated as the percentage change in quantity demanded divided by the percentage change in income

price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in its price, calculated as the percentage change in quantity demanded divided by the percentage change in price

total revenue

the amount paid by buyers and received by the sellers of a good, calculated as the price of the good times the quantity sold

Steeper the demand curve

smaller price elasticity of demand

Complements

- have negative cross-price elasticities - when the price of one decreases, quantity demanded of the other increases - move in opposite directions

Substitues

- have positive cross-price elasticities - as the price of one decreases the other quantity demanded for the other decreases as well - move in the same direction

Unit elastic demand

- price elasticity is = 1 - total revenue remains constant when the price changes

Inferior Good

- quantity demanded decreases as income increases - inferior goods have negative income elasticities

Normal Good

- quantity demanded increases as income increases -normal goods have positive elasticities

Inelastic demand

- when price increases, total revenue increases - price and total revenue move in the same direction - price elasticity is < 1

Elastic Demand

-when price increases, total revenue decreases -price and total revenue move in opposite directions - price elasticity > 1

Rank the following from most to least elastic produce food strawberries

Most elastic- Strawberries In between- produce Least elastic- food

Total Revenue Formula

TR = P x Q (Total Revenue = Price x Quantity)

cross-price elasticity of demand

a measure of how much the quantity demanded of one good responds to a change in the price of another good, calculated as the percentage change in the quantity demanded of the first good divided by the percentage change in the price of the second good

price elasticity of supply

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

elasticity

a measure of the responsiveness of the quantity demanded or quantity supplied to a change in one of its determinants

When the price of toilet paper increases by 10%, the quantity demanded decreases by 5%. What is the price elasticity of demand for toilet paper? a. 0.5 b. 2 c. 5 d. 10

a. 0.5

Of the following goods, which would you expect to have the most elastic demand? a. 100% cotton green t-shirt b. green t-shirt c. t-shirt d. clothing

a. 100% cotton green t-shirt

The price elasticity of demand of a good depends in part on its relative necessity in comparison to other goods. Assume the following goods all have approximately the same price. Which of the goods has the LEAST elastic demand? a. Access to medicine for individuals with chronic illnesses b. Designer clothing

a. Access to medicine for individuals with chronic illnesses

If a seller knows that the price elasticity of demand for her product is 2.4, what will happen to her total revenue if the price decreases? a. Total revenue will increase b. Total revenue will remain constant c. Total revenue will decrease

a. Total revenue will increase

A linear, downward-sloping demand curve is _______. a. inelastic at some points, and elastic at others b. elastic c. inelastic d. unit elastic

a. inelastic at some points, and elastic at others

If a small percentage increase in the price of a good greatly reduces the quantity demanded for that good, the demand for that good is ________. a. price elastic b. income elastic c. income inelastic d. price inelastic e. unit price elastic

a. price elastic

In general, a flatter demand curve is more likely to be ________. a. price elastic b. price inelastic c. unit price elastic d. none of the answer choices

a. price elastic

If a supply curve for a good is price elastic, then ________. a. the quantity supplied is sensitive to changes in the price of that good b. the quantity supplied is insensitive to changes in the price of that good c. the quantity demanded is sensitive to changes in the price of that good d. the quantity demanded is insensitive to changes in the price of that good e. none of the answer choices

a. the quantity supplied is sensitive to changes in the price of that good

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 ________. a. zero; one b. zero; zero c. one; zero d. one; one

a. zero; one

Suppose that at a price of $30 per month, there are 30,000 subscribers to Small Town Streaming Service. If Small Town Streaming Service raises its price to $40 per month, the number of subscribers will fall to 20,000. At which of the following prices does Small Town Streaming Service earn the greatest total revenue? a. Either $30 or $40 per month because the price elasticity of demand is 1.0 b. $30 per month c. $40 per month d. $0 per month

b. $30 per month

If consumers always spend 15 percent of their income on clothing, then the income elasticity of demand for clothing is ________. a. 0.15 b. 1.00 c. 1.15 d. 1.50 e. none of the answer choices

b. 1.00

The price of a good rises from $16 to $24, and the quantity supplied rises from 90 to 110 units. Calculated with the midpoint method, the price elasticity of supply is _______. a. 1/5 b. 1/2 c. 2 d. 5

b. 1/2

When the price of a ticket to a sporting event increases from $70 to $90, the quantity demanded decreases from 7,500 to 4,500. Using the midpoint method, the price elasticity of demand is _____, which means demand is _____. a. 0.5; inelastic b. 2; elastic

b. 2; elastic 3000 / 6000 = .5 / 20 / 80 = .25 = 2

According to the concept of cross-price elasticity, if the price of Pepsi increased, what would we expect to happen to the quantity of Coca Cola demanded? a. Decrease. b. Increase. c. Price of Coca Cola would also increase. d. Nothing. Coca Cola is better than Pepsi.

b. Increase.

If the price elasticity of demand is 0.8, is demand elastic, inelastic, or unit elastic? a. Elastic b. Inelastic c. Unit elastic

b. Inelastic

Which of the following would cause a demand curve for a good to be price inelastic? a. The good is a luxury. b. The good is a necessity. c. There are a great number of substitutes for the good. d. The good is inferior.

b. The good is a necessity.

The demand for which of the following is likely to be the most price inelastic? a. Delta airline tickets b. Transportation c. Uber rides d. Greyhound bus tickets

b. Transportation

If the cross-price elasticity between two goods is negative, the two goods are likely to be ________. a. substitutes b. complements c. luxuries d. necessities

b. complements

The demand for toothpaste is more _____ than the demand for diamond earrings. a. elastic b. inelastic

b. inelastic

If the income elasticity of demand for a good is negative, it must be a(n) ________. a. elastic good b. inferior good c. luxury good d. normal good

b. inferior good

If supply is price inelastic, the value of the price elasticity of supply must be ________. a. zero b. less than 1 c. greater than 1 d. infinite e. none of the answer choices

b. less than 1

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. a. less; larger b. more; smaller c. less; smaller d. more; larger

b. more; smaller

If there is excess capacity in a production facility, it is likely that the firm's supply curve is ________. a. price inelastic b. price elastic c. unit price elastic d. none of the answer choices

b. price elastic

Suppose George's income decreases by 10%. As a result, the quantity of Good X George demands increases by 20%. George's income elasticity for Good X is _____, and Good X is ______ good. a. -0.5; an inferior b. 0.5; a normal c. -2; an inferior d. 2; a normal

c. -2; an inferior

On a linear demand curve, if the price is low and the quantity demanded is high, demand is _____ in that region and a price increase will cause _____ in total revenue. a. Elastic; An increase b. Elastic; A decrease c. Inelastic; An increase d. Inelastic; A decrease

c. Inelastic; An increase

Which of the following is an example of an inelastic good? a. Cars b. Housing c. Insulin d. Coffee

c. Insulin

The citizens of Rohan spend a higher fraction of their income on food than do the citizens of Gondor. The reason could be that _______. a. Rohan has lower food prices, and the price elasticity of demand is 0.5 b. Rohan has lower food prices, and the price elasticity of demand is zero c. Rohan has lower income, and the income elasticity of demand is 0.5 d. Rohan has lower income, and the income elasticity of demand is 1.5

c. Rohan has lower income, and the income elasticity of demand is 0.5

The price elasticity of demand is defined as ________. a. the percentage change in price of a good divided by the percentage change in the quantity demanded of that good b. the percentage change in income divided by the percentage change in the quantity demanded c. the percentage change in the quantity demanded of a good divided by the percentage change in the price of that good d. the percentage change in the quantity demanded divided by the percentage change in income e. none of the answer choice

c. the percentage change in the quantity demanded of a good divided by the percentage change in the price of that good

The ability of firms to enter and exit a market over time means that, in the long run, _______. a. the demand curve is more elastic b. the supply curve is less elastic c. the supply curve is more elastic d. the demand curve is less elastic

c. the supply curve is more elastic

If an increase in the price of a good has no impact on the total revenue in that market, demand must be ________. a. price inelastic b. price elastic c. unit price elastic d. all of the answer choices

c. unit price elastic

If a farmer must sell all of their daily harvest of vegetables before they spoil for whatever price they are offered, once the vegetables are picked, the farmer's price elasticity of supply for fresh vegetables is ________. a. unable to be determined from this information b. one c. zero d. infinite

c. zero

Suppose the price of Good X decreases by 8%. As a result, the quantity demanded of Good Y decreases by 4%. What is the cross-price elasticity of demand? How are Good X and Good Y related? a. -2; Complements b. -0.5; Normal goods c. 2; Inferior goods d. 0.5; Substitutes

d. 0.5; Substitutes

A decrease in supply (shift to the left) will increase total revenue in that market if ________. a. demand is price elastic b. supply is price elastic c. supply is price inelastic d. demand is price inelastic

d. demand is price inelastic

If consumers think that there are very few substitutes for a good, then ________. a. supply would tend to be price elastic b. supply would tend to be price inelastic c. demand would tend to be price elastic d. demand would tend to be price inelastic e. none of the answer choices are correct

d. demand would tend to be price inelasticd. demand would tend to be price inelastic

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

d. each farmer is a price taker

An increase in a good's price reduces the total amount consumers spend on the good if the ________ elasticity of demand is ________ than one. a. income; greater b. price; less c. income; less d. price; greater

d. price; greater

Technological improvements in agriculture that shift the supply of agricultural commodities to the right tend to ________. a. increase total revenue to farmers as a whole because the demand for food is elastic b. increase total revenue to farmers as a whole because the demand for food is inelastic c. reduce total revenue to farmers as a whole because the demand for food is elastic d. reduce total revenue to farmers as a whole because the demand for food is inelastic

d. reduce total revenue to farmers as a whole because the demand for food is inelastic

An increase in the supply of grain will reduce the total revenue grain producers receive if _______. a. the supply curve is inelastic b. the demand curve is elastic c. the supply curve is elastic d. the demand curve is inelastic

d. the demand curve is inelastic

A good tends to have a small price elasticity of demand if _______. a. the long-run response is being measured b. there are many close substitutes c. the market is narrowly defined d. the good is a necessity

d. the good is a necessity

If the price elasticity of supply is zero, the supply curve is _______. a. upward sloping b. fairly flat at low quantities but steeper at larger quantities c. horizontal d. vertical

d. vertical

Suppose that at a price of $30 per month, there are 30,000 subscribers to Small Town Streaming Service. If Small Town Streaming Service raises its price to $40 per month, the number of subscribers will fall to 20,000. Using the midpoint method for calculating the elasticity, what is the price elasticity of demand for this company's streaming service? a. 0.66 b. 2.0 c. 1.0 d. 0.75 e. 1.4

e. 1.4

If demand is linear (a straight line), then price elasticity of demand is ________. a. inelastic throughout b. elastic throughout c. constant along the demand curve d. inelastic in the upper portion and elastic in the lower portion e. elastic in the upper portion and inelastic in the lower portion

e. elastic in the upper portion and inelastic in the lower portion

price elasticity of demand greater than 1

elastic demand

A good in the presence of many close substitutes is predicted to have relatively _______ demand, since consumers can easily choose to purchase one of the close substitutes if the price of the good were to increase. elastic or inelastic

eleastic

Flatter the demand curve

greater price elasticity of demand

luxury goods have ______ income elasiticity's high or low

high income elasticity's

perfectly elastic demand curve

horizontal line

Price elasticity of demand less than 1

inelastic demand

Unit demand curve

is neither exceptionally steep nor exceptionally flat

Compared to the short-run demand for oil, the demand for oil in the long run will tend to be ________ elastic. less or more

more

income elasticity of demand =

percentage change in quantity demanded / percentage change in income

Price elasticity of demand =

percentage change in quantity demanded/percentage change in price

cross-price elasticity of demand

the percentage change in the quantity demanded of one good / the percentage change in the price of another good

Price elasticity of demand equal to 1

unit elastic demand