econ 101 chapter 5

Rank the following from the least elastic (inelastic) to most elastic.

demand for food, demand for dessert, demand for cookies, demand for oreos

Elastic

when the percentage change in the quantity demanded is greater than the percentage change in the price of the good or service. The price elasticity of demand is greater than 1.

If a curve is perfectly inelastic does it violate the law of demand?

yes

Suppose you know that the price elasticity of demand for your product is 0.5, and you are thinking about raising your price by 8%. How much can you expect quantity to decrease?

4%

Necessity

A good or service that is viewed by consumers as a high priority. Consumers tend to be less sensitive to price changes of goods that are assumed to be necessities. Usually inelastic.

Minimum wage

A legal minimum for wages (the price of one hour of labor) for most categories of workers.

Which of the following statements about the effects of a government setting maximum prices is true?

A maximum price will cause a shortage of a good to be produced only if the maximum price is below the equilibrium price.

Rent control

A policy which sets a legal maximum rent that can be charged for some apartments in some major cities. (price ceiling)

Many major U.S. cities have adopted rent controls for some housing. An effective rent control is what kind of price control?

A price ceiling with a maximum price below equilibrium price

Rank the following in order from the least elastic demand to most elastic:

Allergy medicine that is prescribed by a physician, Any over-the-counter allergy medicine, Sudafed Cold and Allergy Medicine

If population increases in a city with effective rent controls (and nothing else changes), which of the following describes what will happen in the market for rental housing?

An increase in demand, but no change in quantity supplied.

When the federal government subsidizes higher education in the form of Pell grants to students, it results in:

An increase in the demand for higher education

When the federal government subsidizes higher education in the form of direct subsidies to universities, it results in:

An increase in the supply of higher education

A government may impose a price ceiling if which of the following is true?

Consumers can persuade legislators that lower prices are needed

Inelastic

For a business an increase in price will increase the total revenue received by the business, and a decrease in price will reduce total revenue.

elastic

For a business, an increase in price will decrease the total revenue received by the business, and a decrease in price will increase total revenue.

Substitutes

Goods or services that consumers consider as serving similar purposes

Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold.

I do not know because I cannot tell how much costs would change in relationship to revenues.

A major city was thinking about increasing its bus fares and commissioned a study to estimate the price elasticity of demand. The study estimated that elasticity was 0.4. What action should the city have taken to increase revenue from bus fares?

Increase fares

An increase in an effective maximum legal price will do what to prices and quantities actually sold in a market? Prices will __________ and the quantities actually sold will ___________.

Increase; increase

If the income elasticity of a good is 0.8, what do we know about the good?

It is a normal good because it is inelastic

Price elasticity of demand

It measures how sensitive the quantity demanded is to changes in the price level of a good. The percentage change in quantity demanded of a good or service divided by the percentage change in price (equation).

Taxes

Mandatory payments to governments from consumers and producers

When will a minimum wage be an effective price control? When it is a _________.

Minimum "price" that is above equilibrium price (price floor)

Situation A: When a $10 per unit tax is imposed on the producer of Bippies (a candy), the equilibrium price increases by $4. Situation B: When a $10 per unit tax is imposed on the producer of Bippies, the equilibrium price increases by $2. Based on the two situations above, Bippies in Situation A has a _________ elastic supply OR has a _________ elastic demand than exists in Situation B.

More; less

Subsidies

Payments from governments to producers or consumers of specific goods and services. Usually when there is a price floor. (example subsidies for farmers) they will decrease equilibrium price and increase equilibrium quantity

A firm has a choice of raising or lowering its price. If the firm wishes to increase its revenues (the price times the quantity sold), what should it do?

Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold.

A business should ___________ (increase/decrease) the price of a good with an elastic demand if it wants to increase revenues.

decrease

Who is likely to be in favor of a price ceiling on a good?

The consumers of the good who can still purchase it after the ceiling is imposed

Price ceiling

The legal maximum price for which a good or service can be sold. Examples include laws limiting apartment rents in some cities. can result in a shortage

Income elasticity of demand

The percentage change in quantity demanded of a good or service divided by the percentage change in income.

Price elasticity of supply

The percentage change in quantity supplied of a good or service divided by the percentage change in price.

When price decreases, quantity increases. Price elasticity of demand measures how much ___________.

The quantity increases when price decreases

If the government taxes car producers, that will happen in the market for cars?

The supply curve will shift to the left.

Sometimes consumers purchase goods because of "conspicuous consumption"; i.e., they want others to know that they can afford to buy the goods. There are many examples of these goods, such as Rolex watches, Coach purses, and flying first class. What would you expect the income elasticity of demand to be for these goods?

These are luxury goods, so income elasticity would be greater than 1.

sin tax

a relatively high tax designed to raise revenue and reduce consumption of a socially undesirable product such as liquor or tobacco

If the government imposes an effective price ceiling in a market, what will be the result?

a shortage

Assume that the elasticity of demand is 1.6. Is demand elastic or inelastic?

elastic

for elastic and inelastic we usually refer to the demand curve

for elastic and inelastic we usually refer to the demand curve

A business should ___________ (increase/decrease) the price of a good with an inelastic demand if it wants to increase revenues.

increase

An increase in an effective minimum legal price will do what to prices and quantities actually sold in a market? Prices will __________ and the quantities actually sold will ___________.

increase; decrease

Elasticity

is a measure of the sensitivity of changes in one variable to changes in another

influences on price elasticity of demand

luxury vs necessity, the portion of their income they spend on a good (the more they spend the more elastic it is), the number of substitutes there are for the good, and how much time buyers have to adjust to price changes (more time equals more elastic)

Assume that as your income increases, your consumption of burgers decreases. We can assume that your income elasticity of demand for burgers is what?

negative

Price floor

the legal minimum price at which a good or service can be sold. An example is the federal minimum wage, currently $7.25 per hour. can result in a surplus

Profits

total revenue - total costs

If you were selling a product with an elasticity of 1.6 and you wanted to increase your revenue, what should you do to the price?

lower the price

Inelastic

when the percentage change in the quantity demanded is less than the percentage change in the price of the good or service. The price elasticity of demand is less than 1.