Econ 2030 Chapter 6

Which of the following factors affect the number of substitutes a good has?

-The time period being considered -The degree to which a good is a luxury -The market definition -The importance of a good in one's budget

If the price of a good goes up by 40 percent and the quantity demanded falls by 20 percent, what is the price elasticity of demand?

1/2 -Elasticity of demand = percentage change in quantity/percentage change in price = 20/40 = 1/2.

A marketing student observes that when the price of ice cream rises by 5 percent, the quantity of ice cream a supplier is willing to sell rises by 10 percent. The student correctly concludes that the elasticity of supply for ice cream is:

2

If average movie attendance decreases 10 percent at a local movie theater when prices increase 5 percent, then in absolute terms the elasticity of demand for movie tickets is about:

2.0 Elasticity of demand = percentage change in quantity/percentage change in price = 10/5 = 2.0.

When supply is highly elastic and demand increases, price

Changes relatively little while quantity increases enormously. -Reason: The more elastic the supply, the greater the effect of a demand shift on quantity, and the smaller the effect on price.

True or false: A broadly market-defined good has more substitutes than a narrowly market-defined good.

False

A broadly market-defined good has more substitutes than a narrowly market-defined good.

False -A narrowly market-defined good has more substitutes than a broadly market-defined good. There aren't as many substitutes for the category food as there are for particular foods such as carrots.

True or false: Perfectly elastic reflects the situation in which quantity does not respond to changes in price.

False -Perfectly elastic reflects the situation where quantity responds enormously to changes in price.

What does the percentage change in quantity demanded divided by the percentage change in price measure?

Price elasticity of demand

True or false: Perfectly inelastic reflects the situation in which quantity does not respond to changes in price.

True

True or false: When a supplier faces an elastic demand, it should hesitate to increase price.

True -When demand is elastic, increasing price will decrease revenue. Profit may or may not rise depending on the change in costs relative to the change in revenue.

True or false: A firm knows that it faces inelastic demand. It should consider increasing its price.

True -When demand is inelastic, increasing price will increase revenue. Since costs will fall, profit will definitely rise.

A college bookstore has estimated the elasticity of demand for its textbooks to be 1.89. Using this information, the college bookstore decides to look into how costs will change when they increase production before lowering price... Are they correct in their reasoning?

Yes, because while lowering prices when demand is elastic will raise revenue, costs will rise as well. The effect on profit is unclear

A straight line supply curve that has a slope of 0.5 _____.

can be elastic or inelastic

Cross-price elasticity of demand is defined as the percentage change in

demand for the good divided by percentage change in price of a related good.

Perfectly inelastic reflects the situation in which quantity

does not respond at all to changes in price.

When you move down the demand curve starting where the demand curve intersects the price axis, total revenue

first increases, then decreases.

Complements

goods that are used in conjunction with other goods.

Inferior goods

goods whose consumption decreases when income increases.

Normal goods

goods whose consumption increases with an increase in income.

Luxuries are goods that have an income elasticity

greater than one.

The percentage change in quantity demanded divided by the percentage change in income is known as

income elasticity of demand.

For a normal good, as income increases, consumption

increases

A pet store has estimated the elasticity of demand for gerbils to be 1.32. Using this information, a store that wants to raise revenues would

lower gerbil prices. -When demand is elastic, lowering prices increases total revenue.

A good whose consumption increases with an increase in income is known as a(n) _____.

normal goods

Income elasticity is defined as the

percentage change in quantity demanded divided by the percentage change in income.

The price elasticity of supply is the

percentage change in the quantity supplied divided by the percentage change in price.

Cross-price elasticity of demand tells us the responsiveness of demand to the change in

prices of related goods.

Price elasticity of demand is the percentage change in

quantity demanded divided by the percentage change in price.

Price elasticity of supply is the percentage change in

quantity supplied divided by the percentage change in price.

Slope and elasticity are _____.

related, but not the same

Perfectly elastic reflects the situation in which quantity

responds enormously to changes in price.

When supply is highly inelastic and demand increases, price

rises significantly while quantity hardly changes at all.

Goods that can be used in place of one another are called _____.

substitutes