ECON Chapter 5
Demand is said to be price elastic if
buyers respond substantially to changes in the price of the good.
The price elasticity of demand measures
buyers' responsiveness to a change in the price of a good.
When the price of good A is $50, the quantity demanded of good A is 500 units. When the price of good A rises to $70, the quantity demanded of good A falls to 400 units. Using the midpoint method, the price elasticity of demand for good A is
0.67, and an increase in price will result in an increase in total revenue for good A
Suppose that when the price of good X increases from $800 to $850, the quantity demanded of good Y increases from 65 to 70. Using the midpoint method, the cross-price elasticity of demand is about
1.2, and X and Y are substitutes
A manufacturer produces 400 units when the market price is $10 per unit and produces 600 units when the market price is $12 per unit. Using the midpoint method, for this range of prices, the price elasticity of supply is about
2.2
Suppose the price of a bag of frozen chicken nuggets decreases from $6.50 to $5.75 and, as a result, the quantity of bags demanded increases from 600 to 800. Using the midpoint method, the price elasticity of demand for frozen chicken nuggets in the given price range is
2.33
If the price elasticity of demand for a good is 2.0, then a 10 percent increase in price results in a
20 percent decrease in the quantity demanded.
Last year, Tess bought five handbags when her income was $54,000. This year, her income is $60,000, and she purchased seven handbags. Holding other factors constant and using the midpoint method, it follows that Tess's income elasticity of demand is about
3.17, and Tess regards handbags as normal goods.
Which of the following could be the price elasticity of demand for a good for which a decrease in price would increase total revenue?
4
Studies indicate that the price elasticity of demand for cigarettes is about 0.4. A government policy aimed at reducing smoking changed the price of a pack of cigarettes from $2 to $6. According to the midpoint method, the government policy should have reduced smoking by
40 percent
Suppose the price elasticity of supply for cheese is 0.6 in the short run and 1.4 in the long run. If an increase in the demand for cheese causes the price of cheese to increase by 15 percent, then the quantity supplied of cheese will increase by
9 percent in the short run and 21 percent in the long run.
Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 0.75. Which of the following events is consistent with a 10 percent decrease in the quantity of the good demanded?
A 13.33 percent increase in the price of the good
For which of the following goods is the income elasticity of demand likely highest?
Diamonds
Which of the following statements is valid when the market supply curve is vertical?
Market quantity supplied does not change when the price changes.
If the price of natural gas rises, when is the price elasticity of demand likely to be the highest?
One year after the price increase
Suppose that two supply curves pass through the same point. One is steep, and the other is flat. Which of the following statements is correct?
The steeper supply curve represents a supply that is inelastic relative to the supply represented by the flatter supply curve.
Which of the following is likely to have the most price elastic demand?
Tommy Hilfiger jeans
Which of the following is likely to have the most price inelastic demand?
Toothpaste
A good will have a more inelastic demand, the
broader the definition of the market.
A decrease in supply will cause the largest increase in price when
both supply and demand are inelastic
If the cross-price elasticity of two goods is negative, then the two goods are
complements.
Marcus says that he would smoke one pack of cigarettes each day regardless of the price. If he is telling the truth, Marcus's
demand for cigarettes is perfectly inelastic
Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers are to a change in price, the
flatter the demand curve will be.
If the price elasticity of supply is 1.2, and price increased by 5 percent, quantity supplied would
increase by 6 percent
If the demand for donuts is elastic, then a decrease in the price of donuts will
increase total revenue of donut sellers
When the price of candy bars is $1.00, the quantity demanded is 500 per day. When the price falls to $0.80, the quantity demanded increases to 600. Given this information and using the midpoint method, we know that the demand for candy bars is
inelastic
When her income increased from $10,000 to $20,000, Heather's consumption of macaroni decreased from 10 pounds to 5 pounds and her consumption of soy-burgers increased from 2 pounds to 4 pounds. Using the midpoint method, we can conclude that for Heather, macaron
is an inferior good with an income elasticity of -1 and soy-burgers are normal goods with an income elasticity of 1.
Suppose researchers at the University of Wisconsin discover a new vitamin that increases the milk production of dairy cows. If the demand for milk is relatively inelastic, the discovery will
lower both price and total revenues
Goods with many close substitutes tend to have
more elastic demands.
For a good that is a luxury, demand
tends to be elastic.
You are in charge of the local city-owned aquatic center. You need to increase the revenue generated by the aquatic center to meet expenses. The mayor advises you to increase the price of a day pass. The city manager recommends reducing the price of a day pass. You realize that
the mayor thinks demand is inelastic, and the city manager thinks demand is elastic.
If marijuana were legalized, it is likely that there would be an increase in the demand for marijuana. If demand for marijuana is inelastic and the supply of marijuana is perfectly elastic, this will result in
the same price and higher total revenue from marijuana sales.
A key determinant of the price elasticity of supply is the
time horizon.