ECON - Elasticity

You read an article stating that HTC's latest cell phone price has increased from $450 to $550. At the same time the quantity demanded for the Samsung Galaxy 7s increases from 1000 to 1850. Calculate the cross price elasticity of demand using the midpoint method. Are these two cell phones complements or substitutes?

The cross-price elasticity of demand is 2.98 and they are substitutes.

Which of the following two goods illustrate a cross-price elasticity likely greater than zero?

The substitute goods of blueberries and strawberries.

You are the manager of the public transit system. You are informed that the system faces a deficit, but you cannot cut service, which means you cannot cut costs. Your only hope is to increase revenue by increasing fares. You are advised that the estimated price elasticity of demand for the first few months after a price change is about −0.3. Select the statement that best describes the results of raising the fare in the short run.

Total revenue rises immediately after the fare increase, since demand over the immediate period is price inelastic.

What happens to total revenue (TR) if the price decreases on a product with demand that is price elastic?

Total revenue will rise.

When income increases and demand for a good falls, the good is considered a

an inferior good.

Good news for an industry that typically produces price inelastic goods can

be bad news for individual producers because when these factors shift the supply curve to the right it decreases total revenues.

If the demand for a product is inelastic but the supply is elastic, the ________ will bear the tax incidence.

consumer

The government imposes an excise tax on house paint. The house paint tax incidence takes place within a market where the supply of house paint is elastic and the demand for house paint is inelastic. Who pays the most of the excise tax?

consumers of house paint

If the government wanted to encourage savings by offering a tax break, such a policy would increase savings most effectively if the supply curve for financial capital is

elastic.

If the demand curve for energy is at first inelastic, then changes over time and becomes increasingly elastic, then the demand curve is

getting flatter.

Elasticities are often ________ in the long run than in the short run.

higher

Joe received a promotion this year at work and now has an income which has increased by 21% since last year. Joe has now increased his quantity demanded of red wine by 7%. In this example, Joe's

income elasticity is .33 and the good is a normal good.

An increase in demand will shift the demand curve to the right, therefore ________ the equilibrium price.

increasing

Higher costs can typically be passed on to consumers when a product is considered

inelastic.

Price and total revenue are positively related when demand is

inelastic.

The electric power company in a city increased its prices by 15% this year. Since the demand for electricity is a(n) ________ demand in the short run, the firm's revenues will ________.

inelastic; greatly increase

A person who takes insulin to treat their diabetes most likely has a(n) ________ demand for that drug. Therefore an increase in the price of insulin will result in ________ total revenue for the drug company.

inelastic; increased

A tax is imposed on chewing gum purchases. Consumers end up paying all of the tax through a price increase while the producers pay none of the tax. This happened because the demand curve

is perfectly inelastic.

A new technological breakthrough increases production for an industry and shifts the supply curve to the right. If the firm ________, then the firm will likely increase revenues with this new technology.

produces products that are price elastic

The wage elasticity of labor demand calculation is

the % change in quantity of labor demanded divided by the % change in wage.

Total revenue is defined as ________ and represented by the formula ________.

the price of a product times the number of units sold; TR=P x Qd

When supply is inelastic and demand is elastic, the tax incidence falls on ________.

the producer