Econ101 ch5 ISU

price floor

A legal minimum price. An effective price floor is a legal minimum price that is above the equilibrium.

If demand were elastic, an increase of 10 percent in the price might cause a 20 percent decrease in quantity demanded. What would happen to the total revenue in this case?

the total revenue in this case would decrease

What would happen to the store's total revenue with this 10 percent price increase if quantity falls by 5 percent?

there would be an overall increase in revenue

when does total revenue increase for elastic demand?

when price decreases

when does total revenue increase for inelastic demand?

when price increases

Why might demand for movies be more elastic in the summer than in the winter?

you have more options on things to do in the summer time so there are more substitute activities to do compared to winter when it is cold and gross out

price elasticity of supply

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

price ceiling

A legal maximum price. An effective price ceiling is a legal maximum price that is below the equilibrium price.

elasticity of supply

%change in quantity supplied/%change in price

price elasticity between two pts

((Q2-Q1)/((Q1+Q2)/2))/((P2-P1)/((P1+P2)/2))

Percentage change formula

(ending value - beginning value)/(beginning value)*100

elasticity of demand

(percentage change in quantity)/(percentage change in price)

what determines the elasticity of demand

-number of substitutes -whether or not a good is a necessity -percentage of income spent on good -length of time for adjustment

If the government mandates that a price cannot be set above some specified level, then A None of the below. B Only the demand curve will shift. C Only the supply curve will shift. D There will always be excess supply. E There will always be excess demand.

A None of the below.

The current equilibrium price of a specific type of automobiles is $23,000. An increase of a price ceiling on automobiles from $20,000 to $25,000 will do what to the amount sold in the market and to the price of automobiles? A The price of automobiles will increase and more will be sold. B The price of automobiles will not change and no more will be sold. C The price of automobiles will increase to $25,000 and fewer will be sold. D The price ceiling must not be effective as the equilibrium price is above the initial price ceiling.

A The price of automobiles will increase and more will be sold.

Suppose that a 10 cent tax per apple is imposed on apple growers (producers). Then A the effective supply curve will shift upwards by 10 cents B the effective supply curve will shift upwards by 5 cents C the effective supply curve will shift downwards by 10 cents D the effective demand curve will shift upwards by 5 cents E the effective demand curve will shift downwards by 10 cents

A the effective supply curve will shift upwards by 10 cents

what happens to revenues if there is a decrease in price? A)Increase B)Decrease

A) increase

When the federal government subsidizes higher education in the form of direct subsidies to universities, it results in: A)An increase in the supply of higher education B)A decrease in the supply of higher education C)An increase in the demand for higher education D)A decrease in the demand for higher education

A)An increase in the supply of higher education The effect of a subsidy directly to the supplier of higher education is a reduction in costs. Anytime there is a decrease in the cost of doing business, supply increases.

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? A)Increase fares B)Decrease fares C)Do not change fares

A)Increase fares Since 0.4 < 1, demand is inelastic. Therefore, in order to increase revenues, price should be increased.

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? A)Lower price B)Increase price C)Do not change price

A)Lower price If demand is elastic, consumers are very responsive to price changes, so the quantity change will outweigh the price change. So if you want revenue to increase, you should lower the price since the quantity increase will outweigh the price decrease.

If the government taxes car producers, that will happen in the market for cars? A)The supply curve will shift to the left. B)The demand curve will shift to the right. C)There will be a movement along the supply curve to the left. D)There will be a movement along the demand curve to the right.

A)The supply curve will shift to the left. A tax on producers represents an increase in the cost of doing business, so supply would decrease, shifting the curve 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? A)These are luxury goods, so income elasticity would be greater than 1. B)These are normal goods, so income elasticity would be greater than 1. C)These are inferior goods, so income elasticity would be greater than 1.

A)These are luxury goods, so income elasticity would be greater than 1. If incomes increase, for example, then consumers are likely to disproportionately increase their spending on luxury goods to keep pace with those with their new, higher incomes.

The total amount spent on a service with an inelastic demand will ______________ if supply decreases. A One cannot tell without knowing the size of the change in supply. B increase C decrease D remain the same

B increase

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

B)Decrease If demand is elastic, consumers will respond disproportionately to price changes. If price increases, there will be a large effect on demand, outweighing the price increase. If price increases, revenue decreases. If price decreases, quantity will increase by more, increasing revenue.

If the country enters a period of prosperity, resulting in consumer incomes increasing by 4% and the income elasticity of a good is 0.8, what will happen to the demand for that good as a result? A)Demand will increase by 1.2% B)Demand will increase by 3.2% C)Demand will increase by 4.8%

B)Demand will increase by 3.2% Solve for change in quantity in the income elasticity equation; multiply 4% by 0.8 to get 3.2% increase in quantity.

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 faces a _________ elastic demand than exists in Situation B. A)More; more B)More; less C)Less; less D)Less; more

B)More; less In situation A, the equilibrium price is higher than in situation B. Therefore, the supply in situation A must be more elastic and/or the demand in situation A must be less elastic than in situation B.

An example of price controls given in your text concerns minimum wage increases. On a supply and demand diagram (with wages on the vertical axis and number of workers on the horizontal), would minimum wage be considered a price ceiling or a price floor? A)Price ceiling B)Price floor C)Neither D)Cannot tell

B)Price floor A minimum wage is a minimum. Wages cannot be less than that minimum. Thus it is a floor.

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? A)8% B)5% C)4% D)We can't tell how much quantity will decrease.

C)4% 4%. The equation for elasticity of demand is percentage change in quantity divided by the percentage in price. In this case, we know two of these: -0.5 = Percentage Change in Quantity / 8%. Solving for the numerator (8% x -0.5) = -4%: quantity will decrease 4%.

Many major U.S. cities have adopted rent controls for some housing. An effective rent control is what kind of price control? A)A price ceiling with a maximum price above equilibrium price B)A price floor with a minimum price above equilibrium price C)A price ceiling with a maximum price below equilibrium price D)A price floor with a minimum price below equilibrium price

C)A price ceiling with a maximum price below equilibrium price Cities consider rent controls because the demand for apartments has allowed rent levels to increase dramatically. In order to make things more affordable to many, cities want to limit how high the prices can get. This would be imposing a limit to keep the level of prices below equilibrium. The price control would be a price ceiling with a maximum price below the equilibrium.

If the government imposes an effective price ceiling in a market, what will be the result? A)Equilibrium B)A surplus C)A shortage D)Demand will shift left and supply will shift right

C)A shortage Since this price ceiling is 'effective' this suggests the maximum price is less than the free market equilibrium price. When the price ceiling is below the equilibrium price, it means that the price cannot rise above that level. At the price ceiling, there will be a higher quantity demanded for this good than producers are willing to supply. Therefore, there will be a shortage.

When the federal government subsidizes higher education in the form of Pell grants to students, it results in A)An increase in the supply of higher education B)A decrease in the supply of higher education C)An increase in the demand for higher education D)A decrease in the demand for higher education

C)An increase in the demand for higher education The effect of a subsidy directly to the consumer is that the effective price of that particular product decreases for the consumer. Therefore, the quantity of higher education demanded at each price would increase with more Pell grants.

When will a minimum wage be an effective price control? When it is a _________. A)Maximum "price" that is above equilibrium price B)Maximum "price" that is below equilibrium price C)Minimum "price" that is above equilibrium price D)Minimum "price" that is below equilibrium price

C)Minimum "price" that is above equilibrium price If the price floor is effective, it actually holds prices up. Thus, it must be above the equilibrium price. If it is below the equilibrium wage, the market wage is above the minimum and the minimum has no effect (is ineffective) on the wages that are paid.

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? A)Raise price when demand is elastic, because the quantity demanded will increase. B)Lower price when demand is elastic, because the quantity demanded will decrease. C)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. D)Lower price when demand is inelastic, because the revenues lost from the lower price will be smaller than the revenues gained from the increase in quantity sold.

C)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. If a firm raises its price, then it will gain revenues from the higher price but lose revenues from the decrease in quantity demanded. If demand is inelastic, the percentage change in quantity will be less than the percentage change in price. The loss in revenues from the decrease in quantity will be less than the gain in revenues from the increase in price.

A change in demand will cause the equilibrium price to change by ______________ and the equilibrium quantity to change by ______________ with an elastic supply than if supply were inelastic. A more; more B more; less C less; less D less; more E the same amount; the same amount

D less; more

Which of the following statements about the effects of a government setting maximum prices is true? A)A maximum price will always cause a surplus of a good to be produced. B)A maximum price will always cause a shortage of a good to be produced. C)A maximum price will cause a surplus of a good to be produced only if the maximum price is above the equilibrium price. D)A maximum price will cause a shortage of a good to be produced only if the maximum price is below the equilibrium price.

D)A maximum price will cause a shortage of a good to be produced only if the maximum price is below the equilibrium price. If the price ceiling is set above the equilibrium price, then it is not effective and the equilibrium price will prevail and no shortage occurs.

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? A)An increase in the number of rental housing units available, but no change in rent. B)An increase in quantity supplied and quantity demanded. C)An increase in supply, but no change in quantity demanded. D)An increase in demand, but no change in quantity supplied.

D)An increase in demand, but no change in quantity supplied. An increase in population will make demand increase, but rent control is a price ceiling, meaning that price is not allowed to rise. Therefore, demand will increase, but supply will not since price is capped at the ceiling.

Consider a good with a price floor that is above the equilibrium price. If demand decreases, what will happen to the price in the market and the amount produced? A The price will increase and the amount produced will stay the same. B The price will stay the same and the amount produced will increase. C The price and the amount produced will increase. D The price and the amount produced will stay the same. E The price will stay the same and the amount produced will decrease.

E The price will stay the same and the amount produced will decrease.

You are running a small business and are thinking about ways to increase your profits. Assume you are facing an elastic demand. Would you raise or lower your prices? A)Raise because revenues would increase B)Lower because revenues would increase C)Raise because revenues and costs would decrease D)Lower because revenues would increase and costs would decrease E)I do not know because I cannot tell how much costs would change in relationship to revenues.

E)I do not know because I cannot tell how much costs would change in relationship to revenues. If demand is elastic, a price increase will cause a greater percentage decrease in quantity. Revenues will fall. Costs will fall. We cannot tell about profits, because we do not know the relative sizes of the cost decrease and the revenue decrease. A price decrease will result in an increase in revenues as the quantity demanded increases by a larger percentage than the decrease in price. But we don't know how large the increase in costs would be to produce that larger amount of output. Here also, we do not know what happens to profits.

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

Elastic When elasticity is greater than 1, demand is elastic.

inelastic demand

The quantity demanded is not as sensitive to changes in prices. Specifically, demand is inelastic if the percentage change in quantity demanded divided by the percentage change in price is less than one.

elastic demand

The quantity demanded is sensitive to changes in prices. Specifically, demand is elastic if the percentage change in quantity demanded divided by the percentage change in price is greater than one.

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

a) Increase When demand is inelastic, a change in the price leads to a less than proportional change in quantity, so the effect of the price change is greater than the quantity change. If price increases, revenue increases. If price decreases, revenue decreases.

Explain in your own words what it means for demand to be elastic or inelastic.

inelastic doesnt respond much to price change whereas elastic changes a lot with price change