MICRO Chapter 5: Elasticity of Demand

If the price elasticity of supply is 0.75, then when the price of Good Y falls by 10 percent, the quantity supplied of Good Y:

*falls* by 7.5 percent. (.75/-10 x 100 = -7.5)

Refer to the figure. If price decreases from $20 to $10, total revenue will:

*increase* by $1,500, so the demand curve is *elastic*.

Farmers can produce more milk at lower cost, but Americans want to drink only so much milk. This suggests that the demand curve for milk is:

*inelastic*

Suppose the price of a good rises from $10 to $20 and quantity demanded falls from 500 to 400. If you calculate the elasticity of demand WITHOUT using the midpoint method, the answer would be _____. If you calculate the elasticity of demand WITH the midpoint method, the answer would be _____. Economists say _____ when calculating elasticity.

-1/5; -1/3; *use the midpoint method*

Good X and Good Y are related goods. When the price of Good X rises by 20 percent, the quantity demanded for Good Y falls by 40 percent. What is the cross-price elasticity?

-2 (Change in demand/change in price: -40/20=-2)

When the demand curve for a good is *unit elastic*, raising the price of the good by 25 percent will change the revenue of the firm by:

0 percent.

If the price of cocoa rises by 20 percent, the quantity supplied of cocoa rises by 4 percent. What is the elasticity of supply?

0.2 (% change in supply/% change in price) 4/20 = 0.2

Assume that demand increases by 1 percent, the absolute value of price elasticity of demand is 1.0, and price elasticity of supply is 1.0. What is the percentage price change in this case?

0.5 (1%/1.0+1.0)

On October 1, 2009, the Nintendo Wii's Japanese price dropped from ¥25,000 to ¥20,000. In the three months after the price drop, Japanese sales of the Wii were approximately 1,040,000. Twelve months earlier, over the same interval at the high price, sales totaled 890,000. Using the midpoint method, what is the absolute value of the price elasticity of demand of a Wii console? Is it an elastic or inelastic good?

0.7; inelastic

If the price of Good Y falls from $10 to $8, and the quantity demanded of it rises from 1,000 units to 1,200 units, the price elasticity of demand expressed in absolute value is:

0.82

Tonya consumes 40 steaks a year when her yearly income is $40,000. After her income falls to $35,000 a year, she consumes only 35 steaks a year. Calculate her income elasticity of demand for steaks

1

(Figure: Slave Redemption) Refer to the figure. Assume the graph illustrates the Sudanese slave trade. When slave redeemers enter the market, the total number of freed slaves is ________ and the net number of freed slaves is ________.

1,100; 100

The price of cigars is $10, with a quantity demanded of 1,000 per day. If the price increases to $12, the quantity demanded declines to 800 per day. What is the absolute value of elasticity of demand?

1.22

If the price of Good Y falls from $10 to $8, and the quantity supplied of it falls from 1,000 units to 600 units, the price elasticity of supply is:

2.25

If the demand for a good is estimated to be _____, then firms producing the good will experience an *increase in total revenue* ^ if *prices fall* v.

2.5 (elastic)

The elasticity of demand for a good is -0.75. A 4 percent increase in price will cause a:

3 percent decrease in quantity demanded.

(Figure: Slave Redemption and Elasticity) Refer to the figure. Assume the graph illustrates the Sudanese slave trade. How many slaves are freed after the redemption program?

400

The elasticity of demand for oil is -0.5 and the elasticity of supply is 0.20. If the demand for oil increases 10 percent, what happens to the price of oil?

It increases by 14 percent. (10%/.5+.20 = 14.28)

The quantity demanded for cosmetic surgery increased by 12 percent following a period of strong economic growth that raised consumer income by 4 percent. What type of good is cosmetic surgery?

It is a luxury good since the income elasticity of demand exceeds 1.

Istanbul's Dolmabaçe Palace, built near the end of the Ottoman Empire, rests on a former garden that was created in the eighteenth century at great expense by filling in a bay. What does the Dolmabaçe Palace teach us about the elasticity of supply of land?

It is not perfectly *inelastic*, but close to it.

Because of aging requirements it takes many years to make good Scotch. If a technology were invented that made it possible to create good Scotch literally overnight, how would the short-run supply of good Scotch change?

It would become *more elastic*.

On June 14, 2011, the Delaware Senate approved a gun buyback program. The yearlong program would authorize the state to pay 100 for every gun turned over to police. What sort of gun should Delaware officials expect to get if this plan becomes law?

Nonworking guns, usually kept in someone's back closet.

If the demand for currently illegal recreational drugs is *highly inelastic* and these drugs became legal, prices would fall. An economist would expect which of the following to happen in response to the lower price?

Not many more people would become drug users.

A new per unit subsidy for almond production in the United States increases the world supply of almonds. If almonds are *inelastically demanded*, what will happen to total revenues from almond production?

They will fall.

A new per unit tax on yacht production decreases the supply of yachts. If yachts are elastically demanded, what will happen to total revenues from yacht production?

They will fall. (elastic demand = total revenue fall with decrease in supply)

A new per unit subsidy for hybrid car production increases the supply of hybrid cars. If hybrid cars are elastically demanded, what will happen to total revenues from hybrid car production?

They will rise. (Elastic demand: lower price = higher revenue)

Which of the following statements about the price elasticity of supply in the Sudanese slave trade is correct?

When the supply curve is perfectly inelastic, every slave bought by the redeemers is one fewer slave held in captivity.

The table lists the characteristics of three goods. Good ________ is the most inelastic, and Good ________ is the most elastic.

Z; Y

If the price elasticity of demand for a product is 2 in absolute value, and the price elasticity of supply for the same product is 1, what is the predicted percent change in price from a 5 percent fall in the supply?

a 1.67 percent *rise* in price (5%/2+1)

If both the supply of and the demand for a good are highly elastic, a shift of either curve will always result in

a large change in quantity.

If the price elasticity of demand for a product is 1 in absolute value, and the price elasticity of supply of the same product is 1, what is the predicted percent change in price from a 1 percent increase in demand?

a rise in price of 0.5 percent

Which one of the following products would tend to have *inelastic* demand?

crude oil

The price of good X increases from $55 to $60, and quantity demanded decreases from 500 to 400. The price of good Y increases from $55 to $60, and quantity demanded decreases from 500 to 475. Given this information, the:

demand curve for good X is *more elastic* than the demand curve for good Y.

If the supply of rental housing increases causing its price to fall and apartment dwellers move into bigger apartments that *cost the same as their old ones*, we can infer that the:

demand for apartments is unit elastic.

The manager of a company notices that the company's *total revenue would increase* if she *raised the price* of the company's product. Accordingly, the manager can assert that the demand for the company's product is:

inelastic

A 4 percent increase in the price of beer will cause a 1 percent decline in the quantity of beer demanded. *The demand for beer is*:

inelastic (-1%/4 = -.25) < 1 is inelastic

When the supply curve in the Sudanese slave trade is perfectly ________, every slave bought by the redeemers results in/is ________ held in captivity.

inelastic; one less slave

The case for drilling oil in ANWR is strengthened when the:

price of oil is higher.

Refer to the figure. Assume the graph illustrates the Sudanese slave trade. If the supply curve is perfectly elastic as it is in the graph, a rise in the demand for slaves (from D1 to D2) causes:

the price of slaves to remain unchanged.

Refer to the figure. If price falls from $60 to $40, total revenue goes ________, so demand is ________.

up by $120; elastic