MicroEcon Chapter 19 w/ glossary

The price elasticity of supply measures the responsiveness of the ___________________ of a good to a change in its price. A supply curve in which a slight decrease in price leads to a zero quantity supplied is ____________. If quantity supplied remains constant no matter what happens to price, the supply curve is ______________________.

quantity supplied; perfectly elastic; perfectly inelastic

Price elasticity of demand is a measure of buyer ______________________ to price changes.

responsiveness

If the cross price elasticity of demand is positive, then the two goods are _____________. If the cross price elasticity of demand is negative, the two goods are _________________.

substitutes; complements

perfectly inelastic demand ---->

vertical demand curve

perfectly inelastic supply ---->

vertical supply curve

If price elasticity of demand is calculated using the original price and quantity, then over a given range in the demand curve price elasticity of demand () a. differs, depending on whether price rises or falls. b. is the same, regardless of whether price rises or falls. c. is equal to 1. d. rises as price falls.

(a)

If price rises, the quantity supplied will be greater the () a. longer the time that elapses. b. more income elastic is the good. c. higher the price elasticity of demand for the good. d. All of the above.

(a)

If the cross price elasticity of demand between Goods A and B is positive, the goods are () a. substitutes. b. complements. c. unrelated. d. necessities.

(a)

Price elasticity of demand measures responsiveness of () a. quantity demanded to changes in price. b. quantity demanded to changes in income. c. price to changes in quantity demanded. d. price to changes in demand.

(a)

At current prices of a highly addictive drug, the demand for the drug is highly price () a. elastic. b. inelastic. c. cross elastic. d. unit elastic.

(b)

Digitals and downloadable apps are () a. substitutes. b. complements. c. not related goods. d. necessities.

(b)

If price falls and over that price range demand is inelastic, total revenues will () a. remain constant. b. fall. c. rise. d. fall, then rise.

(b)

If price rises and total revenue rises, then the price elasticity of demand over that range is () a. elastic. b. inelastic. c. unit elastic. d. equal to 1.

(b)

If the demand for Good A is perfectly elastic, () a. quantity demanded does not vary with price. b. the demand curve is horizontal. c. the demand curve is vertical. d. the demand curve is positively sloped.

(b)

If the price elasticity of demand is 0.33, then () a. demand is inelastic. b. demand is inelastic over that price range. c. demand is elastic. d. demand is elastic over that price range.

(b)

When the income elasticity of demand for Good A is calculated, () a. the price of Good A varies. b. income changes, which lead to horizontal shifts in the demand curve for Good A, are measured. c. a movement along the demand curve for Good A is measured. d. All of the above.

(b)

A perfectly inelastic supply curve () a. shows great quantity supplied responsiveness to price changes. b. is horizontal at the given price. c. indicates zero quantity supplied responsiveness to price changes. d. is a normal situation.

(c)

Analogy: A movement along a demand curve is to price elasticity of demand as a shift in the demand curve is to () a. an increase in demand. b. changes in taxes or subsidies. c. income elasticity of demand. d. substitutes and complements.

(c)

If price falls by 1 percent and quantity demanded rises by 2 percent, then the price elasticity of demand () a. is inelastic over that range. b. is 0.5. c. is elastic over that range. d. cannot be calculated from this information.

(c)

If the cross price elasticity between Goods A and B is −10, then A and B are () a. close substitutes. b. near substitutes. c. strongly complementary. d. mildly complementary.

(c)

Which one of the following is not a determinant of the price elasticity of demand? () a. existence and closeness of substitutes b. proportion of expenses on the good to the consumer's budget c. price elasticity of supply d. length of time allowed for adjustment to a price change

(c)

Which one of the following is not true concerning the price elasticity of demand? () a. Its sign is always negative, due to the law of demand. b. It is a unitless, dimensionless number. c. It equals the percentage change in price divided by the percentage change in quantity demanded. d. It measures the responsiveness of quantity demanded to changes in price.

(c)

If the demand for Good A is perfectly inelastic at all prices, () a. quantity demanded does not change as price changes. b. the law of demand is violated. c. the demand curve is vertical at the given quantity. d. All of the above.

(d)

If the supply of Good B is perfectly elastic and price falls, quantity supplied will () a. remain unchanged. b. rise. c. fall. d. fall to zero.

(d)

Which of the following goods is probably the most highly income elastic? () a. salt b. food c. alcoholic beverages d. private education

(d)

The determinants of price elasticity of demand are _____________________________________, ________________________________, and ______________________________________.

1. closeness of available substitutes 2. proportion of the good in consumer budget 3. length of time to respond

Elastic Demand

A demand relationship in which a given percentage change in price will result in a larger percentage change in quantity demanded.

Inelastic Demand

A demand relationship in which a given percentage change in price will result in a less-than-proportionate percentage change in the quantity demanded.

Unit Elasticity of Demand

A demand relationship in which the quantity demanded changes exactly in proportion to the change in price.

Perfectly Inelastic Demand

A demand that exhibits zero responsiveness to price changes. No matter what the price is, the quantity demanded remains the same.

Perfectly Elastic Demand

A demand that has the characteristic that even the slightest increase in price will lead to zero quantity demanded.

Perfectly Elastic Supply

A supply characterized by a reduction in quantity supplied to zero when there is the slightest decrease in price.

Perfectly Inelastic Supply

A supply for which quantity supplied remains constant, no matter what happens to price.

T-F The less time people have to respond to a price change, the higher is the price elasticity.

F (Elasticity increases over time because substitutes become more readily available over time)

T-F Price elasticity of demand deals with absolute, not relative, values.

F (It deals with relative values)

The price elasticity of demand for Microsoft software is less than the price elasticity of demand for software.

F (It is greater, because there are more substitutes for Microsoft's software than for software in general)

T-F If the demand for Good A is perfectly elastic, its demand curve is vertical at that price.

F (It is horizontal at that price)

T-F If the price elasticity of demand is 3, then over the relevant price range demand is inelastic.

F (It is price elastic because the coefficient exceeds 1)

T-F Price elasticity of demand measures the responsiveness of price to changes in quantity demanded.

F (It measures quantity demanded responsiveness to price changes)

T-F If price falls and total revenues rise, then over that price range demand is inelastic.

F (It must have been elastic)

T-F If supply is perfectly inelastic, the curve will be horizontal at the given quantity.

F (it will be vertical at the given quantity)

Cross Price Elasticity of Demand - E xy (Exy)

The percentage change in the amount of an item demanded (holding its price constant) divided by the percentage change in the price of a related good.

determinant of price elasticity ---->

Quality of Substitutes

If the price elasticity of demand is 0.5 at the current price of an item, an increase in the price of the item will increase revenues.

T

T-F Because of the law of demand, price elasticity of demand will always (implicitly) be a negative number.

T

T-F If the cross price elasticity of demand for Goods A and B is negative, A and B are complements.

T

T-F If the demand for Good A is perfectly inelastic over all prices, Good A violates the law of demand.

T

T-F Income elasticity of demand is calculated for a horizontal shift in the demand curve, given price.

T

T-F When price elasticity of demand is calculated by using the average value approach, price elasticity is the same whether price rises or falls over a given demand curve range.

T

T-F When the demand for an item is perfectly elastic, the slightest increase in the price of that item causes the quantity demanded to drop to zero. As a result, the demand curve for the item is horizontal.

T

Income Elasticity of Demand - E i (Ei)

The percentage change in the amount of a good demanded, holding its price constant, divided by the percentage change in income. The responsiveness of the amount of a good demanded to a change in income, holding the good's relative price constant.

Price Elasticity of Demand - E p (Ep)

The responsiveness of the quantity demanded of a commodity to changes in its price; defined as the percentage change in quantity demanded divided by the percentage change in price.

Price Elasticity of Supply - E s (Es)

The responsiveness of the quantity supplied of a commodity to a change in its price - the percentage change in quantity supplied divided by the percentage change in price.

The __________________ value method of calculating the price elasticity of demand can be used.

average

cross-price elasticity of demand ----->

complementary or substitute goods

The income elasticity of demand is defined as the percentage change in _____________________ for a good, holding its ________ constant, divided by the percentage change in ______________.

demand; price; money income

Cross price elasticity of demand is defined as the percentage change in the ________________ for one good, holding its ________________ constant, divided by the percentage change in the ___________ of another good.

demand; price; price

If price rises and total revenues fall, then demand was price ____________. If total revenues rise, then demand was price _____________. If total revenues remain constant, then demand was ________________.

elastic; inelastic; unit elastic

If price falls and total revenues rise, then in that range demand was price _____________. If price falls and total revenues remain constant, then in that range demand was price _______________. If price falls and total revenues fall, then in that range demand was price ____________________.

elastic; unit elastic; inelastic

inelastic ---->

elasticity coefficient less than 1

perfectly elastic demand ---->

horizontal demand curve

perfectly elastic supply ---->

horizontal supply curve

Assume a 1 percent change in price. If quantity demanded changes by less than 1 percent, then we say that in that range the demand for the good is _______________________. If quantity demanded changes by 1 percent, then in that range demand is _________________. If quantity demanded changes by more than 1 percent, then in that range demand is ________________.

inelastic; unit elastic; elastic

A demand curve that exhibits zero responsiveness to price changes is ______________. Such a demand curve is (horizontal, vertical) at the given quantity. A demand curve in which even the slightest increase in price will lead to a zero quantity demanded is ________________. Such a demand curve is (horizontal, vertical) at the given price.

perfectly inelastic; vertical; perfectly elastic; horizontal

Price elasticity of demand is defined as the percentage change in _____________________ divided by the percentage change in ______________________. The problem with this measure is that we get (the same, a different) numerical value when we move up, as opposed to down, the same range of the demand curve.

quantity demanded; price; a different average