Micro*Economic

Suppose a movie theater raises the price of popcorn 10 percent, but customers do not buy any less popcorn. What does this tell you about the price elasticity of demand? What will happen to total revenue as a result of the price increase?

Demand for popcorn is perfectly inelastic, and total revenue will increase.

If the price of a good or service increases and the total revenue received by the seller declines, is the demand for this good over this segment of the demand curve elastic or inelastic? Explain

Demand is elastic because the percentage change in quantity is greater than the percentage change in price.

Which of the following is true about the price elasticity of demand on the top part of a linear demand curve?

Demand is elastic.

When Honda introduced the Acura to compete with European luxury cars, there was a danger that the new line would take sales away from Honda's Accord. To make Acura more competitive with other luxury cars, suppose Honda cuts the price of Acura while keeping the price of Accord unchanged. If Honda's fear comes true, will it find a negative cross-elasticity of demand, or a positive cross-elasticity of demand?

Determining the effect of cutting the Acura's price on sales of Accords calls for cross-elasticity. Once the price of Acura is cut, Honda would calculate the change in the quantity of Accords demanded. If Acura's decrease in price causes people to buy fewer Accords, Honda is indeed competing with itself. If you said a positive cross-elasticity of demand indicates the two goods are substitutes and they would compete with each other,

A perfectly price-elastic demand is consistent with which of the following?

A horizontal demand curve

In Exhibit 12, the change in total revenue resulting from a change in price from A to D indicates that the demand curve is

elastic.

Determinants of price elasticity of demand

include the availability of substitutes, the percentage of one's budget spent on the product, and the length of time allowed for adjustment. Each of these factors is directly related to the elasticity coefficient.

If the percentage change in the quantity demanded of a good is less than the percentage change in price, price elasticity of demand is

inelastic

Suppose the president of a college argues that a 25 percent tuition increase will raise revenues for the college. It can be concluded that the president thinks that demand to attend this college is

inelastic, but not perfectly inelastic.

A perfectly elastic demand curve has an elasticity coefficient of

infinity

Price elasticity of demand.

is a measure of the responsiveness of the quantity demanded to a change in price. Specifically, price elasticity of demand is the ratio of the percentage change in quantity demanded to the percentage change in price

Price elasticity of supply

is a measure of the responsiveness of the quantity supplied to a change in price. Price elasticity of supply is the ratio of the percentage change in quantity supplied to the percentage change in price.

Income elasticity of demand

is the percentage change in quantity demanded divided by the percentage change in income. For a normal good or service, income elasticity of demand is positive. For an inferior good or service, income elasticity of demand is negative.

Cross-elasticity of demand

is the percentage change in the quantity demanded of one product caused by a change in the price of another product. When the cross-elasticity of demand is positive, the two products are substitutes. When the cross-elasticity of demand is negative, the two products are complements.

Tax incidence

is the share of a tax ultimately paid by buyers and sellers. Facing a downward-sloping demand curve and an upward-sloping supply curve, sellers cannot raise the price by the full amount of the tax. If the demand curve is vertical, sellers will raise the price by the full amount of the tax.

4. Question WorkspaceCheck My WorkIf bus travel is an inferior good, its income elasticity of demand is

negative.

If automobiles and gasoline are complements, then their cross-elasticity coefficient is

negative.

Perfectly elastic demand

occurs when the quantity demanded declines to zero for even the slightest rise or fall in price. This is an extreme case in which the demand curve is horizontal and the elasticity coefficient equals infinity.

Perfectly inelastic demand

occurs when the quantity demanded does not change in response to price changes. This is an extreme case in which the demand curve is vertical and the elasticity coefficient equals zero.

Unitary elastic demand

occurs where there is a 1 percent change in quantity demanded in response to a 1 percent change in price. Demand is unitary elastic when the elasticity coefficient equals 1 and total revenue remains constant as the price changes.

Inelastic demand

occurs where there is a change of less than 1 percent in quantity demanded in response to a 1 percent change in price. Demand is inelastic when the elasticity coefficient is less than 1 and total revenue varies directly with the direction of the price change.

Elastic demand

occurs where there is a change of more than 1 percent in quantity demanded in response to a 1 percent change in price. Demand is elastic when the elasticity coefficient is greater than 1 and total revenue (price times quantity) varies inversely with the direction of the price change.

The president of Tucker Motors says, "Lowering the price won't sell a single additional Tucker car." The president believes that the price elasticity of demand is

perfectly inelastic.

If a decrease in the price of movie tickets increases the total revenue of movie theaters, this is evidence that demand is

price elastic.

Demand for any product will become more inelastic

the fewer the number of substitutes available.

If a good is inferior in an economic sense,

the income elasticity of demand is negative.

If the price elasticity of demand is elastic, then

there are a large number of substitute products available.

Along a segment of the demand curve where the price elasticity of demand is less than 1, a decrease in price

will decrease total revenue.

Suppose Sally buys exactly five bars of English toffee each week, regardless of whether the toffee bars are regularly priced at $1 or on sale for $0.50. Based on this information, what is Sally's price elasticity of demand for English toffee in this price range?

0

If the quantity of bread demanded rises 2 percent when the price of bread declines 10 percent, then the price elasticity of demand is

0.2.

Suppose Bill budgets exactly $50 each month for fresh shrimp regardless of whether shrimp is priced at $10 per pound, or is on sale for $4 per pound. Based on this information, Bill's price elasticity of demand is

1.

Suppose that when price is $10, quantity supplied is 20 units, and when the price is $6, the quantity supplied is 12 units. What is the price elasticity of supply?

1.0

As shown in Exhibit 11, the price elasticity of demand for good X between points E and B is

3/7 = 0.43.

The marketing staff at American Airlines is concerned over low sales revenues and announces special cuts in its fares this summer. The New York to Los Angeles fare, for example, is reduced from $500 to $420. Does the American Airlines staff think demand is elastic, unitary elastic, or inelastic?

American Airlines must believe the quantity of airline tickets demanded during the summer is quite responsive to a price cut. For total revenue to rise with a price cut, the quantity demanded must increase by a larger percentage than the percentage decrease in the price. For this to occur, the price elasticity of demand must exceed 1. If you said American Airlines believes demand is elastic,

Why would consumers prefer that the government tax products with elastic, rather than inelastic demand?

As the demand for a product becomes more inelastic, the greater the amount of a tax on this product that sellers can pass on to consumers by raising the product's price.

Assume Congress prohibits the sale of Japanese luxury cars, such as Lexus, Acura, and Infiniti, in the United States. How would this affect the price elasticity of demand for Mercedes, BMWs, and Jaguars in the United States?

Because substitutes (Japanese luxury cars) are no longer available to U.S. consumers, the quantity demanded of Mercedes, BMWs, and Jaguars in the United States would be less responsive to changes in the prices for these cars. If you said the price elasticity of demand for Mercedes, BMWs, and Jaguars would become less elastic,

Suppose the income elasticity of demand for furniture is 3.0 and the income elasticity of demand for physician services is 0.3. Compare the impact on furniture and physician services of a recession that reduces consumers' incomes by 10 percent

Furniture sales fall by 30 percent and physician services by only 3 percent. Thus, the demand for physician services is much less responsive to a reduction in income than the demand for furniture.

Price elasticity of demand tends to be larger in the long run than in the short run. Which of the following is a reason that this statement is true?

If price rises, over time, consumers have more opportunities to find suitable substitutes.

Suppose the price elasticity of demand for farm products is inelastic. If the federal government wants to follow a policy of increasing income for farmers, what type of programs will the government enact?

If the price of used cars is raised 1 percent, the quantity demanded will fall 3 percent. If the price is raised 10 percent, the quantity demanded will fall 30 percent.

The Variation in Elasticity and Total Revenue along a Hypothetical Demand Curve

Part (a) shows a straight-line demand curve and its three elasticity ranges. In the $40-$20 price range, demand is elastic. As price decreases in this range, total revenue increases. At $20, demand is unitary elastic, and total revenue is at its maximum. In the $20-$5 price range, demand is inelastic. As price decreases in this range, total revenue decreases. The total revenue (TR) curve is plotted in part (b) to trace its relationship to price elasticity.

What is the price elasticity of demand for a vertical demand curve?

Perfectly inelastic

Assume the cross-elasticity of demand for car tires with respect to the price of cars is −2. What does this tell you about the relationship between car tires and cars when the price of cars rises by 10 percent?

The negative number tells you car tires are complements. If the price of cars rises by 10 percent, the quantity demanded of car tires falls by 20 percent.

Suppose a university raises its tuition from $3,000 to $3,500. As a result, student enrollment falls from 5,000 to 4,500. Calculate the price elasticity of demand. Is demand elastic, unitary elastic, or inelastic?

The price elasticity of demand for the university is inelastic. 4500-5000/5000+4500 =1/19 3500-3000/3000+3000 = 1/13 1/19/1/13=0.68

Using supply and demand analysis, which of the following is true, the more elastic the demand curve?

The smaller the portion of a sales tax that is passed on to the consumer.

Using supply and demand analysis, which of the following is true, the more inelastic the demand curve?

Using supply and demand analysis, which of the following is true, the more inelastic the demand curve?

Share of Budget Spent on the Product

When the price of salt changes, consumers pay little attention. Why should they notice? The price of salt or toothpicks can double, and this purchase will remain a small percentage of one's budget. If, however, college tuition, the price of dinners at restaurants, or housing prices double, people will look for alternatives. These goods and services account for a large part of people's budgets.

Which of the following pairs of goods has a higher price elasticity of demand? a. Oranges or Sunkist oranges. b. Cars or salt. c. Foreign travel in the short run or foreign travel in the long run.

a. Sunkist oranges b.Cars c. Foreign travel in the long run

In Exhibit 12, if the area 0ABC equals the area 0DEF, the demand curve is

a. unitary elastic

If Tucker University increases tuition to increase its revenue, it will

be successful if demand is inelastic.