Microeconomics - Chapter 5

Refer to Figure 5-5. Using the midpoint method, between prices of $12 and $18, price elasticity of demand is:

0.33.

Refer to Table 5-4. As price rises from $10 to $12, the price elasticity of demand using the midpoint method is approximately:

0.42.

Alice says that she would buy one banana split a day regardless of the price. If she is telling the truth,

Alice's demand for banana splits is perfectly inelastic.

For which of the following goods is the income elasticity of demand likely highest?

Diamonds.

Which of the following should be held constant when calculating an income elasticity of demand?

All of the above should be held constant.

OPEC successfully raised the world price of oil in the 1970s and early 1980s, primarily due to:

An inelastic demand for oil and a reduction in the amount of oil supplied.

The midpoint method for calculating elasticities is convenient in that it allows us to:

Calculate the same value for the elasticity, regardless of whether the price increases or decreases.

Necessities such as food and clothing tend to have:

Low price elasticities of demand and low income elasticities of demand.

The price elasticity of demand measures how much:

Quantity demanded responds to a change in price.

When consumers face rising gasoline prices, they typically:

Reduce their quantity demanded more in the long run than in the short run.

For a good that is a necessity, demand:

Tends to be inelastic.

Total Revenue

The amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold.

Total Revenue remains:

Unchanged as price increases when demand is unit elastic.

In the market for oil in the short run, demand:

and supply are both inelastic.

Refer to Figure 5-5. The maximum value of total revenue corresponds to a price of:

$30.

Income Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income.

Refer to Figure 5-6. Using the midpoint method, the price elasticity of demand between point A and point B is:

2.5.

Refer to Figure 5-5. Using the midpoint method, between prices of $48 and $54, price elasticity of demand is about:

5.67.

Computing Income Elasticity of Demand:

= % change in quantity demanded / % change in income

Computing the Price Elasticity of Demand:

= % change in quantity demanded / % change in price

Computing Cross-Price Elasticity of Demand:

= % change in quantity demanded of good 1 / % change in price of good 2

Computing Price Elasticity of Supply:

= % change in quantity supplied / % change in price

Price Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price.

Cross-Price Elasticity of Demand

A measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good.

Price Elasticity of Supply

A measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price.

Elasticity:

A measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants.

Suppose good X has a negative income elasticity of demand. This implies that good X is:

An inferior good.

A perfectly elastic demand implies that:

Any rise in price above that represented by the demand curve will result in a quantity demanded of zero.

Holding all other forces constant, when the price of gasoline rises, the number of gallons of gasoline demanded would fall substantially over a ten-year period because:

Buyers tend to be much more sensitive to a change in price when given more time to react.

The cross-price elasticity of demand can tell us whether goods are:

Complements or substitutes.

If the cross-price elasticity of two goods is negative, then those two goods are:

Complements.

Last year, Sheila bought 6 pairs of shoes when her income was $40,000. This year, her income is $50,000 and she purchased 10 pairs of shoes. Holding other factors constant, it follows that Sheila:

Considers shoes to be a normal good.

Refer to Figure 5-3. Between point A and point B on the graph, demand is:

Elastic, but not perfectly elastic.

Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers are to a change in price, the:

Flatter the demand curve will be.

In general, elasticity is a measure of:

How much buyers and sellers respond to changes in market conditions.

Refer to Figure 5-4. If the price decreases in the region of the demand curve between points A and B, we can expect total revenue to:

Increase.

Refer to Figure 5-6. Sellers' total revenue would increase if the price:

Increased from $4 to $6.

Refer to Figure 5-4. The section of the demand curve from B to C represents the:

Inelastic section of the demand curve.

For which of the following types of goods would the income elasticity of demand be positive and relatively large?

Luxuries.

Computing the Price Elasticity of Demand Using The Midpoint Method:

Price Elasticity of Demand = (Q2-Q1)/[(Q2+Q1)/2]/(P2-P1)/[(P2+P1)/2]

If the cross-price elasticity of two goods is positive, then those two goods are:

Substitutes.

Suppose demand is perfectly elastic, and the supply of the good in question decreases. As a result,

The equilibrium quantity decreases, and the equilibrium price is unchanged.

You are in charge of the local city-owned golf course. You need to increase the revenue generated by the golf course in order to meet expenses. The mayor advises you to increase the price of a round of golf. The city manager recommends reducing the price of a round of golf. You realize that:

The mayor thinks demand is inelastic, and the city manager thinks demand is elastic.

A key determinant of the price elasticity of supply is the time period under consideration. Which of the following statements best explains this fact?

The number of firms in a market tends to be more variable over long periods of time than over short periods of time.

When the price of good A is $50, the quantity demanded of good A is 500 units. When the price of good A rises to $70, the quantity demanded of good A falls to 400 units. Using the midpoint method,

The price elasticity of demand for good A is 0.67, and an increase in price will result in an increase in total revenue for good A.

Consider airfares on flights between New York and Minneapolis. When the airfare is $250, the quantity demanded of tickets is 2,000 per week. When the airfare is $280, the quantity demanded of tickets is 1,700 per week. Using the midpoint method,

The price elasticity of demand is about 1.43, and an increase in the airfare will cause airlines' total revenue to decrease.

Cross-price elasticity of demand measures how:

The quantity demanded of one good changes in response to a change in the price of another good.