Microeconomics chapter 5 (exam2)

If Ei> 0

normal good ( positive)

if the income elasticity coefficient for fish tacos is 0.25 then fish tacos are: A. normal goods because the demand for fish tacos increases when income increases B. normal goods because the demand for fish tacos decreases when income increases C. inferior goods because the demand for fish tacos increases when income increases D. inferior goods because the demand for fish tacos decreases when income increases

normal goods because the demand for fish tacos increases when income increases

Determinants of Price Elasticity of Demand

-luxury vs necessity -share of total budget -availability of substitutes -time allowed for adjustment

midpoint formula

ED= % change in QD/ %change in Price Q2-Q1/(Q2+Q1/2) / P2-P1/(p2+p1/2)

If Ed > 1

Elastic (much responsiveness, many substitutes)

normal goods

Goods for which demand goes up when income is higher and for which demand goes down when income is lower.

inferior goods

Goods for which demand tends to fall when income rises.

complementary goods

Products and services that are used together. When the price of one falls, the demand for the other increases (and conversely).

suppose a fitness center has determined that the price elasticity of demand for monthly memberships is equal to 1.8 as a result if the center seeks to increase revenue it should:

Raise price since demand is relatively elastic

if the supply of a resource is perfectly inelastic, as decrease in the demand for that resource will cause: A. an increase in the equilibrium price, but no change in the equilibrium quantity B. a decrease in the equilibirum price, but no change in the equilibirum quantity C. an increase in the equilibrium quantity, but no change in the equilibrium price D. a decrease in the equilibrium quantity, but no change in the equilibrium price

a decrease in the equilibrium price, but no change in the equilibrium quantity

which of the following pairs of goods is most likely to have a cross elasticity of demand coefficient of 1.2? A. chicken and fish B. hot dogs and hotdog buns C. motor boats and water skis D. French fries and ketchup

chicken and fish

which of the following pairs of goods is most likely to have a cross elasticity that is greater than zero?

coca-cola and Dr.Pepper

The responsiveness of buyers to changes in the price of a product is measured by: A. equilibrium B. price elasticity C. the change in supply relative to the change in price D. income elasticity of demand

price elasticity of demand

perfectly inelastic

quantity does not respond at all to changes in price (E=0) vertical line

price elasticity of demand is calculated as:

the percentage change in quantity demanded divided by the percentage change in price

ceteris paribus, the demand for a product will be more elastic when:

the price of the product is large relative to income

if ed=1

unit elastic

Use the midpoint formula to calculate the price elasticity of demand coefficient for a product if quantity demanded is 30 when price is $3 and quantity demanded is 20 when price is $5.(solve) A. 1.25 B. 0.2 C. 5 D. 0.8

0.8

If the number of memberships at the local gym increased from 400 to 500 when the membership price fell from $48 to $40 per month, the absolute value of the price elasticity of demand coefficient, rounded to one decimal place, is: A. 1.2 B. 0.25 C. 0.8 D. 12.5

1.2

use the midpoint formula to calculate the price elasticity of demand coefficient for a product if quantity demanded is 125 when price is $4 and quantity demanded is 75 when price is $6 A. 1.25 B. 0.8 C. 5 D. 0.2

1.25

If a 10% reduction in the price of a commodity results in a 10% increase in quantity demanded, the absolute value of the price elasticity of demand coefficient is ___ and demand is said to be ___.

1;unit elastic

perfectly elastic

In this special case, the demand curve is horizontal, meaning consumers have an instantaneous and infinite response to a change in price

suppose the income elasticity for medical care is 2 and the income elasticity for dental care is 1.5 these values imply that: A. medical care and dental care are both normal goods B. medical care and dental care are both inferior goods C. medical care and dental care are substitutes D. medical care and dental care are complements

Medical care and dental care are both normal goods

if demand is Inelastic:

Price and Total revenue are positively related (same direction)

if demand is elastic:

Price and total revenue are negatively related (opposite directions)

elasticity along a linear demand curve

Slope measures responsiveness. But slope and elasticity are not the same thing! Along a linear, straight-line demand curve, the slope is constant but the elasticity varies.

Total Revenue and Price Elasticity of Demand formula

TR=P x QD

If Ex < 0

complement ( negative)

If the cross elasticity of demand between goods X and Y is -2, goods X and Y are:

complementary goods

if the cross elasticity of demand between goods X and Y are: A. inferior goods B. complementary goods C. normal goods D. substitute goods

complementary goods

if a 10% increase in the price of cream cheese reduces bagel consumption by 5%, then: A. cream cheese and bagels are commentary goods B. cream cheese and bagels are substitute goods C. cream cheese is a normal good and bagels are inferior goods D. cream cheese and bagels are both normal goods

cream cheese and bagels are complementary goods

If a 10% increase in the price of cream cheese reduces bagel consumption by 5%, then:

cream cheese and bagels are complementary goods.

the price elasticity of demand coefficient ________ when moving down along a linear downward sloping demand curve.

decreases

If quantity demanded is 40 when price is $3 and quantity demanded is 20 when price is $5, then total revenue ________ if price increases from $3 to $5, implying that demand is ________. A. increases; elastic B. decreases; elastic C. increases; inelastic D. decreases; inelastic

decreases; elastic

if the absolute value of the price elasticity of demand coefficient for liquid hand soap is 1.67 the demand for liquid hand soap is:

elastic

The demand for Smell-Good Shampoo is likely to be:

elastic if there are lots of good substitutes for Smell-Good Shampoo available.

If the demand function is linear and downward-sloping, demand is: A. inelastic on the top portion, unit elastic in the middle, and elastic on the bottom portion of the demand function B. elastic on the top portion, unit elastic in the middle, and inelastic on the bottom C. unit elastic on the top portion, elastic in the middle, and inelastic on the bottom portion of the demand function D. elastic at each price if the function is very flat and inelastic at each price if the function is very steep

elastic on the top portion, unit elastic in the middle, and inelastic on the bottom portion of the demand function.

if the absolute value of the price elasticity of demand for tickets to musicals is 1.2, then the demand for musicals is _________ and a(n) __________ in the price of tickets to musicals will lead to an increase in total revenue for musical theaters. A. inelastic; increase B. inelastic; decrease C. elastic; decrease D. elastic; increase

elastic; decrease

substitute goods

goods that can be used to replace the purchase of similar goods when prices rise

Demand that is perfectly elastic graphs as a:

horizontal line

If a seller wants to increase revenue from the sale of a product with a price elasticity of demand coefficient of 0.6, then the seller should:

increase price because demand is inelastic.

if Ed<1

inelastic ( little responsiveness, few substitutes)

the demand for a life saving drug is likely to be: A. inelastic because the drug is a necessity B. elastic because the drug is a necessity C. inelastic if there are substitutes drugs available D. elastic if there are no substitute drugs available

inelastic because the drug is a necessity

When the price of a hotdog at the ballpark is $4, quantity demanded is 2,250. When the price of a hotdog at the ballpark is $6, quantity demanded is 1,750. The demand for hotdogs at the ballpark is relatively _____ and the price elasticity coefficient is equal to_____ using the midpoint formula.(solve)

inelastic; 0.625

if the absolute value of the price elasticity of demand coefficient for milk is 0.75 then the demand for milk is ____________ and a(n) __________ in price will lead to an increase in total revenue.

inelastic; increase

If Ei < 0

inferior good (negative)

if the demand for widgets decreases as consumer income increases, widgets must be a(n) ____________ with a ________ income elasticity of demand. A. normal good; positive B. inferior good; negative C. complementary good; negative D. substitute good; positive

inferior good; negative

if the income elasticity for canned beans is equal to -0.8, then the canned beans are:

inferior goods

If the demand for electricity is inelastic but not perfectly inelastic, a 10% increase in the price of electricity is likely to:

lead to a decrease in the quantity demanded of electricity of less than 10%

price elasticity of demand

measure the responsiveness in the quantity demanded of a good due to some percent change in price

cross elasticity of demand (Ex):

measures the responsiveness in the demand for a good due to some percentage change in the price of a related good

income elasticity of demand (Ei)

measures the responsiveness in the demand for a good, due to some percentage change in income

Assume a university, seeking to increase parking revenue, hires a consultant to analyze the demand for covered parking on campus. If the consultant determines that the price elasticity of demand coefficient for covered parking is 0.65, then the consultant should advise the university to: A. add more covered parking and maintain the current price B. raise the price of covered parking on campus C. lower the price of covered parking on campus D. encourage students and faculty to park off campus

raise the price of covered parking on campus.

products that are necessities with no close substitutes tend to have ____________ demand curves A. perfectly elastic B. relatively inelastic C. unit elastic D. relatively elastic

relatively inelastic

If Ex >0

substitute (positive)

Which of the following pairs of goods is most likely to have a cross elasticity of demand coefficient of -1.2?

tennis rackets and tennis balls

Which of the following pairs of goods is most likely to have a cross elasticity of demand coefficient of -1.2? A. hamburgers and pizza B. tennis rackets and tennis balls C. tennis rackets and badminton rackets D. coffee and tea

tennis rackets and tennis balls

Demand is unit elastic when: A. buyers are completely unresponsive to price changes B. the percentage change in quantity is equal to the percentage in price C. the absolute value of the price elasticity of demand coefficient is equal to 0 D. sellers set price equal to quantity

the percentage change in quantity is equal to the percentage in price.

cross elasticity measure: A. the percentage change in the quantity demanded of one product divided by the percentage change in income B. the percentage change in the quantity demanded of one product divided by the percentage change in the price of a different product. C. the percentage change in the quantity demanded of one product divided by the percentage change in the price of that product. D. the percentage change in the quantity supplied of one product divided by the percentage change in the price of that product.

the percentage change in the quantity demanded of one product divided by the percentage change in the price of a different product

Cross elasticity measures:

the percentage change in the quantity demanded of one product divided by the percentage change in the price of a different product.

The demand for a product tends to be less elastic if: A. the product is a luxury or something buyers can easily do without B. the price of the product is large relative to income C. the product is a necessity with few good substitutes D. a lot of time is allowed for consumers to react to a price change

the product is a necessity with few good substitutes.

Ceteris paribus, the demand for a product will be more elastic when: A. the time allowed for adjustment to a price change for the product is very short B. there are many close substitutes for the product available C. the product is a necessity D. spending on the product is small relative to income

there are many close substitutes for the product available.