Topic 6: Elasticity

Which of the following scenarios is likely to make the supply of Maine lobsters more elastic?

Time passes to allow lobstermen to adjust to market conditions.

The price elasticity of demand is a _____ number because of the law of demand.

negative

Cross-price elasticity of demand uses

negative and positive values to determine if goods are substitutes or complements.

Generally, we calculate elasticity as the:

percentage change in quantity demanded/supplied divided by the percentage change in price.

The _____ sign on _____ elasticity of supply indicates the direct relationship that exists between price and quantity supplied.

positive; price

Businesses are interested in the _____ because it allows them to estimate the potential changes in the quantity demanded associated with changes in the prices of their products.

price elasticity of demand

In the _____ range of the demand curve, the percentage change in quantity demanded is less than the percentage change in price.

inelastic

The lower range of the linear demand curve is relatively _____.

inelastic

When the proportion of income spent of a good or service is relatively small, demand is relatively more _____.

inelastic

When there are few substitutes for a good or service, demand tends to be relatively more _____.

inelastic

If |Ed| = 0.25, the demand is:

inelastic. *When |Ed| < 1, the demand is inelastic

The price elasticity of demand is often turned into a positive number to:

make the number easier to work with when determining whether the demand is elastic, inelastic, or unit-elastic.

Suppose that the quantity of umbrellas demanded at a price of $8 is 2,500 units. That company's total revenue is $_____.

$20,000

Using absolute values, in the elastic range of the demand curve:

% change in quantity demanded > % change in price.

Suppose that when the price of gasoline is $3 per gallon, the total amount of gasoline purchased in the United States is 8 million barrels per day. Also, suppose that when the price of gas decreases to $2.25 per gallon, the total amount of gasoline purchased is 12 million barrels per day. Based on these numbers and using the simple formula, the percentage change in price is:

($2.25 - $3.00) / $3.00 = -0.25 -0.25 x 100% = -25% Answer is: -25%

The simple formula for price of demand is:

((Old Q demand - New Q demanded) / (Old Q demanded)) divided by ((Old Price - New Price) / (Old Price))

Suppose that when the price of gasoline is $3.50 per gallon, the total amount of gasoline purchased in the United States is 6 million barrels per day. Also, suppose that when the price of gas decreases to $3 per gallon, the total amount of gasoline purchased is 8 million barrels per day. Based on these numbers and using the simple formula, the percentage change in quantity demanded is:

(8 - 6) / 6 = 0.3333 0.3333 x 100% = 33.33% Answer is: 33.33%

When the product price falls from $80 to $60, the quantity demanded rises from 500 to 800 units. The slope in this range is:

-0.067

A 10% decrease in the price of gas grills leads to a 15% increase in the demand for flank steaks. The cross-price elasticity of demand between gas grills and flank steaks is:

-1.5

If an increase in the price of pineapple juice of 10% results in an increase in the demand for grape juice of 5%, the cross-price elasticity of demand between pineapple juice and grape juice is:

0.5

For each pair of goods, determine which one would have a relatively more elastic demand curve. Gasoline at you local gas station or gasoline in your city; Plain white T-shirts or all clothing; Rice or jewelry

Gasoline at your local gas station; Plain white T-shirts; Jewelry

_____ is a measure of how responsive demand is to a change in consumer income.

Income elasticity of demand

_____ elasticity of demand is a measure of how responsive the quantity demanded is to a change in price.

Price

For which of the following products is demand likely to be the most inelastic? a. Flat screen TV b. Table salt c. Sports car d. In-ground hot tub

Table salt

If nicotine in cigarettes is highly addictive, why would it make economic sense for producers of cigarettes to offer free samples of their products to young adults?

The free samples will help get people addicted to nicotine, which makes demand less elastic.

Suppose the income elasticity of demand for watches is 0.7. If the median income in the United States rises by 10%, then demand for watches should:

increase by 7%.

If demand is elastic, increasing prices will _____ total revenues.

decrease

If Es = 4.55, the supply is:

elastic.

The slope of a linear demand curve is:

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

The time periods associated with a set of supply curves include:

the long run. the immediate period. the short run.

Along the elastic range of the demand curve,

the percentage change in quantity demanded is greater than the percentage change in price.

Price elasticity of supply is a measure of how responsive:

the quantity supplied is to a change in price.

Suppose that when the price of gasoline is $3.50 per gallon, the total amount of gasoline purchased in the United States is 6 million barrels per day. Also, suppose that when the price of gas decreases to $3 per gallon, the total amount of gasoline purchased is 8 million barrels per day. Based on these numbers and using the simple formula, the price elasticity of demand for gasoline is:

-2.34.

For each pair of goods, determine which one would have a relatively more elastic demand curve. 1. Gasoline sales this weekend or gasoline sales this year. 2. Snow shove sales during a storm or snow shovel sales over a winter. 3. Bicycle sales in the spring or bicycles sales over the year.

Demand tends to become relatively more elastic over time. 1. gasoline sales this year 2. snow shovel sales over a winter 3. bicycles sales over the year

Economists use the concept of _____ to examine a wide variety of relationships and measure the degree of responsiveness.

elasticity

In economics, a measure of how responsive one variable is to a change in another variable is:

elasticity.

For each of the following situations, determine whether the demand is elastic, inelastic, or unit-elastic. a. Price elasticity of demand = 1.50 b. Price elasticity of demand = -0.50 c. Price elasticity of demand = 1.00 d. Price elasticity of demand = 3.50 e. Price elasticity of demand = -0.05

a. elastic b. inelastic c. unit-elastic d. elastic e. inelastic If the result is... >1: Elastic; <1: Inelastic; =1: Unit-elastic

For each pair of goods, determine which one would have a relatively more elastic demand curve (Determine elasticity according to luxury and necessary goods). Airline travel or gasoline Opera tickets or shoes Shampoo or manicures

airline travel opera tickets manicures

It has been estimated that the price elasticity of demand for attending Atlanta Braves baseball games is -0.57.1 If price were the only factor to change, one might conclude that a decrease in attendance of 11.4% was caused by:

an increase in ticket prices of 20%.

A price elasticity of demand of -0.50 means that if the prices increases by 1%, the quantity demanded will _____ by _____%.

decrease; 0.50%

A price elasticity of demand of -1.25 means that if the price increases by 1%, the quantity demanded will _____ by _____%.

decrease; 1.25%

When there are many substitutes for a good or service, demand tends to be relatively more _____.

elastic.

Relatively elastic demand curves tend to be _____ than relatively inelastic demand curves.

flatter

Economists find elasticity useful because it:

has no units attached to it and can be used to compare elasticities across different producers. can be used to compare elasticities across countries.

According to cross-price, when two goods are substitutes, if the price of good A increases, demand for good B _____.

increases