Ch 6: Elasticity Review Questions

What is the cross-price elasticity of demand for two goods that are unrelated?

Zero

If the income elasticity of SUVs is greater than 1, what is the good considered?

a luxury

Prior to the 1997 federal tobacco settlement a pack of cigarettes sold for $2.48. The terms of the settlement required a decrease in teenage smoking of 60 percent. If the elasticity of cigarette demand for teenagers is about 1.3 then the price of cigarettes should rise to __________ in order to achieve the target reduction of 60 percent.

$3.62 Given the required percentage change is 60% and an elasticity of 1.3 you can determine the required percentage change in price needed to be 0.60/1.3 = .4615 or 46.15%. So $2.48(1 + .4615) = $3.62.

If a 20 percent increase in the price of Red Bull energy drinks results in a decrease in the quantity demanded of 25 percent, the price elasticity of demand is:

-1.25 If a 20 percent increase in the price of Red Bull energy drinks results in a decrease in the quantity demanded of 25 percent, the price elasticity of demand is -1.25. The price elasticity of demand is equal the percentage change in quantity demanded divided by the percentage change in price so: -25/20 = -1.25 Red Bull is considered elastic since the absolute value of the coefficient exceeds one.

The income elasticity for peanut butter is -3. This defines peanut butter as what type of good?

An inferior good

If the cross-price elasticity of demand between two products is -3.0, then the two products are:

Complements

Which of the following goods is probably the most highly income elastic?

Private education

Personal computers and computer display monitors are:

complements

If a 20 percent increase in the price of Red Bull energy drinks results in a decrease in quantity demanded of 25 percent, we say the demand for Red Bull is __________ in this range.

elastic

If the supply of Good B is perfectly elastic and price falls the quantity supplied will:

fall to zero

The more substitutes that exist for a particular product, the __________ the price elasticity of demand

greater

Which of these demand curves shows a perfectly inelastic demand

horizontal line

If the price elasticity of supply is 0.4, then a 20% increase in price will __________ the quantity supplied by __________ %.

increase, 8.0

At current prices of a highly addictive drug the demand for the drug is highly price:

inelastic

The disappearance of the family farm can be partially attributed to the fact that the elasticity of demand for wheat is __________, while at the same time, the income elasticity for wheat is __________.

inelastic, low

Economists avoid confusion over units in the computation of elasticity by using:

percentage changes

The price elasticity of supply always has a:

positive value

If prices rise the quantity supplied will be greater:

the longer the time that elapses

An increase in the price of a substitute for iPads will lead to __________ in the quantity demanded of iPads so the cross-price elasticity of demand will be __________.

an increase, positive

A perfectly inelastic supply curve:

indicates the quantity supplied does not respond to a change in price

When you compute a price elasticity of demand the answer is always:

negative

The __________ is a measure of responsiveness of the change in quantity demanded of a good to the change in its price.

price elasticity of demand

The current price of wheat is $1.00 per bushel, and the price elasticity of demand for wheat is known to be 0.50. A bad harvest causes the supply of wheat to decrease and as a result the price of wheat rises by 20%. What will be the percentage change in quantity demanded for wheat and will farm revenues rise or fall?

10% rise The current price of wheat is $1.00 per bushel, and the price elasticity of demand for wheat is known to be 0.50. A bad harvest causes the supply of wheat to decrease and as a result the price of wheat rises by 20%. The percentage change in quantity demanded for wheat will decline by 10% and farm revenues will rise. The elasticity of demand is the percentage change in quantity divided by the percentage change in price. An elasticity of demand coefficient of 0.50 indicates that the quantity demanded will fall by .50 x 20% = 10%. Since wheat is inelastic we know that farm revenues will rise as a result

Along a linear demand curve, the slope __________ while the price elasticity of demand __________.

is constant, changes from one point to another