Chapter 5

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The suppliers of ____________are more likely to have a tax imposed on their production.

Gasoline

Is the demand for a container of salt likely to be inelastic or elastic? Why?

Inelastic because salt is a necessary dietary component

Determinants of Elasticity

is the good a necessity

Elasticity of Demand

will always have a negative value

Inelastic

q<p

Inelastic

ED < 1

Total Revenue

PxQ

Which of the following is likely to have the largest elasticity of supply?

The producer of vanilla ice cream

Elastic

responsive to price changes

elasticity of demand formula

% change in quantity demanded / % change in price

% change formula

(ending value - beginning value / beginning value) x 100

Which of the following statements about the effects of a government setting maximum prices is true?

A maximum price will cause a shortage of a good to be produced only if the maximum price is below the equilibrium price.

Which of the following statements about the effects of rent control is true?

A maximum price will cause a shortage of a good to be produced only it the maximum price is below the equilibrium price.

Many major U.S. cities have adopted rent controls for some housing. An effective rent control is what kind of price control?

A price ceiling with a maximum price above equilibrium price

If population increases in a city with effective rent controls (and nothing else changes), which of the following describes what will happen in the market for rental housing?

An increase in demand, but no change in quantity supplied.

Determinants of Elasticity

Are there many substitutes

Elastic

As price increases, quantity decreases by a larger percentage.

Elastic

As prices decrease, quantity increased by a larger percentage.

Which of the following goods would be the most likely to be subject to a government-imposed tax?

Bottles of alcohol

When will a minimum wage be an effective price control? When it is a _________.

Minimum "price" that is above equilibrium price

If the country enters a period of prosperity, resulting in consumer incomes increasing by 4% and the income elasticity of a good is 0.8, what will happen to the demand for that good as a result?

Demand will increase by 3.2%

Elastic

ED > 1

Unit of Elastic

Ed = 1

A business should ___________ (increase/decrease) the price of a good with an inelastic demand if it wants to increase revenues.

Increase

An increase in an effective minimum legal price will do what to prices and quantities actually sold in a market? Prices will __________ and the quantities actually sold will ___________.

Increase; decrease

An increase in an effective maximum legal price will do what to prices and quantities actually sold in a market? Prices will __________ and the quantities actually sold will ___________.

Increase; increase

If the income elasticity of a good is 0.8, what do we know about the good?

It is a normal good.

You are running a small business and are thinking about ways to increase your profits. Assume you are facing an elastic demand. Would you raise or lower your prices?

Lower because revenues would increase

Assume that as your income increases, your consumption of burgers decreases. We can assume that your income elasticity of demand for burgers is what?

Negative

A government may impose a price ceiling if which of the following is true?

Producers can persuade legislators that higher prices are needed

A firm has a choice of raising or lowering its price. If the firm wishes to increase its revenues (the price times the quantity sold), what should it do?

Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold.

Who is likely to be in favor of a price ceiling on a good?

The consumers of the good who can still purchase it after the ceiling is imposed

When price decreases, quantity increases. Price elasticity of demand measures how much ___________.

The quantity increases when price decreases

An increase in an inelastic demand will cause _______ change in the equilibrium price than the same increase in an elastic demand.

a greater

An increase in an inelastic demand will cause (a greater or lesser or same) change in the equilibrium quantity than the same increase in an elastic demand.

a lesser

to switch how much effort does it take to identify

alternative or alter our behavior

Elasticity of Demand

as price changes, quantity changes in the opposite direction

unitary/unit elastic

as price decrease, quantity increases by the same percent

inelastic

as price decreases, quantity increase by a smaller percentage

Inelastic

as price increase, quantity decreases by a smaller percentage

unitary/unit elastic

as price increases, quantity decreases by the same percent

Determinants of Elasticity

how much of the budget does it take up

Determinants of Elasticity

how much time for adjustment to price change

If a man spends approximately 45% of his income on air travel and his sister only spends about 2% of her income on air travel (and that is the only difference), would the man's demand for air travel be less or more elastic than his sister's?

more

The price elasticity of demand will be _________________ if demand is elastic.

more than one

Elasticity of Demand

negative slope

Inelastic

not very responsive to price changes

inelastic

p down q up; tr down

Elastic

p down q up; tr goes up

Elastic

p up q down; tr goes down

inelastic

p up q down; tr up

An example of price controls given in your text concerns minimum wage increases. On a supply and demand diagram (with wages on the vertical axis and number of workers on the horizontal), would minimum wage be considered a price ceiling or a price floor?

price floor

unitary/unit elastic

proportionately responsive to price changes

Elastic

q>p

if it makes a small portion of the budget

we are less responsive

More substitutes means

we are more elastic

If we need it

we are more inelastic


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