Chapter 5

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

When demand is perfectly inelastic, the demand curve will be

vertical, because buyers purchase the same amount as before whenever the price rises or falls

Harry's Barber Shop increased its total monthly revenue from $1,500 to $1,800 when it raised the price of a haircut from $5 to $9. The price elasticity of demand for Harry's Haircuts is

0.417

Muriel's income elasticity of demand for football tickets is 1.50. All else equal, this means that if her income increases by 20 percent, she will buy

30 percent more football tickets

Total revenue when the price is P2 is represented by the area(s)

A + B

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

Recently, in Smalltown, the price of Twinkies fell from $0.80 to $0.70. As a result, the quantity demanded of Ho-Ho's decreased from 120 to 100. Compute the cross-price elasticity of demand for Ho-Ho's. Does a typical consumer view Twinkies and Ho-Ho's substitutes or compliments?

Cross price elasticity : 1.33. Typical consumers view Twinkies and Ho-Ho's : Substitutes

Drug interdiction , which reduces the supply of drugs, may decrease drug-related crime because the demand for drugs is inelastic

False

Normal goods have negative income elasticities of demand, while inferior goods have positive income elasticities of demand

False

Price elasticity of demand along a linear, downward-sloping demand curve increases as price falls.

False

Supply trends to be more elastic in the sport run and more inelastic in the long run

False

The demand for gasoline will respond more to a change in price over a period of five weeks than over a period of five years

False

The flatter the demand curve that passes through a given point, the more inelastic the demand.

False

When demand is inelastic, a decrease in price increases total revenue.

False

When the price of knee braces increased by 25 percent , the Brace Yourself Company increased its quantity supplied of knee braces per week by 75 percent. BYC's price elasticity of supply of knee braces is 0.33.

False

When the Shaffers had a monthly income of $4000, they usually ate out 8 times a month. Now that the couple makes $4500 a month, they eat out 10 times a month. Compute the couple's income elasticity of demand for restaurant meals. Is a restaurant meal a normal or inferior good to the couple?

Income elasticity of demand for the Shaffers is 2. Normal Good

Cross-price elasticity of demand measures how the quantity demanded of one good changes as the price of another good changes

True

Goods with close substitutes tend to have more elastic demands than do goods without close substitutes.

True

If a supply curve is horizontal then supply is said to be perfectly elastic and the price elasticity of supply approaches infinity.

True

If demand is perfectly inelastic, the demand curve is vertical, and elasticity is equal to 0

True

If the price of calculators increases by 15 percent and the quantity demanded per week falls by 45 percent as a result, then the price elasticity of demand is 3

True

Necessities tend to have inelastic demands, whereas luxuries have elastic demands.

True

OPEC failed to maintain a high price of oil in the long run, partly because both the supply of oil and the demand for oil are more elastic in the long run than in the short run

True

The demand for Rice Krispies is more elastic than the demand for cereal in general

True

The income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in income

True

Consider the following pairs of goods. For which of the two goods would you expect the demand to be more price elastic? Why?

a. Water < Diamonds (demand : more elastic) b. Insulin < Nasal decongestant spray (demand) c. Food in general < Breakfast cereal (demand) d. Gasoline over the course of a week < Gasoline over the course of a year (demand) e. Personal computers < IBM personal computers (demand)

Technological advances in wheat production can lower farmers' total revenue because the

demand for wheat is inelastic

When small changes in price lead to infinite changes in quantity demanded, demand is perfectly

elastic and the demand curve will be horizontal

The section of the demand curve labeled A represents the

elastic section of the demand curve

Which of the following statements does not help to explain why government drug interdiction increases drug-related crime?

government drug programs are more lenient now with drug offenders than they were in the 1980s

Demand is elastic if elasticity is

greater than 1

There are fewer farmers in the United States today than 200 years ago because of

increases in farm technology and an inelastic demand for food

The section of the demand curve labeled C represents the

inelastic section of the demand curve

Which of the following expressions represents a cross-price elasticity of demand?

percentage change in quantity demanded of apples divided by percentage change in price of pears

Demand is said to be unit elastic if

quantity demanded changes by the same percent as the price

In the case of perfectly inelastic demand,

quantity demanded stays the same whenever price changes

If the quantity supplied responds only slightly to changes in price, then

supply is said to be inelastic

There are very few, if any, good substitutes for motor oil. Therefore,

the demand for motor oil would tend to be inelastic

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

the equilibrium price increases and the equilibrium quantity is unchanged

Assume the section of the demand curve labeled A corresponds to prices between $6 and $12. Then, when the price increases from $8 to $10

the percent decrease in the quantity demanded exceeds the percent increase in the price

Income elasticity of demand measures how

the quantity demanded changes as consumer income changes

Which of the following would be true as the price elasticity of supply approaches infinity?

very small changes in price lead to very large changes in quantity supplied

Knowing that the demand for wheat is inelastic, if all farmers voluntarily plowed under 10 percent of their wheat crop, then

wheat farmers would experience an increase in their total revenue