ECN module 4: elasticity

To raise the most tax revenue, governments should consider taxing goods with:

price inelastic demands

Which of the following concepts can be used to understand the effects of price changes on quantity demanded and quantity supplied, as well as the effect of raising taxes on revenue from the tax? A) supply and demand model B) scarcity C) elasticity

C) elasticity

How do we express the percentage change in quantity using the variables Q1 (original quantity) and Q2 (new quantity)?

Q2−Q1 ---------- x 100 (Q2+Q1)÷2

The price elastic portion of the linear demand curve lies:

above the point of unit elasticity.

If wage increases by 10%, a(n) ________ worker is likely to supply 7% more labor because elasticity of labor supply is assumed to be ________.

adult; inelastic

Along the elastic range of a demand curve, a decrease in price causes:

an increase in total revenue

If demand price elasticity measures 2, this implies that consumers would:

buy 2 percent more of the product in response to a 1 percent drop in price.

Negative cross-price elasticity of demand between two goods indicates that the two goods are

complements

If the supply curve for a product is horizontal, then the elasticity of supply is

equal to infinity

Which of these questions is the best example of elasticity?

how much will a change in price or quantity impact consumer or producer behavior?

A smoker who is willing to pay whatever it takes to support a smoking habit likely has ________ demand.

inelastic

It is Valentine's Day and Jason is desperately looking all over town for a dozen roses to give to Judy. Most likely, Jason's price elasticity of demand is:

less than one

If the elasticity of demand for a company's product is estimated to be 1.72, what would you advise the company to do if their objective is to increase revenue?

lower their prices

A 10% decrease in the price of potato chips leads to a 30% increase in the quantity of soda demanded. It appears that

cross-price elasticity of demand for soda is -3

In a market with relatively inelastic demand, if the supply curve shifts due to a fall in production costs, the equilibrium price will ________ by ________ than equilibrium quantity.

decrease; more

You are the manager of a restaurant and would like to increase revenue. The servers suggest decreasing the price of drinks and food. The servers' recommendation is based on the assumption that

demand for food and drink is elastic

If a 10 percent cut in price causes a 15 percent increase in sales, then:

demand is price elastic in this range

The size of the change in the quantity demanded of a good or service due to change in its price is measured by the elasticity of demand. When the percentage change in the quantity demanded for a good or service is MORE than the percentage change in price, the demand for that good or service is ________ and the price elasticity coefficient is ________.

elastic; greater than 1

Other things constant, the price elasticity of demand for a product will be smaller (more inelastic) if:

people spend an insignificant share of their income on the product

When the demand for a good or service does NOT vary when there is a change in price, the good is ________?

perfectly inelastic

Demand "C" represents a demand curve that is

relatively inelastic

You are the manager of the public transit system. You are informed that the system faces a deficit, but you cannot cut service, which means you cannot cut costs. Your only hope is to increase revenue by increasing fares. You are advised that the estimated price elasticity of demand, several years after the price change, will be about −1.5. Select the statement that best describes the results of raising the fare in the long run. A) Total revenue rises immediately, since demand will remain price inelastic. B) Total revenue will fluctuate as the demand fluctuates C) Total revenue falls, since demand changes and becomes price elastic

C) Total revenue falls, since demand changes and becomes price elastic

You are the manager of the public transit system. You are informed that the system faces a deficit, but you cannot cut service, which means you cannot cut costs. Your only hope is to increase revenue by increasing fares. You are advised that the estimated price elasticity of demand for the first few months after a price change is about −0.3. Select the statement that best describes the results of raising the fare in the short run. A) Total revenue falls, since demand changes and becomes price inelastic B) Total revenue will rise incrementally as the demand fluctuates and price moves back and forth between being elastic and inelastic C) Total revenue rises immediately after the fare increase, since demand over the immediate period is price inelastic

C) Total revenue rises immediately after the fare increase, since demand over the immediate period is price inelastic

Demand is ________ if a small change in price creates a large change in demand.

elastic

Teenage workers are assumed to have ________ labor supply; therefore a 5% increase in wages would result in ________ percentage change in quantity of labor supplied.

elastic; greater

A lower price elasticity of demand coefficient occurs when:

few substitutes exist

A person who takes life-saving prescription drugs most likely has a(n) ________demand for that drug. Therefore an increase in the price of the drug will result in ________ total revenue for the drug company.

inelastic; increased

The size of the change in the quantity demanded of a good or service due to change in its price is measured by the elasticity of demand. When the percentage change in the quantity demanded for a good or service is less than the percentage change in price, the demand for that good or service is ________ and price elasticity is ________.

inelastic; less than 1

When income increases and demand for a good falls, the good is considered a

inferior good

Given that total revenue = price x quantity, what will happen to total revenue if price increases when demand is elastic?

it will decrease

When income increases and the demand for a good increases, the good is considered a

normal good

The elasticity of supply is defined as the ________ change in quantity supplied divided by the ________ change in price.

percentage; percentage

The price elasticity of demand between milk and soda is likely to be:

positive, because the goods are substitutes

When the local grocery store puts peanut butter on sale, reducing its price from $4.30 per item to $3.50 per item, the quantity sold increases from 180 per week to 270 per week. This response illustrates which of the following concepts?

price elasticity of demand

If the price elasticity of demand is computed for two products, and product A measures .79, and product B measures 1.6, then:

product B is more price elastic than product A

The price elasticity of demand measures the responsiveness of

quantity demanded to a change in price

If the elasticity of demand for a company's product is estimated to be 1.72, what would you advise the company to do if their objective is to DECREASE revenue? Group of answer choices

raise the price

Elasticity allows economists to measure

responsiveness of one variable to changes in another variable

Determining the price elasticity of demand involves all of the following factors, but NOT

slope of the supply curve

If the cross-elasticity of demand for two goods is positive, this means that the goods are:

substitues

The responsiveness of suppliers to changing prices is called the:

supply elasticity

How do we find the percentage change in quantity using the midpoint formula?

the change in quantity divided by the average quantity, multiplied by 100

Suppose the price of apples increase by 20%, resulting in consumers to purchase 15% more pears. Given this information, it appears that

the cross-price elasticity of pears is 0.75

A public transit company finds that when it reduces the price of a bus ticket, total revenues remain the same. One can conclude from this that:

the demand curve is horizontal, reflecting infinite price elasticity.

When a 5% increase in income causes a 3% drop in quantity demanded of a good

the income elasticity is .6 and the good in an inferior good

When a 10% increase in income causes a 4% increase in quantity demanded of a good

the income elasticity is 0.4 and it is a normal good

The elasticity of demand is defined as

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

What does this concept of price elasticity of demand represent?

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

Using the midpoints method, calculate the price elasticity of demand of Good X using the following information: When the price of good X is $50, the quantity demanded of good X is 400 units. When the price of good X rises to $60, the quantity demanded of good X falls to 300 units.

the price elasticity of demand for good X = 1.57

Suppose there is a major technological advance in the production of a good that causes production costs to fall. If demand for the product is relatively inelastic, what will happen in the market?

the price will be relatively decrease greater than the increase in quantity

In Exhibit 5-5, if the area OABC equals the area ODEF, the demand curve is:

unitary elastic