ECON 2113 Exam 2

If the price elasticity of demand for a good is -0.40, then a 1 percent increase in price results in a

0.4 percent decrease in the quantity demanded.

If the price of good X increases by 4 percent and there is a 4 percent decrease in the quantity demanded of good X then the price elasticity of demand for X is:

1

Your income elasticity of demand for ECU women's basketball tickets tickets is 1.50. All else equal, this means that if your income increases by 20 percent, then you will buy

30 percent more basketball tickets. (1.5x20)

Courtney enjoys bananas, so much that she would be willing to pay more than she now pays. Suppose that Courtney learns from her personal trainer that a banana after a work-out is a good food choice which promotes muscle recovery. This advice causes Courtney to change her tastes such that she values bananas more than before. If the market price is the same as before, then

Courtney's consumer surplus would increase

Suppose that the price elasticity of supply for wine is 1.4. What does this number mean in words?

If the price of wine increases by 2 percent than the quantity supplied increases by 2.8 percent

For which of the following goods would demand be most elastic?

Levi 's jeans a more specific or branded item because it is harder to substitute

Meredith really likes banana splits, so much that she claims that she would buy one banana split a day regardless of the price. If she is telling the truth,

Meredith's demand for banana splits is perfectly inelastic.

If the price of corn is $3 per bushel, farmers can sell 10 million bushels. When the price of corn is $4 per bushel, farmers can sell 8 million bushels. Which of the following statements is true?

The demand for corn is price inelastic, and so an increase in the price of corn will increase the total revenue of corn farmers.

Housing shortages caused by rent control likely have what effect over time?

The shortage will increase, because the demand for, and supply of, housing are more elastic in the long run.

If the price elasticity of demand for a good is -0.94, then which of the following events is consistent with a 4 percent decrease in the quantity of the good demanded?

a 4.255 percent increase in the price of the good

A legal minimum price at which a good can be sold is

a price floor

An efficient allocation of resources requires that

all potential gains from trade among buyers and sellers are being realized.

Economists define producer surplus as the

amount a seller is paid minus the cost of production.

The following situation isn't very common, however, if there is perfectly elastic demand then

any rise in price above that represented by the demand curve will result in a quantity demanded of zero.

Graphically, consumer surplus is represented as the area between the demand and supply curves.

below the demand curve and above price

The price elasticity of demand measures

buyers' responsiveness to a change in the price of a good.

Total surplus

can be used to measure society's well-being is the sum of consumer and producer surplus amounts to value to buyers minus cost to sellers

In the long run, the quantity supplied of most goods

can respond substantially to a change in price.

Another question on the same topic: total revenue and elasticities: Jenna makes bracelets. If the demand for bracelets is elastic and Jenna wants to increase her total revenue, she should

decrease the price of her bracelets.

Suppose that a technological advance in wheat production (maybe an improved seed, a better tractor, improvements in fertilizers, etc.) leads to a reduction in farmers' total revenue. This is likely because the

demand for wheat is inelastic

It's important that you understand the relationship between price elasticity of demand and total revenue. What this in mind, if a price increase leads to an increase in total revenue then we know....

demand is inelastic

Goods that are a necessity for life like food and medicine

demand tends to be inelastic

Denise values the new iPhone at $600. The actual price of the iPhone is $1000. Denise

does not buy the iPhone and she experiences a consumer surplus of $0 on her non-purchase.

If a tax is placed on the buyers of a good, then we expect that the demand curve shifts Correct!

downward by the amount of the tax.

Should there be a large quantity demanded response to a change in price, then economists say that demand is

elastic

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

false

The larger the number (in absolute value) of the price elasticity of demand, the

greater the responsiveness of quantity demanded to a change in price.

What does it mean if a price control is "binding"? the most that a price can be.

he price control has an effect in the market.

A consumer's willingness to pay directly measures

how much a buyer values a good.

What does the price elasticity of supply measure?

how the quantity supplied responds to changes in the price of the good.

Once again, same concept, this time with a graph - if price increases from $10 to $15, total revenue will

increase by $20, so demand must be inelastic in this price range.

If the demand for ECU football tickets is elastic, then a decrease in the price of ECU football tickets will

increase total revenue.

If a tax is imposed on the buyers of flashlights, then the burden of the tax will fall

on both buyers and sellers

Should the price of gasoline increases overnight by $1 per gallon, when will the price elasticity of demand (in absolute value) likely be the highest?

one year after the price increases (generally the longest time after the price changes)

The demand for Chocolate ice cream is likely quite elastic because

other flavors of ice cream are good substitutes for this particular flavor.

How is the price elasticity of demand calculated (something that you'll need to know on the next test :)

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

If two goods are substitutes, their cross-price elasticity will be

positive

Suppose you and your roommate eat three packages of Food Lion Mac and Cheese each week. After graduating from ECU, both of you get real jobs and make some real money. You still enjoy Food Lion Mac and Cheese very much and buy even more, however, your roommate now upgrades to Kraft Mac and Cheese (no longer buying the Food Lion brand). Economists would say that the income elasticity of Food Lion Mac and Cheese is:

positive for you and negative for your roommate.

When government imposes a binding price ceiling or a price floor in a market,

price no longer serves as a rationing device.

In the situation where demand is inelastic then the

quantity demanded changes proportionately less than price.

Here is the other extreme case, (once again, this is highly unlikely), in the situation of perfectly inelastic demand,

quantity demanded stays the same whenever price changes.

Which of these scenarios is most likely if a tax is imposed on the sellers of a good then this will

raise the price paid by buyers and lower the equilibrium quantity.

Notice a theme yet ? Another question about elasticities and revenues.....If corn farmers know that the demand for corn is inelastic, and they want to increase their total revenue, what do you recommend?

reduce the number of acres they plant in corn.

If a tax is placed on a good, then the goods' buyers and sellers share the burden,

regardless of how the tax is levied.

Total revenue

remains unchanged as price increases when demand is unit elastic.

Price elasticity of supply is primarily determined by

the ability of sellers to change the amount of the good they produce.

As price falls from P A to P B, which demand curve is most elastic demand?

the curve that is less steep , covering more of the graph

If demand is elastic then which of the following statements must be true:

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

The term income elasticity of demand captures how

the quantity demanded changes as consumer income changes.

Should the minimum wage exceed the equilibrium wage then

the quantity supplied of labor will exceed the quantity demanded.

All of the following determine the price elasticity of demand for a good except:

the steepness or flatness of the supply curve for the good things that do the time horizon the definition of the market for the good the availability of substitutes for the good

Efficiency in a market is achieved when

the sum of producer surplus and consumer surplus is maximized.

If the price doubles from $6 to $12, what happens to total revenue. What can we infer about the price elasticity of demand?

total revenue would increase and demand is inelastic between points C and B.

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

true

You were just diagnosed with heart disease. Your doctor prescribed Crestor and there is no generic available yet for Crestor. Therefore,

your demand for Crestor would tend to be inelastic.