Econ HW Assignment #3

price elasticity of demand =

%change in QD ------------------ & change in P

MidPoint Method

(Q2-Q1) -------- (Q+Q1) ______________________ (P2-P1) -------- (P2+P1)

The greater the price elasticity of demand, the

greater the responsiveness of quantity demanded to a change in price

Suppose the price of potato chips decreases from $1.45 to $1.25 and, as a result, the quantity of potato chips demanded increases from 2,000 to 2,200. Using the midpoint method, the price elasticity of demand for potato chips in the given price range is

0.64

What are the determinate of elasticity?

1. availability of close substitutes 2. necessity or a luxury 3. definition of the market 4. time horizon 5. proportion of the budget

If the price elasticity of demand for a good is 1.5, then a 3 percent decrease in price results in a

4.5% increase in the quantity demanded

If the price elasticity of demand for a good is 10.0, then a 4 percent increase in price results in a

40% decrease in the quantity demanded

A - 1.3 price elasticity of D B - 2.1 price elasticity of D Which of the following is consistent with the elasticities given in this table?

A is airline tickets in the short ru, and B is airline tickets in the long run

Perfectly Elastic

Np = infinite or undefined nobody has an incentive to lower or raise price because then everyone would start lowering their prices ex:) agricultural products

Perfectly inelastic

Np=0, doesn't matter the price, buyers will still buy the same ex:) prescription medications

Total Revenue =

Price * QD

Elasticity

a measure of how much buyers and sellers respond to changes in market conditions

Which of the following is likely to have the most price inelastic demand?

chocolate (vs. specific brands of chocolate)

When the price of bubble gum is $0.50, the quantity demanded is 400 packs per day. When the price falls to $0.40, the quantity demanded increases to 600. Given this information and using the midpoint method, we know that the demand for bubble gum is

elastic

Np > 1

elastic - consumers are responsive to price

Suppose that quantity demanded falls by 30% as a result of a 5% increase in price. The price elasticity of demand for this good is

elastic and equal to 6

Relatively Inelastic

if its slope is rather steep

relatively elastic

if its slope is relatively flat

Np < 1

inelastic - consumers are unresponsive to price

The price elasticity of demand measures the

magnitude of the response in quantity demanded to a change in price

If the price of natural gas rises, when is the price elasticity of demand likely to be the highest?

one year after the price increase

necessity, broad groups

price elasticity of demand goes down

More substitues & luxury goods, narrowed down goods, more time available, large part of budget

price elasticity of demand goes up

When consumers face rising prices gasoline prices, they typically...

reduce their quantity demanded more in the long run than in the short run

As we move downward and to the right along a linear, downward-sloping demand curve,

slope remains constant but elasticity changes

Elasticity of demand is closely related to-the slow of the demand curve. The less responsiveness buyers are to a change in price, the

steeper the demand curve will be

Last month, sellers of good Y took in $100 in total revenue on sales of 50 units of good Y. This month sellers of good Y raised their price and took in $120 in total revenue on sales of 40 units of good Y. At the same time, the price of good X stayed the same, but sales of good X increased from 20 units to 40 units. We can conclude that goods X and Y are

substitutes, and have a cross-price elasticity of 1.67

Suppose that Juan Carlos is filling out a survey that he received in the mail. The survey asks him what he would do if the price of his favorite toothpaste increased. Juan Carlos reports that he would switch to a different brand. The survey asks what he would do if the price of all toothpastes increased. Juan Carlos reports that he must use toothpaste, so he would have to adjust his spending elsewhere. These examples illustrate the importance of...

the definition a market in determining the price elasticity of demand

Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 2. Which of the following events is consistent with a 0.1% increase in the price of the good?

the quantity of the good demanded decreases by 0.2%

For a particular good, a 5% increase in price causes a 15% decrease in quantity demanded. Which of the following statements is most likely applicable to this good?

there are many substitutes to this good

Np = 1

unit elastic - %change in QD offsets the % change in price