HPU ECO2030 Principals of Microeconomics - Homework 2

Which type of goods is most adversely affected by recessions?

Goods for which the income elasticity coefficient is relatively high and positive.

Which of the following is correct?

If demand is elastic, a decrease in price will increase total revenue.

We would expect the cross elasticity of demand between dress shirts and ties to be

negative, indicating complementary goods.

The basic formula for the price elasticity of demand coefficient is

percentage change in quantity demanded/percentage change in price.

A firm can sell as much as it wants at a constant price. Demand is thus

perfectly elastic and and absolute price elasticty will be very large.

A demand curve that is parallel to the horizontal (quantity) axis is

perfectly elastic.

If quantity demanded is completely unresponsive to price changes (as for gasoline), demand is

perfectly inelastic and absolute price elasticity will equal zero.

A straight line demand curve that is completely vertical to the horizontal (quantity) axis is

perfectly inelastic.

Refer to the table. Over the $6-$4 price range, supply is

perfectly inelastic.

Assume that a 4 percent increase in income across the economy produces an 8 percent increase in the quantity demanded of good X. The coefficient of income elasticity of demand is

positive, and therefore X is a normal good.

Assume that a 6 percent increase in income in the economy produces a 3 percent increase in the quantity demanded of good X. The coefficient of income elasticity of demand is

positive, and therefore X is a normal good.

We would expect the cross elasticity of demand between Pepsi and Coke to be

positive, indicating substitute goods.

The formula for cross elasticity of demand is percentage change in

quantity demanded of X/percentage change in price of Y.

The demand for a luxury good whose purchase would exhaust a big portion of one's income is

relatively price elastic.

The demand schedules for such products as eggs, bread, and electricity tend to be

relatively price inelastic.

The price elasticity of supply measures how

responsive the quantity supplied of X is to changes in the price of X.

If the income elasticity of demand for store brand macaroni and cheese is −3.00, this means that

store brand macaroni and cheese is an inferior good.

The main reason for the high price of antiques is that

supply is relatively inelastic and demand increases over time.

If a firm can sell 3,000 units of product A at $10 per unit and 5,000 at $8, then

the absolute price elasticity of demand is 2.25.

We would expect

the demand for Coca-Cola to be more price elastic than the demand for soft drinks in general.

Suppose that the price of peanuts falls from $3 to $2 per bushel and that, as a result, the total revenue received by peanut farmers goes doen from $16 to $14 billion. Thus,

the demand for peanuts is inelastic.

If a firm finds that it can sell $13,000 worth of a product when its price is $5 per unit and $11,000 worth of it when its price is $6, then

the demand for the product is elastic in the $6-$5 price range.

The elasticity of demand for a product is likely to be greater,

the greater the amount of time over which buyers adjust to a price change.

An increase in demand will increase equilibrium price to a greater extent

the less elastic the supply curve.

Cross elasticity of demand measures how sensitive purchases of a specific product are to changes in

the price of some other product.

It takes a considerable amount of time to increase the production of pork. This implies that

the short-run supply curve for pork is less elastic than the long-run supply curve for pork.

Which of the following goods will least likely suffer a decline in demand during a recession?

toothpaste

Suppose the supply of product X is perfectly inelastic. If there is an increase in the demand for this product, equilibrium price

will increase, but equilibrium quantity will be unchanged.

Suppose that as the price of Y falls from $2.00 to $1.90, the quantity of Y demanded increases from 110 to 118. Then the absolute value of the price elasticity (using the midpoint formula) is

1.37.

A consumer's weekly income is $300, and the consumer buys 5 bars of chocolate per week. When income increases to $330, the consumer buys 6 bars per week. The income elasticity of demand for chocolate by this consumer is about

2

The supply of product X is elastic if the price of X rises by

5 percent and quantity supplied rises by 7 percent.

In which of the following instances will the total revenue of a firm decline?

Price rises and demand is elastic.

Suppose the income elasticity of demand for toys is +2.00. This means that

a 10 percent increase in income will increase the purchase of toys by 20 percent.

Suppose that a firm has "pricing power" and can segregate its market into two distinct groups based on differences in elasticities of demand. The firm might charge

a higher price to the group that has the less elastic demand.

Suppose that a 20 percent increase in the price of good Y causes a 10 percent decline in the quantity demanded of normal good X. The coefficient of cross elasticity of demand is

negative, and therefore these goods are complements.

The main determinant of elasticity of supply is the

amount of time the producer has to adjust inputs in response to a price change.

If a firm's demand for labor is elastic, a union-negotiated wage increase will

cause the firm's total payroll expenses to decline.

The demand for a product is inelastic with respect to price if

consumers are largely unresponsive to a per unit price change.

Microsoft charges a substantially lower price for a software upgrade than for the initial purchase of the software. This implies that Microsoft views the demand curve for the software upgrade to be

more elastic than the demand for the original software.

Movie theaters charge lower prices to see a movie in the afternoon than in the evening because there is an

elastic demand to see movies in the afternoon.

If the supply of product X is perfectly elastic, an increase in the demand for it will increase

equilibrium quantity, but equilibrium price will be unchanged.

The price elasticity of demand coefficient measures

how strongly buyers change their consumption of a product due to a change on its price.

If the government tightens up on drug dealers and raises the costs of dealing illegal drugs, then the drug addicts' dollar expenditures to feed their addiction will tend to

increase because their demand is price-Inelastic.

If the demand for bacon is relatively price elastic, a 10 percent decline in the price of bacon will

increase the amount demanded by more than 10 percent.

If the absolute value of price elasticity of demand for a product is 2.5, then a price cut from $2.00 to $1.80 will

increase the quantity demanded by about 25 percent.

If the price elasticity of demand for a product is unity, a decrease in price will

increase the quantity demanded, but total revenue will be unchanged.

If the demand for product X is inelastic, a 4 percent decrease in the price of X will

increase the quantity of X demanded by less than 4 percent.

Gigantic State University raises tuition fee for the purpose of increasing its revenue so that more faculty can be hired. In that case, GSU is assuming that the demand for education at GSU is

inelastic

Suppose that the price of product X rises by 20 percent and the quantity supplied of X increases by 15 percent. The coefficient of price elasticity of supply for good X is

less than 1, and therefore supply is inelastic.