Microeconomics: Chapter 7 - Elasticity
The price elasticity of demand of a linear demand curve is
elastic in high-price ranges and inelastic in low-price ranges.
The demand for a luxury good whose purchase would exhaust a big portion of one's income is
elastic.
Total revenue decreases as the price of a good increases, if the demand for the good is
elastic.
When interpreting the Ed value as either elastic or inelastic, we look at the
absolute value of the Ed coefficient (dropping the negative sign).
Which is NOT characteristic of a product with relatively inelastic demand? a. The good is regarded by consumers as a necessity. b. There are a large number of good substitutes for the good. c. Buyers spend a small percentage of their total income on the product. d. Consumers have had only a short time period to adjust to changes in price.
b. There are a large number of good substitutes for the good.
In which instance will total revenues decline? a. price increases and Ed equals -.41 b. price increases and demand is unit-elastic c. price decreases and demand is elastic d. price increases and Ed equals -2.47
d. price increases and Ed equals -2.47
You are the sales manager for a software company and have been informed that the absolute value of the price elasticity of demand for your most popular software is less than 1. To increase total revenues from that product, you should
increase the price of the software.
If the price-elasticity coefficient for a good is -.75, the demand for that good is described as
inelastic.
A negative income elasticity of demand indicates that the product
is an inferior good.
The basic formula for the price elasticity of demand is
percentage change in quantity demanded/percentage change in price.
We would expect the cross-price elasticity of demand between Pepsi and Coke to be
positive, indicating substitute goods.
If a 10% increase in the price of one good, A, results in an increase of 5% in the quantity demanded of another good, B, then it can be concluded that the two goods, A and B are
substitutes.
