Chapter 5

If the price of cell phones increases by 5 percent and the quantity demanded falls by 2 percent, the absolute value of the price elasticity of demand is

0.4

If the price of sandals increases by 10 percent and the quantity demanded falls by 30 percent, then the price elasticity of demand in absolute value is

3

If the price of Coke rises by 5 percent and the sales of Pepsi go up by 10 percent, we can conclude that

Both goods are substitute goods because the cross-price elasticity is +2.

A price decrease will cause total revenue to fall if

Demand is inelastic.

________is the change in what is on the horizontal axis (quantity) divided by the change in what is on the vertical axis (price).

Elasticity

Price elasticity of demand refers to

How sensitive buyers are to a change in price.

If the elasticity of demand for cigarettes is 0.4, a seller should

Increase price to increase total revenue.

If income rises by 10 percent and the quantity sold of a particular vehicle falls by 7 percent, then this particular type of vehicle is

Inferior good

Ceteris paribus, the longer the time period, the

More elastic the demand for the good.

A good is normal if the sign on the income elasticity formula is

Positive

The elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in .

Price

Price elasticity of demand shows how

Responsive the quantity demanded is to a change in price

When the prices of postage stamps rise, the demand for Internet service increases, ceteris paribus. Postage stamps and Internet service are therefore

Substitutes

If demand is perfectly elastic,

The demand curve is horizontal.

If demand is very inelastic,

The demand curve will be very steep.

When demand is inelastic

The percentage change in price is greater than the percentage change in quantity demanded.

If the demand for a product is elastic, then

The percentage change in quantity demanded is greater than the percentage in price.

A 25 percent decrease in the price of breakfast cereal leads to a 20 percent increase in the quantity of cereal demanded. As a result:

Total revenue will decrease

A 10 percent increase in the price of soda leads to a 20 percent increase in the quantity of iced tea demanded. It appears that:

cross-price elasticity of demand for iced tea is 2.

The price elasticity of demand measures the:

the responsiveness of the quantity demanded to changes in price