chapter 5 micro economics
A perfectly inelastic demand implies that buyers would
purchase the same amount as before when the price rises by 10%. Perfectly inelastic demand indicates that consumers will purchase the same amount as before when the price rises or falls.
The price elasticity of supply is computed as the percentage change in
quantity supplied divided by the percentage change in price. Feedback: Correct. The price elasticity of supply measures how much the quantity supplied of a good responds to a change in the price of that good and is computed as the percentage change in quantity supplied divided by the percentage change in price.
For which pairs of goods is the cross-price elasticity most likely to be positive?
quilts and comforters The cross-price elasticity is positive for substitutes, like quilts and comforters.
The local restaurant makes such great nachos that consumers do not respond much at all to a change in the price. If the owner is only interested in increasing revenue, she should
raise the price of the nachos. When consumers do not respond much to a change in price, they have inelastic demand. When demand is inelastic, price and total revenue move in the same direction so raising the price of nachos will result in higher revenue.
A drug interdiction program that successfully reduces the supply of illegal drugs in the United States likely will
raise the price, reduce the quantity, increase total revenues, and increase crime. drug interdiction program that successfully reduces the supply of illegal drugs in the United States likely will decrease supply while demand remains constant, resulting in a higher price and a reduction in quantity. Because the demand for illegal drugs is inelastic, an increase in the price results in an increase in total revenue. Because buyers of illegal drugs now need to pay a higher price to buy drugs, crime increases.
If kale farmers know that the demand for kale is price inelastic, in order to increase their total revenues they should
reduce the number of acres they plant to decrease their output. Feedback: Correct. If kale farmers reduce the number of acres they plant, the supply of kale will shift to the left. The demand for kale will not shift. When supply shifts to the left and demand remains constant, the equilibrium price of kale increases and the equilibrium quantity decreases. When the price increases for a good with inelastic demand, total revenue increases.
The price elasticity of supply measures how responsive
sellers are to a change in price. Feedback: Correct. The price elasticity of supply measures how responsive sellers are to a change in price.
If the cross-price elasticity of demand for two goods is 0.88, then the two goods are
substitutes Feedback: Correct. The cross-price elasticity is positive for substitutes.
Refer to the Table. Which of the three supply curves represents the least elastic supply?
supply curve B Using the midpoint method, the price elasticities of supply are225 for supply curve A,15 for supply curve B, and325 for supply curve C. Supply curve B represents the least elastic supply because it has the lowest price elasticity of supply of the three.
Given the market for illegal drugs, when the government is successful in reducing the flow of drugs into the United States,
supply shifts to the left, demand is unaffected, and price increases. When the government is successful in reducing the flow of drugs into the United States, supply decreases (shifts to the left), demand is unaffected, and price increases.
Refer to the Table. Which of the following is consistent with the elasticities given in Table?
A is blue jeans, and B is pants.
Refer to the Figure. Using the midpoint method, demand is unit elastic between prices of
$16 and $32. Using the midpoint approach, the price elasticity of demand is 1 between $16 and $32. To compute the percent change in quantity, (8-16) / [(8 +16)/2] = -0.67. To compute the percent change in price, (32-16) / [(32+16)/2] =0.67. Dividing the percent change in quantity by the percent change in price and taking the absolute value yields a price elasticity of demand of 1 which is unit elastic.
Refer to the Figure. The maximum value of total revenue corresponds to a price of
$24 Total revenue is maximized when the price is $24 and the quantity is12units. Total revenue equals price x quantity, so $24 x12= $288.
Refer to the Figure. At a price of $16 per unit, sellers' total revenue equals
$256. Feedback: Correct. Total revenue equals price x quantity, so $16 x16= $256.
Refer to the Figure. Over which range is the supply curve in this figure the least elastic?
$305 to $490 The supply curve is least elastic at high levels of output where the curve is relatively steep. Using the midpoint method, the price elasticities of supply are about386 from $50 to $85,100 from $85 to $170,070 from $170 to $305, and061 from $305 to $490. These values confirm that the supply curve is least elastic (has the lowest price elasticity of supply) over the range $305 to $490.
Refer to the Figure. Over which range is the supply curve in this figure the most elastic?
$50 to $85 The supply curve is most elastic at low levels of output where the curve is relatively flat. Using the midpoint method, the price elasticities of supply are about386 from $50 to $85,100 from $85 to $170,070 from $170 to $305, and061 from $305 to $490. These values confirm that the supply curve is most elastic (has the highest price elasticity of supply) over the range $50 to $85.
Refer to the Table. Using the midpoint method, the income elasticity of demand for good Y is
-0.44, and good Y is an inferior good. Correct. Using the midpoint method, the income elasticity of demand for Good Y is about -0.44 and good Y is an inferior good because the income elasticity is less than zero. To compute the percent change in quantity, (68-74) / [(68 +74)/2] = -0.08. To compute the percent change in income, (46,000-38,000) / [(46,000+38,000)/2] =0.19. Dividing the percent change in quantity by the percent change in income yields an income elasticity of demand of about -0.44.
Matt purchases 4 boxes of spinach and 3 pounds of tomatoes per month when the price of spinach is $1.50 per box. He purchases 5 boxes of spinach and5pounds of tomatoes per month when the price of spinach is $1.00 per pound. Using the midpoint method, Matt's cross-price elasticity of demand for spinach and tomatoes is
-1.25, and they are complements. Using the midpoint method, the cross-price elasticity of demand is -1.25 and spinach and tomatoes are complements. To compute the percent change in quantity of good tomatoes, (5-3) / [(5 + 3)/2] = 0.5. To compute the percent change in price of spinach, (1.00-1.50) / [(1.00+1.50)/2] = -0.4. Dividing the percent change in quantity of tomatoes by the percent change in price of spinach yields a cross-price elasticity of demand of -1.25. When two goods have a negative cross-price elasticity, they are complements.
Refer to the Figure. Between point A and point B, price elasticity of demand is equal to
0.6. Using the midpoint approach, the price elasticity of demand is 0.6 between $4 and $8. To compute the percent change in quantity, (24-16) / [(24 +16)/2] =0.4. To compute the percent change in price, (4-8) / [(4+8)/2] = -0.67. Dividing the percent change in quantity by the percent change in price and taking the absolute value yields a price elasticity of demand of 0.6.
Refer to the Table. Using the midpoint method, at a price of $8, what is the income elasticity of demand when income rises from $2,000 to $3,500?
0.73 Using the midpoint method, the income elasticity of demand is about 0.73 when income rises from $2,000 to $3,500 and the price is $8. To compute the percent change in quantity, (24-16) / [(24 +16)/2] =0.4. To compute the percent change in income, (3,500-2,000) / [(3,500+2,000)/2] =0.55. Dividing the percent change in quantity by the percent change in income yields an income elasticity of demand of about 0.73.
Refer to the Table. Using the midpoint method, the price elasticity of demand in the price range from $25 to $30 is about
0.80 Using the midpoint approach, the price elasticity of demand is about 0.80 between $25 and $30. To determine the relevant quantities, divide the total revenue by the price. When price is $25 and total revenue is $550, quantity is 22. When price is $30 and total revenue is $570, quantity is 19. To compute the percent change in quantity, (19-22) / [(19 +22)/2] = -0.15. To compute the percent change in price, (30-25) / [(30+25)/2] = 0.18. Dividing the percent change in quantity by the percent change in price and taking the absolute value yields a price elasticity of demand of about 0.80.
When the price of a sweater was $40, the store sold 150 sweaters per month. When it raised the price to $50 each, it sold 120 sweaters per month. Using the midpoint method, the price elasticity of demand for sweaters is
1.0 Using the midpoint method, the price elasticity of demand is 1.00, which indicates unit elasticity. To compute the percent change in quantity, (120-150) / [(120 +150)/2] = -0.22. To compute the percent change in price, (50-40) / [(50 +40)/2] =0.22. Dividing the percent change in quantity by the percent change in price and taking the absolute value yields a price elasticity of demand of 1.00.
Suppose that when the price of good X falls from $60 to $48, the quantity demanded of good Y falls from 10 units to 8 units. Using the midpoint method, the cross-price elasticity of demand is
1.0, and X and Y are substitutes. Using the midpoint method, the cross-price elasticity of demand is 1.00 and X and Y are substitutes. To compute the percent change in quantity of good Y, (8-10) / [(8 +10)/2] = -0.22. To compute the percent change in price of good X, (48-60) / [(48+60)/2] = -0.22. Dividing the percent change in quantity of good Y by the percent change in price of good X yields a cross-price elasticity of demand of 1.00. When two goods have a positive cross-price elasticity, they are substitutes.
Refer to the Table. Using the midpoint method, what is the price elasticity of demand when price rises from $8 to $12?
1.00 Using the midpoint approach, the price elasticity of demand is 1.00 between $8 and $12. To compute the percent change in quantity, (12-18) / [(12+18)/2] = -0.40. To compute the percent change in price, (12-8) / [(12+8)/2] = 0.40. Dividing the percent change in quantity by the percent change in price and taking the absolute value yields a price elasticity of demand of 1.00.
Refer to the Table. Using the midpoint method, at a price of $16, what is the income elasticity of demand when income rises from $1,000 to $2,000?
1.00 Using the midpoint method, the income elasticity of demand is 1 when income rises from $1,000 to $2,000 and the price is $16. To compute the percent change in quantity, (10-5) / [(10 +5)/2] =0.67. To compute the percent change in income, (2,000-1,000) / [(2,000+1,000)/2] =0.67. Dividing the percent change in quantity by the percent change in income yields an income elasticity of demand of 1.
At a price of $16.00 per gallon, a hardware store is willing to supply 180 gallons of paint per week. At a price of $20.00, the hardware store is willing to supply 240 gallons per day. Using the midpoint method, the price elasticity of supply is about
1.29 Using the midpoint approach, the price elasticity of demand is about 129. To compute the percent change in quantity, (240-180) / [(240 +180/2] =029. To compute the percent change in price, (20-16) / [(20+16)/2] =022. Dividing the percent change in quantity by the percent change in price yields a price elasticity of demand of about 129.
Tricia's Tea Shop increased its total monthly revenue from $2,520 to $2,750 when it reduced the price of a cup of tea from $3 to $2.50. The price elasticity of demand for Tricia's Tea Shop is
1.47. Without performing any calculations, we know that the price elasticity of demand for Tricia's tea must be elastic because total revenue and price moved in opposite directions. Using the midpoint approach, the price elasticity of demand is about147 between $3 and $2.50. To determine the relevant quantities, divide the total revenue by the price. When price is $3 and total revenue is $2,520, quantity is840 When price is $2.50 and total revenue is $2,750, quantity is1100. To compute the percent change in quantity, (1100-840) / [(1100 +840/2] =027. To compute the percent change in price, (2.50-3) / [(2.50+3)/2] = -0.18. Dividing the percent change in quantity by the percent change in price and taking the absolute value yields a price elasticity of demand of about147.
At a price of $3.50 per loaf, a bakery is willing to supply 450 loaves of bread per week. At a price of $4.00 per loaf, the bakery is willing to supply 550 loaves per week. Using the midpoint method, the price elasticity of supply is about
1.54 Using the midpoint approach, the price elasticity of supply is 1.54. First, compute the percentage change in quantity: (550 − 450)/[(550 + 450)/2] = 0.2. Next, compute the percentage change in price: (4 − 3.5)/[(4 + 3.5)/2] = 0.13. Dividing the percentage change in quantity by the percentage change in price yields a price elasticity of supply of 1.54.
Suppose the price of memory foam pillows decreases from $100 to $75 and, as a result, the quantity of memory foam pillows demanded increases from 500 to 800 Using the midpoint method, the price elasticity of demand for memory foam pillows in the given price range is about
1.62 Using the midpoint method, the price elasticity of demand is about 1.62, which indicates elastic demand. To compute the percent change in quantity, (800-500) / [(800 +500)/2] =0.462. To compute the percent change in price, (75-100) / [(75 +100)/2] = -0.286. Dividing the percent change in quantity by the percent change in price and taking the absolute value yields a price elasticity of demand of about 1.62.
Refer to the Table. Using the midpoint method, what is the income elasticity of demand for good X?
1.66 Feedback: Correct. Using the midpoint method, the income elasticity of demand for Good X is about 1.66 when income rises from $38,000 to $46,000. To compute the percent change in quantity, (22-16) / [(22 +16)/2] = 0.32. To compute the percent change in income, (46,000-38,000) / [(46,000+38,000)/2] = 0.19. Dividing the percent change in quantity by the percent change in income yields an income elasticity of demand of about 1.66.
Which of the following could be the price elasticity of demand for a good for which a decrease in price would increase revenue?
1.67 Feedback: Correct. A decrease in price results in an increase in revenue when demand is elastic (a price elasticity greater than 1).
If the price elasticity of demand for a good is 2.0, then a 5 percent increase in price results in a
10 percent decrease in the quantity demanded. The price elasticity of demand is the absolute value of the percent change in the quantity demanded divided by the percent change in the price. A 10 percent decrease in the quantity demanded divided by a 5 percent increase in price leads to an absolute value of elasticity equal to 2
Joseph's income elasticity of demand for fried chicken meals is -2. All else equal, this means that if his income increases by 5 percent, he will buy
10 percent fewer fried chicken meals. Joseph's negative income elasticity indicates that he will buy fewer fried chicken meals when his income increases. If income increases by 5, Joseph will by 10 fewer fried chicken meals because -10/5 = -2.
Suppose the price elasticity of supply for dog biscuits is 08 in the short run and 14 in the long run. If an increase in the demand for dog biscuits causes the price of dog biscuits to increase by 15, then the quantity supplied of dog biscuits will increase by about
12% in the short run and 21 in the long run. Feedback: Correct. Price elasticity of supply is the percent change in quantity demanded divided by the percent change in price. If the price increases by 15 and the short run price elasticity of supply is 08, the quantity supplied increases by 12 (12/15 =08). If the price increases by 15 and the long run price elasticity of supply is 14, the quantity supplied increases by 21 (21/15 =14).
If the price elasticity of supply is 1.8, and a price increase led to a 4 increase in quantity supplied, then the price increase is about
2.22%. Feedback: Correct. If the price elasticity of supply is 1.8, a price increase of about 2.22% leads to a 4 increase in quantity supplied (4% /2.22% =1.8).
Refer to the Table. Using the midpoint method, the price elasticity of demand when price rises from $12 to $16 is about
2.33. Using the midpoint approach, the price elasticity of demand is about 2.33 between $12 and $16. To compute the percent change in quantity, (6-12) / [(6 +12)/2] = -0.67. To compute the percent change in price, (16-12) / [(16+12)/2] =0.29. Dividing the percent change in quantity by the percent change in price and taking the absolute value yields a price elasticity of demand of 2.33.
Suppose the price of tablets increases by 8 percent and producers respond by increasing the quantity supplied by 20 percent. The price elasticity of supply for tablets is
2.5 and producers are very responsive to the price change.
When the price of good A is $14, the quantity demanded of good A is 100 units. When the price of good A falls to $12, the quantity demanded of good A rises to 150 units. Using the midpoint method, the price elasticity of demand for good A is
2.60, and a decrease in price will result in an increase in total revenue for good A. sing the midpoint approach, the price elasticity of demand is 2.60, which is elastic. When demand is elastic and the price decreases, total revenue increases. To compute the percent change in quantity, (150-100) / [(150 +100)/2] =0.4. To compute the percent change in price, (12-14) / [(12+14)/2] = -0.15. Dividing the percent change in quantity by the percent change in price and taking the absolute value yields a price elasticity of demand of 2.60.
Refer to the Figure. Using the midpoint method, between prices of $32 and $40, price elasticity of demand is
3.00. Using the midpoint approach, the price elasticity of demand is 3 between $32 and $40. To compute the percent change in quantity, (4-8) / [(4 + 8)/2] = -0.67. To compute the percent change in price, (40-32) / [(40+32)/2] = 0.22. Dividing the percent change in quantity by the percent change in price and taking the absolute value yields a price elasticity of demand of 3.
If the price elasticity of demand for gift wrap is 0.8, then a 5% increase in the price of gift wrap will decrease the quantity demanded of gift wrap by
4%, and gift wrap sellers' total revenue will increase as a result. The quantity demand will decrease by (0.8 x 0.05 = 0.04) 4% when the price elasticity of demand is 0.8 and the price increases by 5%. When demand is inelastic (less than 1), an increase in the price will result in an increase in total revenue because the price increase more than offsets the decrease in quantity demanded.
If the price elasticity of demand for a good is 0.75, then an 8 percent decrease in price results in a
6 percent increase in the quantity demanded. The Law of Demand states that as the price decreases, the quantity demanded increases. The price elasticity of demand is the absolute value of the percent change in the quantity demanded divided by the percent change in the price. A 6 percent increase in the quantity demanded divided by an 8 percent decrease in price leads to an absolute value of elasticity equal to 0.75.
Suppose there is an 18 percent decrease in the price of a good that has a price elasticity of demand of 4. The percent increase in the quantity demanded must be
72 percent. Feedback: Correct. The price elasticity of demand is the absolute value of the percent change in the quantity demanded divided by the percent change in the price. A 72 percent increase in the quantity demanded divided by an 18 percent decrease in price leads to an absolute value of elasticity equal to 4
If the price elasticity of supply is 0.6 and price increases by 15 percent, the quantity supplied will increase by
9 percent. If the price elasticity of supply is 0.6, a price increase of 15 percent leads to a 9 percent increase in quantity supplied (9%/15% = 0.6).
In which of these instances is demand said to be perfectly inelastic?
A decrease in price of 6% causes an increase in quantity demanded of 0%. Feedback: Correct. When there is perfectly inelastic demand for a good, there is a 0% change in quantity in response to any price change.
Refer to the Table. Which of the following is consistent with the elasticities given in Table?
A is a good several years after a price increase, and B is that same good several days after the price increase. Goods tend to have more elastic demand over longer time horizons. Good A has relatively elastic demand because the elasticity value is greater than 1, whereas Good B has relatively inelastic demand because the elasticity value is less than 1
Refer to the Figure. The demand curve most likely to represent the demand for a necessity with few close substitutes is
D3 D3 is most likely to represent the demand for a necessity with few close substitutes because it is the steepest, and therefore least elastic, of the three curves.
Refer to the Figure. As price falls from Pa to Pb, which demand curve represents the least elastic demand?
D3 Feedback: Correct. The least elastic demand curve has the steepest slope. D3 is the steepest of the three demand curves in the range from Pa to Pb. As the price changes from Pa to Pb, the quantity demand changes by the smallest amount on curve D3.
Which of the following is likely to have the most price elastic demand?
Dove® moisturizing body wash Feedback: Correct. Narrowly defined markets tend to have more elastic demand than broadly defined markets because it is easier to find close substitutes for narrowly defined goods.
Which of the following is likely to have the most price elastic demand?
Flowers Necessities tend to have inelastic demands, whereas luxuries have elastic demands
Which of the following statements helps to explain why government drug interdiction increases drug-related crime?
Interdiction results in an increase in the amount of money needed to buy the same amount of drugs. One of the reasons why government drug interdiction increases drug-related crime is that by decreasing the supply and driving up the price of drugs, interdiction results in an increase in the amount of money needed to buy the same amount of drugs. Additional Resources
Refer to the Table. Which of the three supply curves represents perfectly elastic supply?
None of the three supply curves represents perfectly elastic supply. Feedback: Correct. Perfectly elastic supply has an elasticity value that equals infinity. Each of the these three supply curves has relatively elastic supply, with price elasticity values of225 for supply curve A,15 for supply curve B, and325 for supply curve C.
Which of the following was a reason OPEC failed to keep the price of oil high?
Over the long run, producers of oil outside of OPEC responded to higher prices by expanding their production. Feedback: Correct. One of the reasons that OPEC failed to keep the price of oil high was that the higher prices in the short run induced non-OPEC oil producers to expand their production, thereby increasing the total market supply of oil.
Authorities are considering two policies targeted at the market for heroin. The first policy would target the distribution and sale of heroin. The second policy would attempt to educate the public about the dangers of using heroin. If the authorities' primary goal were to reduce the revenue to heroin sellers, so as to make participating in the market less enticing, and assuming both policies would be effective, which of the following statements is correct?
The authorities should pursue the second policy because reducing the demand for heroin will decrease the price of heroin, thereby reducing revenue to heroin sellers. The authorities should educate the public about the dangers of using heroin, which will reduce the demand for heroin and reduce the price of heroin. Because the demand is inelastic, a reduction in price causes a decrease in revenue to the sellers.
Suppose that when the price of perfume is $35 per bottle, a firm can sell 1 million bottles. When the price of perfume is $30 per bottle, firms can sell 1.5 million bottles. Which of the following statements is true?
The demand for perfume is price elastic, so a decrease in the price of perfume will increase the total revenue of perfume producers.
Which of the following could describe a good for which a decrease in price would decrease revenue?
The good is a necessity. Necessities tend to have inelastic demand. When price decreases for a good with inelastic demand, total revenue decreases.
For a particular good, a 15 percent increase in price causes a 10 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?
There are no close substitutes for this good. The price elasticity of demand is computed by dividing the percent change in quantity by the percent change in price. For this good, the price elasticity of demand equals 10/15 = 0.67, which is inelastic. Goods with no close substitutes tend to have less elastic demand because it is more difficult for consumers to switch from that good to another.
If the price elasticity of demand for a good is 0.45, then which of the following events is consistent with a 9 percent decrease in the quantity of the good demanded?
a 20 percent increase in the price of the good The price elasticity of demand is the absolute value of the percent change in the quantity demanded divided by the percent change in the price. A 9 percent decrease in the quantity demanded divided by a 20 percent increase in price leads to an absolute value of elasticity equal to 0.45
If the price elasticity of demand for a good is about 1.3, then which of the following is consistent with a 7 percent increase in the quantity demanded of the good?
a 5.4 percent decrease in the price of the good Feedback: Correct. The Law of Demand states that as the price decreases, the quantity demanded increases. The price elasticity of demand is the absolute value of the percent change in the quantity demanded divided by the percent change in the price. A 7 percent increase in the quantity demanded divided by a 5.4 percent decrease in price leads to an absolute value of elasticity equal to about 1.3.
Compared to 1950 there has been
a 70 percent drop in the number of farmers, but farm output more than doubled.Feedback: Correct. Due to advances in farm technology, there has been a 70 percent drop in the number of farmers, but farm output has more than doubled compared to 1950.
Which of the following would likely have the least elastic supply?
beachfront land The price elasticity of supply depends on the flexibility of the sellers to change the amount of the good they produce. It is almost impossible to produce more beachfront land, so it has the least elastic supply of the goods listed.
The price elasticity of demand measures
buyers' responsiveness to a change in the price of a good.
Because the demand for corn tends to be inelastic, the development of a new, pest-resistant strain of corn would tend to
decrease the total revenue of corn farmers. A new, pest-resistant strain of corn increases the amount of corn that can be produced, so the supply curve shifts to the right. The demand curve does not shift. When supply shifts to the right and demand remains constant, the equilibrium price of corn decreases and the equilibrium quantity increases. When the price decreases for a good with inelastic demand, total revenue decreases
Katerina teaches harp lessons. If the demand for harp lessons is elastic, Katerina could increase her total revenue by
decreasing the price of her harp lessons.When demand is elastic, reducing the price results in higher total revenue.
Ed says that he would buy 12 gallons of gas every week regardless of the price. If he is telling the truth, Ed's
demand for gas is perfectly inelastic. Feedback: Correct. Perfectly inelastic demand implies that consumers will purchase the same amount regardless of the price.
Suppose that 4000 tires are demanded at a particular price. If the price of tires rises from that price by 8 percent, the number of tires demanded falls to 3800. Using the midpoint approach to calculate the price elasticity of demand, it follows that the
demand for tires in this price range is inelastic. Using the midpoint approach, the price elasticity of demand is about 0.63, which indicates inelastic demand. To compute the percent change in quantity, (3800-4000) / [(3800 +4000)/2] = -0.05. The percent change in price is 8 percent, or 0.08. Dividing the percent change in quantity by the percent change in price and taking the absolute value yields a price elasticity of demand of 0.63.
Refer to the Figure. For prices above $50, demand is price
elastic, and total revenue will fall as price rises. Along a linear demand curve, demand is price elastic for the top half of the curve and inelastic for the bottom half of the curve. When demand is elastic, total revenue falls as price rises.
Holding all other factors constant and using the midpoint method, if a manufacturer increases production from 600 to 750 units when price increases by15 percent, then supply is
elastic, since the price elasticity of supply is equal to 148. Using the midpoint approach, the price elasticity of supply is about 148. To compute the percent change in quantity, (750-600) / [(750 +600/2] =022. Dividing the percent change in quantity by the15percent change in price yields a price elasticity of supply of about 148. Because the price elasticity of supply is greater than 1 it is elastic.
In the market for oil in the long run, demand and supply are
elastic, so a shift in supply leads to a small change in price. Feedback: Correct. In the market for oil in the long run, demand and supply are elastic, so a shift in supply leads to a small change in price.
Suppose the cross-price elasticity of demand between pencils and paper is -1.50. This implies that a 10 percent increase in the price of pencils will cause the quantity of paper purchased to
fall by 15 percent. Feedback: Correct. A cross-price elasticity of -1.50 implies that a 10 percent increase in the price of pencils will cause a 15 decrease in the quantity of paper purchased.
Supply is usually more elastic in the long run than in the short run because
firms cannot easily change the size of their factories over short periods of time. The price elasticity of supply depends on the flexibility of the sellers to change the amount of the good they produce. The longer firms have to adjust to a price change, the more responsive they can be. Over short periods of time, firms cannot easily change the size of their factories or enter industries.
If the price of airline tickets falls, when is the price elasticity of demand likely to be the lowest?
immediately after the price increase Feedback: Correct. Goods tend to have less elastic demand over shorter time horizons.
When the price of bananas is $0.60 per pound, the quantity demanded is 200 pounds per day. When the price falls to $0.45 per pound, the quantity demanded increases to 250. Given this information and using the midpoint method, we know that the demand for bananas is
inelastic Using the midpoint method, the price elasticity of demand is about 0.78, which is less than one indicating inelastic demand. To compute the percent change in quantity, (250-200) / [(250 +200)/2] =0.222. To compute the percent change in price, (0.45-0.60) / [(0.45 +060)/2] = -0.286. Dividing the percent change in quantity by the percent change in price and taking the absolute value yields a price elasticity of demand of about 0.78.
Refer to the Figure. For prices below $50, demand is price
inelastic, and total revenue will rise as price rises. Feedback: Correct. Along a linear demand curve, demand is price elastic for the top half of the curve and inelastic for the bottom half of the curve. When demand is inelastic, total revenue rises as price rises.
In the market for oil in the short run, demand and supply are
inelastic, so a shift in supply leads to a large change in price. Feedback: Correct. In the market for oil in the short run, both demand and supply are inelastic, so a shift in supply leads to a large change in price.
The price elasticity of demand for lightbulbs
is relatively inelastic because there are very few substitutes for lightbulbs. Goods with few close substitutes tend to have less elastic demand because it is more difficult for consumers to switch from that good to another when the price changes. Additional Resources
Due to the relative elasticities of demand and supply, the suppliers of oil are likely to be able to cause a
large change in price in the short run, but only a small change in price in the long run. Feedback: Correct. Because both demand and supply are inelastic in the short run, suppliers of oil are likely to be able to cause a large change in price in the short run. However, because both demand and supply are elastic in the long run, suppliers of oil are likely to be able to cause only a small change in price in the long run.
Suppose researchers discover a new shape for cranberry bogs that allow cranberry growers to harvest more cranberries than with the old shape. If the demand for cranberries is relatively inelastic, the discovery will
lower both price and total revenues. Feedback: Correct. The discovery will result in the supply curve shifting to the right. The demand curve for cranberries will not shift. When supply shifts to the right and demand remains constant, the equilibrium price of cranberries decreases and the equilibrium quantity increases. When the price decreases for a good with inelastic demand, total revenue decreases.
A perfectly elastic demand implies that buyers of wheat would
not buy any wheat, at all, with any increase in price above the demand curve. Feedback: Correct. With perfectly elastic demand, any increase in price above that represented by the demand curve will result in a quantity demanded of zero.
Louisa sends candy to the troops overseas. When Louisa's income rises by 3 percent, her quantity demanded of candy increases by 5 percent. For Louisa, the income elasticity of demand for candy is
positive, and candy is a normal good. Feedback: Correct. A normal good is one for which quantity demanded increases as income increases. Normal goods have positive income elasticities.
The percentage change in quantity demanded divided by the percentage change in price computes the
price elasticity of demand. The price elasticity of demand measures the responsiveness of buyers to a change in the price of a good. The price elasticity of demand is computed as the percentage change in quantity demanded divided by the percentage change in price.
You are in charge of increasing revenue for the city's bus service. The mayor advises you to reduce the price of a bus ticket to get more riders, but you think a more prudent approach would be to increase the price of a bus ticket. Your approach is based on the assumption that
the demand for bus tickets is inelastic, and the mayor believes the demand for bus tickets is elastic. Feedback: Correct. When demand is inelastic, higher prices result in higher revenue.
A key determinant of the price elasticity of supply is whether
the sellers have a long or short amount of time to adjust to a price change. Feedback: Correct. The key determinant of the price elasticity of supply is the duration of time the sellers have to adjust to a price change.
Marco says that he will spend exactly $100 per month on restaurant meals, regardless of the price of restaurant meals. Marco's demand for restaurant meals is
unit elastic. If Marco spends exactly $100 on restaurant meals, regardless of the price of restaurant meals, the percent change in his quantity demanded will match exactly any percent change in the price, indicating unit elastic demand.
A concert venue sells 15,000 tickets to a show, regardless of the market price. For this firm, the price elasticity of supply is
zero If all of the tickets sell, regardless of the price, then the sellers have perfectly inelastic supply. With perfectly inelastic supply, elasticity equals zero.
