chapter 6

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If 50 units are sold at a price of​ $20 and 80 units are sold at a price of​ $15, what is the absolute value of the price elasticity of​ demand? Use the midpoint formula.

1.62

Which of the pairs listed will have a negative crossminus−price ​elasticity?

a and b

If a 5 percent increase in income leads to a 10 percent increase in quantity demanded for airline​ travel, then airline travel is

a luxury

Which of the following items is likely to have the highest income elasticity of​ demand?

a vacation

Consider the market for Amazon DVDs. The price elasticity of demand for this product would become more elastic if it

had more close substitutes

If tolls on a toll road can be raised significantly before commuters will consider using a free​ alternative, then an increase in tolls will result in

increase in total revenue

Consider the demand for cigarettes. Suppose the government decreases the cost of cigarettes by lowering cigarette taxes. How will this affect the demand for cigarettes over​ time? If the cost of cigarettes decreases​, then the quantity of cigarettes demanded will

increase​, and this effect will likely become larger​ (in absolute​ value) over time.

Studies show that the income elasticity of demand for wine is approximately five. What does this​ mean?

A one percent increase in income leads to a five percent increase in wine consumption.

Consider the two demand curves illustrated in the figure to the right. Which of the two is relatively more elastic.. ​?

D1

Consider the demand curve illustrated in the figure to the right. Is demand elastic or​ inelastic?

Demand is elastic at all prices above ​$7.00 and inelastic at all prices below ​$7.00. At what price is total revenue​ maximized? Total revenue is maximized when price equals 7

Which of the following statements about the price elasticity of demand is ​correct?

Demand is more elastic in the long run than it is in the short run.

For this​ consumer's household, is the cross-price elasticity of demand between lettuce and other green vegetables positive or​ negative

POSITIVE

Consider the market for a new​ CD, where the price is initially ​$6.00 and 36 thousand copies are​ sold, as indicated in the figure to the right at point A. The music company is considering lowering the price to ​$5.00, at which price 40 thousand copies would be sold. What is total revenue at the initial price​ (at point​ A)?

Revenue is initially 216 What would total revenue be at the lower price​ (at point​ B)? Revenue would be 200 Given this change in total​ revenue, is the price elasticity of demand between these prices elastic or​ inelastic? The price elasticity of demand​ (in this range of​ prices) is inelastic

Which of the following goods would have the most inelastic​ demand?

bread

Which of the pairs listed will have a positive cross−price ​elasticity?

c and d

If a firm wanted to know whether the demand for its product was​ elastic, unit​ elastic, or​ inelastic, then the firm could

change price a little bit and observe what happens to total revenue.

Over the past 30​ years, the price of oil has been relatively​ unstable, fluctuating between​ $11.00 and well over​ $100 per barrel.

the price elasticity of supply for oil is inelastic.

If a 12 percent increase in the price of Cheerios causes a 27 percent reduction in the number of boxes of cereal​ demanded, the price elasticity of demand for Cheerios is

-2.25 ELASTIC

Suppose the price of salt increases by 20 percent​ and, as a​ result, the quantity of pepper demanded increases by 5 percent. The​ cross-price elasticity of demand between salt and pepper is

-4/20 -0.2 in this example, pepper and salt are complements If​ so, then the​ cross-price elasticity of demand between pepper and salt would be positive

Two managers have the following conversation. Manager 1​: ​"The only way we can increase the revenue LOADING... we receive from selling our frozen pizzas is by cutting the​ price." Manager 2​: ​"Cutting the price of a product never increases the amount of revenue you receive. If we want to increase​ revenue, we have to increase​ price." Do you agree with the reasoning of Manager​ 2?

. I disagree. Cutting the price will increase the revenue if the demand is price elastic.

Suppose the price of salt increases by 25 percent​ and, as a​ result, the quantity of pepper demanded increases by 4 percent. The​ cross-price elasticity of demand between salt and pepper is

0.16 substitutes negative

Calculate the income elasticity if an 8 percent increase in income leads to a 4 percent increase in quantity demanded for organic produce.

0.5

Suppose income increases by 10 percent​ and, as a​ result, the quantity of a particular brand of automobile demanded increases by 7 percent. The income elasticity of demand for this fbrand of car is

7/10 .7 this brand of automobile is normal good If​ so, then the income elasticity of demand for this truck is less than 1 but greater than 0

Suppose the cross price elasticity of demand between grapefruit fruit and orange juice is approximately 6. What does this​ mean?

A 1 percent decrease in the price of grapefruit juice leads to a 6 percent decrease in orange juice consumption

Suppose the value of the price elasticity of demand is −3. What does this​ mean?

A 1 percent increase in the price of the good causes quantity demanded to decrease by 3 percent.

Based on resale prices for tickets for the 2013 Super Bowl in New​ Orleans, faceminus−value prices for the most expensive tickets to the 2014 game are expected to more than​ double, with significant price increases for lesserminus−valued tickets as well. Evidence indicates that sports teams are more interested in maximizing attendance instead of ticket​ revenue, since greater attendance means more spending on items such as parking and concessions. Higher ticket prices in secondary markets seem to verify that teams are charging less than they could be if their goal was to maximize ticket revenue. ​Source: Patrick​ Rishe, "Super Bowl XLVIII​ Pricing: A Lesson In Demand​ Elasticity," Forbes​, September​ 19, 2013. Refer to the Article Summary. How would sports teams know if they were operating on the elastic portion of the demand curve for​ tickets?

If they increased ticket prices and the total revenue from ticket sales decreased.

For this​ consumer's household, which product has the higher price elasticity of demand ​: bread or​ lettuce

LETTUCE

Consider a demand curve that has a constant elasticity value of 0. What happens to quantity demanded and total revenue when price​ increases?

The quantity demanded does not change but total revenue increases

The publisher of a magazine gives his staff the information in the table to the right. He tells the​ staff, 'Our costs are currently​ $150,000 more than our revenues each month. I propose to eliminate this problem by raising the price of the magazine to​ $3.00 per issue. This will result in our revenue being exactly equal to our​ cost.' Which of the following statements is​ correct?

The​ publisher's analysis is correct only if the demand is perfectly inelastic.

suppose gas has few close substitutes available if so, then an increase in the price of gas will likely

decrease the quantity of gasoline demanded by a relatively small amount.

A service station owner in Staten​ Island, New​ York, was worried that raising the price of gasoline would cause the quantity demanded to fall by so much that he would be in a worse situation than if he did not raise the price. If raising the price of gasoline would cause the owner to receive less total revenue from the sale of​ gasoline, the demand for gasoline is

elastic

MIT economist Jerry Hausman has estimated the price elasticity of demand for Post Raisin Bran cereal to be −2.5 and the price elasticity of demand for all types of breakfast cereals to be −0.9. The price elasticity of demand for Post Raisin Bran cereal is-------and the price elasticity of demand for all types of breakfast cereals is ----

elastic inelastic

Consider firms that introduce new​ products, such as DVDs in 2001. When firms introduce new​ products, how do they typically determine the price elasticity of demand for those​ products? Firms with new products often

estimate price elasticity of demand by experimenting with different prices.

If the price elasticity of demand for canned soup is estimated at −1.62. What happens to sales revenue if the price of canned soup​ rises?

falls

According to a study of the price elasticities of products sold in​ supermarkets, the price elasticity of demand for toothpaste is estimated at minus− 0.45. Which of the following could explain why the price elasticity of demand for toothpaste is so​ low?

few close substitutes for toothpaste

Based on resale prices for tickets for the 2013 Super Bowl in New​ Orleans, faceminus−value prices for the most expensive tickets to the 2014 game are expected to more than​ double, with significant price increases for lesserminus−valued tickets as well. Evidence indicates that sports teams are more interested in maximizing attendance instead of ticket​ revenue, since greater attendance means more spending on items such as parking and concessions. Higher ticket prices in secondary markets seem to verify that teams are charging less than they could be if their goal was to maximize ticket revenue. ​Source: Patrick​ Rishe, "Super Bowl XLVIII​ Pricing: A Lesson In Demand​ Elasticity," Forbes​, September​ 19, 2013. Refer to the Article Summary. The idea that sports teams could charge more for tickets and still increase revenue indicates that tickets are being priced in the​ ________ portion of their demand curve.

inelastic

Between 1950 and​ 2006, the price of wheat fell dramatically from​ $15.81 per bushel to​ $3.40 per bushel.

inelastic the amount by which the price of wheat rises will be smaller the more inelastic the income elasticity of wheat.

If a good has a negative income elasticity of​ demand, this indicates that the good is

inferior

Why might the price elasticity of demand for Post Raisin Bran cereal be more elastic than the price elasticity of demand for all types of breakfast​ cereals? Post Raisin Bran cereal

is defined more narrowly

The demand for all carbonated beverages is likely to be​ ________ the demand for Dr. Pepper.

less elastic than

If demand is​ inelastic, the absolute value of the price elasticity of demand is

less than 1

Compare the price elasticity of demand for sugar with the price elasticity of demand for food. The price elasticity of demand for sugar is likely

more inelastic because pencils tend to represent a smaller fraction of a​ consumer's budget.

An article in the Dallas Morning News discussed the market for green cars such as hybrid​ gasoline, electric​ cars, and diesel cars. One factor the article mentioned as affecting the market for green cars was the increasing gas mileage of conventional​ gasoline-powered cars. ​Source: Terry Box and Troy​ Oxford, "Green Cars Still a Small Part of​ New-Car Sales," Dallas Morning News​, May​ 26, 2013. This factor is likely to cause the demand for green cars to become

more price elastic

With the increased usage of cell−phone ​services, what has happened to the price elasticity of demand for land−line telephone​ services?

more price elastic

Last​ year, Sefton purchased 60 pounds of potatoes to feed his family of five when his household income was​ $30,000. This​ year, his household income fell to​ $20,000 and Sefton purchased 80 pounds of potatoes. All else​ constant, Sefton's income elasticity of demand for potatoes is

negative, so Sefton considers potatoes to be an inferior good.

Price of elasticity of demand

percentage change in quantity demanded ------------------------ percentage in price

According to an article in the Wall Street​ Journal, unlike​ airlines, even elite hotels​ don't have sophisticated systems that can react quickly to changes in demand. Even if they​ could, many hoteliers say people​ don't respond that much to lower rates.​ 'We've tested​ this, cutting our rates by​ $50 [per​ night], and we​ didn't see an appreciable response in​ occupancy,' says Jim​ Schultenover, a vice president for Ritzminus−Carlton. ​Source: Jesse​ Drucker, "In Times of Beltminus−​Tightening, We Seek Reasonable​ Rates", Wall Street Journal​, April​ 6, 2001. Based on the information​ above, the demand for hotel rooms

price inelastic

If a 35 percent increase in price of golf balls led to an 42 percent decrease in quantity​ demanded, then the demand for golf balls is

relatively elastic

​If, for a given percentage increase in​ price, quantity demanded falls by a proportionately smaller​ percentage, then demand is

relatively inelastic

Compare the price elasticity of demand for water with the price elasticity of demand for wine. The price elasticity of demand for wine is likely

relatively more inelastic because water is a necessity

Economist X. M. Gao and two colleagues have estimated that the​ cross-price elasticity of demand between beer and spirits is 0.15. If​ so, then beer and spirits are

substitutes Gao and colleagues have estimated that the​ cross-price elasticity of demand between beer and wine is 0.31. If the price of wine increases by 10​ percent, then the quantity of beer demanded will increase by 3 percent estimated income of demad for beer to be -0.09 If​ so, then beer is inferior good

What information must economists have to estimate the price elasticity of​ demand? To estimate the price elasticity of​ demand, economists need to know

the demand curve for a product.

The price elasticity of supply is affected by

the passage of time shorter

How is the price elasticity of demand​ measured? The price elasticity of demand is measured as

the percentage change in the quantity demanded divided by the percentage change in price.

Suppose a professional basketball game is to be played at a suburban ​arena, which increases demand for parking on the night of the game.

the supply of parking will be more inelastic and the price of parking will increase by a relatively large amount the night of the game.

If demand is perfectly​ inelastic, the absolute value of the price elasticity of demand is

zero

Rank these three items in terms of the elasticity of the demand for them at any given​ price, from most elastic to least​ elastic: hot​ beverages, coffee and​ Peets' Coffee.

​Peets' Coffee,​ coffee, hot beverages


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