Chapter 9

Reference: Ref 9-1 __(Figure: The Demand Curve) Examine the figure The Demand Curve. If the price is $8, total revenue is _____. If the price is $7, total revenue is _____.

$16; $21

When the price of chocolate-covered peanuts increases from $1.55 to $2.00, the quantity demanded decreases from 220 to 180. If the price is $1.55, total revenue is _____, and if the price is $2.00, total revenue is _____.

$341; $360

A quantity effect

After a price increase, fewer units are sold, which tends to lower revenue.

Which statement will lead to a decrease in total revenue?

The price increases and demand is price-elastic.

The price elasticity of demand for fresh zucchini has been estimated to be 2.25. A new irrigation system yields a 25% increase in the nation's crop of fresh zucchini. Which statement best describes how this will affect total expenditures on zucchini, all other things equal?

Total expenditures will rise.

If demand for a good is inelastic,

a higher price increases total revenue. In this case, the quantity effect is weaker than the price effect.

If demand for a good is unit-elastic,

an increase in price does not change total revenue. In this case, the quantity effect is weaker than the price effect.

If demand for a good is elastic,

an increase in price reduces total revenue. In this case, the quantity effect is stronger than the price effect.

Demand is perfectly elastic

any price increase will cause the quantity demanded to drop to zero. When demand is perfectly elastic, the demand curve is a horizontal line.

Reference: Ref 9-2 __(Figure: Demand for Notebook Computers) Examine the figure The Demand for Notebook Computers. Total revenue at point S equals the:

area 0PSM.

After a price increase,

each unit sold sells at a higher price, which tends to raise revenue.

When the price elasticity of demand is greater than 1, economists say that demand is:

elastic

Joe manages a popular nightclub and lately revenues have been disappointing. Joe's bouncer suggests that raising drink prices will increase revenues, but his bartender suggests that decreasing drink prices will increase revenues. Joe is not sure who is right, but he does know that:

his bouncer thinks the demand for drinks is inelastic, whereas his bartender thinks the demand for drinks is elastic.

After a price decrease, the quantity effect tends to:

increase total revenue.

When the price elasticity of demand is less than 1, they say that demand is:

inelastic

Demand for vegetables at a small farmers' market is steady, but the supply of vegetables has decreased because of a drought. This is good news for farmers if demand is:

inelastic and the price effect outweighs the quantity effect.

Total revenue

is the total value of sales of a good or service. It is equal to the price multiplied by the quantity sold.

Reference: Ref 9-7 __(Figure: The Demand for Shirts) Examine the figure The Demand for Shirts. Using the midpoint method, the price elasticity of demand for the segment BC is:

less than the price elasticity of demand for the segment AB.

When the price elasticity of demand is infinite, economists say that demand is

perfectly elastic.

Suppose the price of gasoline increases 10% and quantity of gasoline demanded in Orlando drops 5% per day. Demand for gasoline in Orlando is:

price inelastic.

Reference: Ref 9-5 __(Figure: The Demand Curve for Oil) Examine the figure The Demand Curve for Oil. In the figure, the price elasticity of demand between $20 and $21 is:

price-inelastic, because the price elasticity is less than 1.

Reference: Ref 9-8 __(Figure: The Market for e-Books) Examine the figure The Market for e-Books. If the price of e-Books decreases from $6 to $4, total revenue _____, which means that demand is _____.

remains constant at $360; unit elastic

All other things equal, the price elasticity of a good will tend to be larger:

the longer the relevant time period.

Demand is perfectly inelastic when

the quantity demanded does not respond at all to changes in the price. When demand is perfectly inelastic, the demand curve is a vertical line.

When demand is elastic,

the quantity effect dominates the price effect; so a fall in price increases total revenue.

When demand is inelastic,

the quantity effect is dominated by the price effect; so a fall in price reduces total revenue.

When demand is unit-elastic,

the two effects exactly balance each other out; so a fall in price has no effect on total revenue.

if the strengths of the two effects are exactly equal,

total revenue is unchanged by the price increase.

unit-elastic

where the price elasticity of demand is exactly 1

four main factors that determine elasticity:

whether close substitutes are available, whether the good is a necessity or a luxury, the share of income a consumer spends on the good, and how much time has elapsed since the price change.