ECON 110 Chapter 4 reveiw
Which of the following goods would tend to have the most elastic demand? *All breakfast foods *Breakfast cereal *All bran cereals *Raisin Bran Which of the following goods would tend to have the most inelastic demand? *Pizza, in the short run *Gasoline, in the long run *Gasoline, in the short run *Pizza, in the long run
Raisin Bran and Gasoline, in the short run Explanation: Determinants of price elasticity of demand are the availability of substitutes, whether the good is a luxury or a necessity, cost relative to income, adjustment time, and scope of the market.
Suppose the demand for coffee went from 12 million cups at $2 to 15 million cups at $1.50. Calculate the price elasticity of demand using the mid-point formula. The price elasticity of demand is approximately:
-0.76 Explanation: We use the mid-point method to calculate the price elasticity of demand. The price elasticity of demand equals the percentage change in quantity demanded divided by the percentage change in price (3/13.5)/(−0.50/1.75) = 0.222/−0.2857 = −0.78
When the price of gasoline is set at $4.00, the gas station sells 1,000 gallons per week. When the price of gasoline falls to $3.80, the station sells 1,050 gallons. Calculate the price elasticity of demand using the mid-point formula. The price elasticity of demand is:
-1 Explanation: Price elasticity of demand = (1,050 − 1,000)/ [1,050 + 1,000)/2] / (3.80 − 4.00)/[(3.80 + 4.00)/2] = 0.049/−0.051 = −0.96
When the price of paintings is set at $500, the local art gallery supplies 20 paintings per week. When the price of paintings increases to $750, the gallery supplies 25 paintings. Calculate the price elasticity of supply using the mid-point formula. The price elasticity of supply is:
0.55 Explanation: Price elasticity of supply = (25 − 20)/ [25 + 20)/2] / (750 − 500)/[750 + 500)/2] = 0.22/0.40 = 0.55
Which of the following firms would tend to have the most elastic supply? *A firm that could use only one specific input *A firm that has many substitute production processes for making its product *A firm that is only able to plan one month into the future Which of the following products would tend to have the most inelastic supply? *Paintings by van Gogh *Clothing, which can be produced in a variety of ways *Paintings by a current artist *Agriculture products, which can be produced using a variety of inputs
A firm that has many substitute production processes for making its product and Paintings by van Gogh Explanation: Determinants of price elasticity of supply are the availability of inputs (substitutability of inputs), flexibility of production processes, and adjustment time.
When demand is elastic: *a price decrease causes total revenue to fall. *a price increase causes total revenue to fall. *total revenue is unchanged when price changes. *a price increase causes total revenue to rise.
a price increase causes total revenue to fall Explanation: When demand is elastic, a price increase causes total revenue to fall. This is because the quantity effect outweighs the price effect. If demand was elastic and the price fell, total revenue would increase. In the case of elastic demand, the denominator exceeds the numerator in the elasticity formula.
When two goods are complements, we expect their _______ of supply to be _________ part one: *income elasticity *cross-price elasticity * price elasticity of supply to be part two: *positive *negative *zero
cross-price elasticity and negative Explanation: Cross-price elasticity of demand describes how the quantity demanded of one good changes when the price of a different good changes. If two goods are complements, we expect the quantity of one good demanded to go down when the price of the other good rises and we expect the quantity of one good demanded to go up when the price of the other good falls. This would result in the cross-price elasticity to be a negative.
if the price elasticity of supply is 5, supply is said to be *perfectly elastic *elastic unit *elastic inelastic *perfectly inelastic This means that a 1 percent increase in the price of the product will lead to a ________ change in the quantity supplied. Supply is _______ to price changes. part one: *6 percent *5 percent *4 percent *1 percent part two: *responsive *unresponsive If a 1 percent change in price leads to no change in the quantity supplied, supply is *perfectly elastic *elastic unit *elastic inelastic *perfectly inelastic .
elastic, 5%, responsive, perfectly inelastic Explanation: If the price elasticity of supply is 5, supply is said to be elastic. This means that a 1 percent increase in the price of the product will lead to a 5 percent change in the quantity supplied. Supply is responsive to price changes. If a 1 percent change in price leads to no change in the quantity supplied, supply is perfectly inelastic.
The price elasticity of demand will always be a negative number because: *price and quantity demanded move in the same direction. *price and quantity demanded move in opposite directions. *demand is determined by consumers. *producers and consumers like different prices.
price and quantity demanded move in opposite directions Explanation: Remember that the demand curve is downward sloping; any rise in price will cause quantity demanded to fall, and any fall in price will cause quantity demanded to rise. Since price elasticity of demand measures the consumer's change in quantity demanded when there is a change in price, the measure will be a negative number because price and quantity demanded move in opposite directions.
The income elasticity of demand for a good describes how much: *the quantity supplied changes in response to a change in consumers' incomes. *the quantity demanded changes in response to a change in producers' incomes. *the quantity demanded changes in response to a change in consumers' incomes. *the quantity supplied changes in response to a change in producers' incomes.
the quantity demanded changes in response to a change in consumers' incomes Explanation: The income elasticity of demand for a good describes how much the quantity demanded changes in response to a change in consumers' incomes. We generally differentiate between normal and inferior goods. Normal goods have an income elasticity that is positive. Inferior goods have an income elasticity that is negative.
Supply is more elastic over long periods than over short periods because: *consumers can make more adjustments in the long run than in the short run. *consumers can make fewer adjustments in the long run than in the short run. *producers can make fewer adjustments in the long run than in the short run. *producers can make more adjustments in the long run than in the short run.
producers can make more adjustments in the long run than in the short run Explanation: Whether supply is elastic or inelastic depends on the supplier's ability to change the quantity produced (expand or shrink production) in response to price changes. This leads to differing price elasticities of supply for different supppliers. The factors that influence price elasticity of supply include availability of inputs, the flexibility of the production process, and the time needed to adjust to changes in price. It is easier to expand or shrink production the more time a supplier has to respond to the price change.
Suppose that the income elasticity of a good is known to be 0.5. This good is considered to be ________ *inferior and a luxury *normal and a luxury *normal and a necessity *inferior and a necessity . As consumer incomes rise, the amount of this good purchased will ________ *increase *stay the same *decrease The share of the consumer's budget that will be spent on this good will _______ *increase *stay the same *decrease
question one: normal and a necessity question two: increase question three: decrease Explanation: Suppose that the income elasticity of a good is known to be 0.5. This good is considered to be normal and a necessity. As consumer incomes rise, the amount of this good purchased will increase. The share of the consumer's budget that will be spent on this good will decrease. To see why this is, consider a 10 percent increase in income. Demand will increase by 5 percent. Thus the absolute amount purchased rises, but the share of spending devoted to this type of good (necessities) will decrease.
the price elasticity of supply is always __________ because the quantity supplied moves in the ________ as the price. part one: negative *positive *infinite *zero part two: *same *opposite The price elasticity of demand is always ___________ demanded because the quantity always moves in the __________ direction from the price. part one: negative *positive *infinite *zero part two: *same *opposite
question one: positive and same question two: negative and opposite Explanation: Remember that the supply curve is upward sloping; any rise in price will cause quantity supplied to rise, and any fall in price will cause quantity supplied to fall. Since price elasticity of supply measures the producer's change in quantity supplied when there is a change in price, the measure will be a positive number because price and quantity demanded move in the same direction. Recall that the demand curve is downward sloping; any rise in price will cause quantity demanded to fall, and any fall in price will cause quantity demanded to rise. Since price elasticity of demand measures the consumer's change in quantity demanded when there is a change in price, the measure will be a negative number because price and quantity demanded move in opposite directions.
A perfectly inelastic demand curve is (Click to select) vertical horizontal downward-sloping upward-sloping . Price elasticity of demand is equal to (Click to select) part one: *vertical *horizontal *downward-sloping *upward-sloping part two: *0 * -1 *-∞ . A perfectly elastic demand curve is _______ upward-sloping vertical downward-sloping horizontal . Price elasticity of demand is equal to part one: *vertical *horizontal *downward-sloping *upward-sloping part two: *0 *-∞ *-1 . Along a linear demand curve that is neither perfectly inelastic nor perfectly elastic, price elasticity of demand is _________ * equal to 0 *infinite equal *to a constant number other than -1 *different at different points * equal to -1 .
question one: vertical and 0 question two: horizontal and -∞ question three: different at different points Explanation: A perfectly inelastic demand curve is vertical. Even if the price increases or decreases, consumers demand the same quantity. Thus, the percent change in quantity is 0, and the price elasticity of demand is equal to 0. A perfectly elastic demand curve is horizontal. Consumers are infinitely responsive to prices, and price elasticity of demand is equal to -∞. Along a linear demand curve, price elasticity of demand is different at different points. At very low quantities and high prices, the percent change in quantity will outweigh the percent change in price. At very low prices and high quantities, the percent change in price will outweigh the percent change in quantity.
If the cross-price elasticity of goods A and B is 0.8, these goods are _________ *substitutes *complements *unrelated goods . The size of the number indicates that these goods can best be described as ________ *strong substitutes *weak substitutes *strong complements *unrelated goods *weak complements .
substitutes and weak substitutes Explanation: Since the sign of cross-price elasticity is positive, these goods are substitutes. However, since the number is less than one, they are weak substitutes
