ECON 5

For a good that is a luxury, demand

tends to be elastic.

Studies indicate that the price elasticity of demand for cigarettes is about 0.4. A government policy aimed at reducing smoking changed the price of a pack of cigarettes from $2 to $6. According to the midpoint method, the government policy should have reduced smoking by

40 percent.

If scientists discover that steamed milk, which is used to make lattés, prevents heart attacks, what would happen to the equilibrium price and quantity of lattés?

Both the equilibrium price and quantity would increase.

Suppose the income of buyers in a market for an inferior good decreases and a technological advancement occurs also. What would we expect to happen in the market?

Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous.

Suppose the number of buyers in a market increases and a technological advancement occurs also. What would we expect to happen in the market?

Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous.

If the price of natural gas rises, when is the price elasticity of demand likely to be the highest?

One year after the price increase

For which pairs of goods is the cross-price elasticity most likely to be positive?

Pens and pencils

If the demand for a product increases, then we would expect equilibrium price

and equilibrium quantity both to increase.

The price elasticity of demand measures

buyers' responsiveness to a change in the price of a good.

If the cross-price elasticity of two goods is negative, then the two goods are

compliments.

At the equilibrium price, the quantity of the good that buyers are willing and able to buy

exactly equals the quantity that sellers are willing and able to sell.

Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers are to a change in price, the

flatter the demand curve will be

If the demand for donuts is elastic, then a decrease in the price of donuts will

increase total revenue of donut sellers.

Goods with many close substitutes tend to have

more elastic demands.

Assume that a 4 percent increase in income results in a 2 percent increase in the quantity demanded of a good. The income elasticity of demand for the good is

positive, and the good is a normal good.

Suppose roses are currently selling for $40 per dozen, but the equilibrium price of roses is $30 per dozen. We would expect a

surplus to exist and the market price of roses to decrease.

If the price of walnuts rises, many people would switch from consuming walnuts to consuming pecans. But if the price of salt rises, people would have difficulty purchasing something to use in its place. These examples illustrate the importance of

the availability of close substitutes in determining the price elasticity of demand.

Cross-price elasticity of demand measures how

the quantity demanded of one good changes in response to a change in the price of another good.

If the supply of a product increases, then we would expect equilibrium price

to decrease and equilibrium quantity to increase.