ECON130 Exam 2

If the price of haircuts increased from $18 to $24 and the quantity decreased from 35 to 28 units, what is the price elasticity of demand?

0.78

If a disease destroys this year's soybean crop,

equilibrium price will rise.

It is generally true that the more substitutes a good has, ....

the more elastic the demand curve of that good.

If demand shifts right and supply shifts left,

the new equilibrium quantity will be indeterminate.

Suppose we know that the price elasticity of demand of good X is equal to -1.2. Then, if its price will increase by 5%, we can predict with certainty that

the quantity demanded of that good will decrease by 6%.

If minimum wage is increased,

the quantity of labor supplied will increase.

If a new bakery enters the market, we can expect

the supply curve to shift right.

Which of the following are determinants of price elasticity?

Whether the good is a necessity or luxury; The price of the good relative to income.; The availability of substitutes.

Suppose when Eric earns a salary of $20,000, he buys 20 fast food meals per year. When Eric gets a raise and earns a salary of $30,000, he buys 10 fast food meals per year. Calculate the income elasticity of demand, and decide whether Eric considers fast food meals a normal or inferior good.

-1.67; Eric considers fast food an inferior good.

Suppose you are a government official tasked with placing a tax on a good to raise funds for public education. Which of the following would you most likely tax if you wished to maximize tax revenue?

Cigarettes

Suppose McDonalds sells 500 burgers at the price of $3 per burger. If it increases its price to $7, the sales drop to 300. Calculate the new revenue and determine price elasticity of demand.

Revenue = $2100; demand is inelastic

If the price elasticity of a certain good is elastic, what would happen to the revenue earned from that good if its price decreases slightly?

Revenue will increase.

If demand is price elastic, then

a fall in price will lower the quantity demanded.

To compute elasticity

calculate the percentage change in quantity divided by the percentage change in price

A 10% increase in the price of movie ticket in Westridge 8 leads to a 15% decrease in the number of tickets sold, indicating the demand for movie ticket in Westridge 8 is

elastic

If a 5% rise in price results in an 8% change in demand, the product is

elastic.

If chicken and pork are substitutes and the price of chicken increases,

demand for pork will increase.

A good with relatively elastic demand is more likely to be a _____, or a good with _____ substitutes.

luxury; many

A shortage in a market is

when supply is less than demand.