Elasticity HW
Consider the market for a new CD, where the price is initially $10.00 and 20 thousand copies are sold, as indicated in the figure at point A. The music company is considering lowering the price to $9.00, at which price 24 thousand copies would be sold. What is total revenue at the initial price (at point A)? Revenue is initially ______ thousand.
200 thousand total revenue is $200 thousand, from a price of $10.00 multiplied by 20 thousand units sold.
Determinants of the price elasticity of demand
>Availability of close substitutes ≻Passage of time ≻Luxuries versus necessities ≻Narrowness of definition of the market ≻Share of the good in the consumer's budget
Normal good
If the quantity demanded of a good increases as income increases, then the good is a normal good.
perfect inelastic demand
The case where the quantity demanded is completely unresponsive to price, and the price elasticity of demand equals zero. in this case, the demand curve is vertical
Perfect elastic demand
The case where the quantity demanded is infinitely responsive to price, and the price elasticity of demand equals infinity. In this case, the demand curve is horizontal.
How to determine when a product is elastic vs inelastic
The demand for a good will be more elastic the larger the share of the good in the average consumer's budget. People tend to buy pencils infrequently and in small quantities, compared to "big-ticket" items such as clothes. Therefore, the demand for pencils is likely more inelastic.
In particular, the supply curve for a particular product will be increasingly more elastic over a ______ period of time.
longer The supply curve for a product will be inelastic if we measure it over a short period of time, but increasingly more elastic the longer the period of time over which we measure it.
Consider the market for a new DVD movie, where the price is initially $20 and 20 copies are sold per day at a superstore, as indicated in the figure to the right. The superstore is considering lowering the price to $16. What is the price elasticity of demand between these two prices (use the Midpoint Formula)? The price elasticity of demand is ____. (Enter your response as a real number rounded to two decimal places.)
-1/50 Price elasticity of demand is the responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in quantity demanded of a product by the percentage change in the product's price. using the midpoint formula price elasticity of demand= percentage change in quantity demanded/percentage change in price price elasticity of demand= (20-28)/((20+28)/2) divided by (20-16)/((20+16)/2) = 0.3333/-0.2222= -1.5
Suppose income increases by 10 percent and, as a result, the quantity of a particular brand of automobile demanded (holding the price for this particular automobile constant) increases by 9 percent. The income elasticity of demand for this brand of car is ________. (Enter your response rounded to two decimal places and include a minus sign if appropriate.) this particular brand of automobile is a _____ good
0.90 The income elasticity of demand A measure of the responsiveness of quantity demanded to changes in income, measured by the percentage change in quantity demanded divided by the percentage change in income: Income elasticity of demand= Percentage change in quantity demanded/ Percentage change in income. Therefore, the income elasticity of demand for this brand of car is: Income elasticity of demand=910=0.90. normal Normal good If the quantity demanded of a good increases as income increases, then the good is a normal good. Inferior good A good is inferior if the quantity demanded falls when income increases. In this example, an increase in income increases the quantity of the automobile demanded, so this brand of car is a normal good.
What would total revenue be at the lower price (at point B)? Revenue would be ______ thousand.
216 In particular, total revenue would be $216 thousand, from a price of $9.00 multiplied by 24 thousand units sold.
inferior good
A good is inferior if the quantity demanded falls when income increases.
income elasticity of demand
A measure of the responsiveness of quantity demanded to changes in income, measured by the percentage change in quantity demanded divided by the percentage change in income: Income elasticity of demand= Percentage change in quantity demanded/ Percentage change in income.
What is the impact of an increase in worker productivity when demand is relatively more elastic? A. An increase in sales revenue received by the firm. B. A large increase in the price received by the firm. C. A small increase in the price received by the firm. D. A decline in sales revenue received by the firm.
A. An increase in sales revenue received by the firm.
Compare the demand for pencils with demand for clothes. The demand for pencils is likely A. more inelastic because pencils tend to represent a smaller fraction of a consumer's budget. B. more elastic because pencils tend to be purchased in larger quantities. C. more inelastic because pencils tend to be purchased more frequently. D. more elastic because pencils tend to represent a larger fraction of a consumer's budget. E. more elastic because pencils tend to represent a smaller fraction of a consumer's budget.
A. more inelastic because pencils tend to represent a smaller fraction of a consumer's budget.
How is the price elasticity of demand measured? The price elasticity of demand is measured as A. the percentage change in the quantity demanded divided by the percentage change in price. B. price divided by the quantity demanded. C. the slope of the demand curve. D. the percentage change in the quantity demanded divided by the percentage change in the quantity supplied. E. the change in price divided by the change in the quantity demanded.
A. The price elasticity of demand is measured as the percentage change in the quantity demanded divided by the percentage change in price.
3. Would you expect PA-12 to be price elastic or inelastic? A. It is very elastic in the short run; however, as substitutes become available, it will become relatively more inelastic. B. It is very inelastic in the short run; however, as substitutes become available, it will become relatively more elastic. C. It would be expected to be very elastic, but according to the graph, it is almost perfectly inelastic. D. It would be expected to be very inelastic, but according to the graph, it is almost perfectly elastic.
B. It is very inelastic in the short run; however, as substitutes become available, it will become relatively more elastic.
Suppose Wendy's hamburgers have many close substitutes available. If so, then an increase in the price of Wendy's hamburgers will likely A. decrease the quantity of Wendy's hamburgers demanded by a relatively small amount. B. decrease the quantity of Wendy's hamburgers demanded by a relatively large amount. C. increase the quantity of Wendy's hamburgers demanded by a relatively small amount. D. increase the quantity of Wendy's hamburgers demanded by a relatively large amount. E. not change the quantity of Wendy's hamburgers demanded.
B. decrease the quantity of Wendy's hamburgers demanded by a relatively large amount. If a product has more substitutes available, it will have more elastic demand. If a product has fewer substitutes available, it will have less elastic demand. Since Wendy's hamburgers have many close substitutes, their demand will be relatively elastic, and a price increase will decrease the quantity demanded by a relatively large amount.
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 A. identify price elasticity of demand by asking for government assistance. B. estimate price elasticity of demand by experimenting with different prices. C. approximate price elasticity of demand with market signals such as surpluses. D. guess price elasticity of demand based on market competition. E. identify price elasticity of demand by using price controls to set price ceilings.
B. estimate price elasticity of demand by experimenting with different prices.
Compare the demand for water with the demand for wine. The demand for water is likely A. relatively more elastic because water is a luxury. B. relatively more inelastic because water is a necessity. C. relatively more inelastic because water is a luxury. D. equally elastic as the demand for wine. E. relatively more elastic because water is a necessity.
B. relatively more inelastic because water is a necessity. Determinants of the price elasticity of demand: ≻Availability of close substitutes ≻Passage of time ≻Luxuries versus necessities ≻Narrowness of definition of the market ≻Share of the good in the consumer's budget The demand curve for a luxury is more elastic than the demand curve for a necessity. Water is more of a necessity than wine, so the demand for water is likely relatively more inelastic.
In addition, assume that between 1950 and 2017 the income of the average American increased substantially and that wheat is a normal good. With this increase in income, A. the price of wheat will be unaffected. B. the amount by which the price of wheat rises will be smaller the lower the income elasticity of wheat. C. the amount by which the price of wheat rises will be smaller the higher the income elasticity of wheat. D. the amount by which the price of wheat falls will be smaller the higher the income elasticity of wheat. E. the amount by which the price of wheat falls will be larger the higher the income elasticity of wheat.
B. the amount by which the price of wheat rises will be smaller the lower the income elasticity of wheat. Income elasticity of demand A measure of the responsiveness of quantity demanded to changes in income, measured by the percentage change in quantity demanded divided by the percentage change in income. If wheat is a normal good, then an increase in income will increase the demand for wheat, raising the market price of wheat. If the income elasticity of wheat is low, then this increase in demand will be smaller, and the price of wheat will increase by a smaller amount than if the income elasticity of demand for wheat were high.
Over the past 30 years, the price of oil has been relatively unstable, fluctuating between $11.00 and well over $100 per barrel. Which of the following potentially contributes to oil-price instability? Oil prices are relatively unstable because A. the demand for oil is elastic. B. the supply of oil is inelastic. C. the income elasticity of demand for oil is negative. D. the market for oil is relatively competitive. E. OPEC has been successful in controlling the quantity of oil its members supply.
B. the supply of oil is inelastic. When a price elasticity is low (small in absolute value), small percentage changes in quantity correspond to large percentage changes in price. The combination of inelastic supply and inelastic demand in the market for oil has resulted in shifts in supply causing relatively large changes in price.
Consider the demand curve illustrated in the figure to the right. Is demand elastic or inelastic? A. Demand is elastic at all prices above $12.00 and inelastic at all prices below $12.00. B. Demand is inelastic (at all prices). C. Demand is elastic at all prices above $10.00 and inelastic at all prices below $10.00. D. Demand is inelastic at all prices above $10.00 and elastic at all prices below $10.00. E. Demand is elastic (at all prices)
C. Demand is elastic at all prices above $10.00 and inelastic at all prices below $10.00. midpoint= ((X1+X2)/2 + (Y1+Y2)/2) (0+10)/2= 5 + (20+0)/2=10)= 5,10 Along most demand curves, elasticity is not constant. For example, elasticity is not constant along a linear demand curve. At prices above the midpoint of a linear demand curve, demand is elastic, and at prices below the midpoint of a linear demand curve, demand is inelastic. Therefore, demand is elastic at all prices above $10.00 and inelastic at all prices below $10.00.
Suppose a professional basketball game is to be played at a suburban arena, which increases demand for parking on the night of the game. If the suburban area has the ability to create additional parking during periods of peak demand, then A. the supply of parking will be more elastic and the price of parking will increase by a relatively large amount the night of the game. B. the supply of parking will be more inelastic and the price of parking will increase by a relatively small amount the night of the game. C. the supply of parking will be more elastic and the price of parking will increase by a relatively small amount the night of the game. D. the supply of parking will be more inelastic and the price of parking will not change the night of the game. E. the supply of parking will be perfectly elastic and the price of parking will increase by a relatively large amount the night of the game.
C. the supply of parking will be more elastic and the price of parking will increase by a relatively small amount the night of the game. When demand increases, the amount that price increases depends on the price elasticity of supply. Price increases more when supply is inelastic. Price increases by less when supply is elastic. The ability to create additional parking makes the supply of parking relatively elastic, resulting in the price of parking increasing by a relatively small amount the night of the game.
In another example, suppose market research shows that a particular brand of truck is a normal good and a necessity. If so, then the income elasticity of demand for this truck is A. negative. B. positive. C. less than 1 but greater than 0. D. greater than 1. E. zero.
C. less than 1 but greater than 0 Normal good If the quantity demanded of a good increases as income increases, then the good is a normal good. Normal goods are often further subdivided into luxury goods and necessity goods: Luxury: A good is a luxury if the quantity demanded is very responsive to changes in income, so that a 10 percent increase in income results in more than a 10 percent increase in quantity demanded. Necessity: A good is a necessity if the quantity demanded is not very responsive to changes in income, so that a 10 percent increase in income results in less than a 10 percent increase in quantity demanded. If the brand of truck is a normal good and a necessity, then the income elasticity of demand is less than 1 but greater than 0.
2. What factors impact price elasticity? A. availability of close substitutes B. time C. proportion of income spent on the product D. All of the above.
D. All of the above. also if the good is a luxury or a necessity
. What is own-price elasticity of demand? A. Price elasticity is a measure of how sensitive the quantity demanded of a product is to a change in price. B. Price elasticity is the ratio of the percentage change in the quantity demanded to the percentage change in price. C. Price elasticity is equal to the slope of the demand curve. D. Both A and B are correct. E. All of the above are correct.
D. Both A and B are correct.
Why might the demand for Post Raisin Bran cereal be more elastic than the demand for all types of breakfast cereals? Post Raisin Bran cereal A. is consumed over a shorter period of time. B. is a smaller share of a consumer's budget. C. is more of a necessity. D. has more substitutes available. E. is defined more broadly.
D. has more substitutes available. If a product has more substitutes available, it will have a more elastic demand. In a narrowly defined market, consumers have more substitutes available. The demand for Post Raisin Bran cereal is likely more elastic than the demand for all cereal because Post Raisin Bran cereal has more substitutes. Alternatively, Post Raisin Bran cereal is a market defined more narrowly.
Instead, suppose pepper and salt were substitutes. If so, then the cross-price elasticity of demand between pepper and salt would be A. negative. B. less than 1. C. zero. D. positive. E. greater than −1.
D. Positive The cross-price elasticity of demand is positive or negative depending on whether the two products are substitutes or complements. An increase in the price of a substitute will lead to an increase in quantity demanded, so the cross-price elasticity of demand will positive. An increase in the price of a complement will lead to a decrease in the quantity demanded, so the cross-price elasticity of demand will be negative. If pepper and salt were substitutes, then the cross-price elasticity of demand would be positive.
Consider the two demand curves illustrated in the figure. Which of the two is relatively more elastic
D2 While elasticity is not the same as slope, it is true that if two demand curves intersect, the one with the smaller slope (in absolute value)—the flatter demand curve—is more elastic. Therefore, D2 is more elastic than D1 because it is flatter.
Consider the demand for cigarettes. Suppose the government decreases the price of cigarettes by lowering cigarette taxes. How will this affect the demand for cigarettes over time? If the price of cigarettes decreases, then the quantity of cigarettes demanded will A. likely never change either initially or over time. B. increase, and this effect will likely remain constant over time. C. decrease, and this effect will likely become larger (in absolute value) over time. D. increase, but this effect will likely become smaller (in absolute value) over time. E. increase, and this effect will likely become larger (in absolute value) over time.
E. increase, and this effect will likely become larger (in absolute value) over time. The more time that passes, the more elastic the demand for a product becomes. This is because it usually takes consumers some time to adjust their buying habits when prices change. Therefore, if the price of cigarettes decreases, then the quantity of cigarettes demanded will increase, and this effect will become larger (in absolute value) over time.
What information must economists have to estimate the price elasticity of demand? To estimate the price elasticity of demand, economists need to know A. the market price and quantity sold. B. the supply curve for a product. C. total revenue. D. the change in price. E. the demand curve for a product.
E. the demand curve for a product. The price elasticity of demand is measured by dividing the percentage change in quantity demanded of a product by the percentage change in the product's price: Price elasticity of demand=Percentage change in quantity demandedPercentage change in price Price elasticity of demand=(Q2−Q1)/Q1 DIVIDED BY (P2−P1)/P1, where the initial price and quantity demanded are P1 and Q1 and the final price and quantity demanded are P2 and Q2. To calculate this (to identify these prices and quantities), economists need to know the demand curve for a product.
market experiments
Firms try different prices and observe the change in quantity demanded that results. That is, when firms are unsure of the price elasticity of the demand curves they face (such as when firms introduce new products), they often experiment with different prices to help determine the price elasticity of demand.
Given this change in total revenue, is demand between these prices elastic or inelastic? Demand (in this range of prices) is elasticelastic.
In this example, a decrease in price increases total revenue, so demand is elastic.
cross price elasticity of demand
The percentage change in quantity demanded of one good divided by the percentage change in the price of another good: Cross-price elasticity of demand= Percentage change in quantity demanded of one good/ Percentage change in price of another good.
price elasticity of supply
The responsiveness of quantity supplied to a change in price, measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the product's price.
total revenue
The total amount of funds received by a seller of a good or service, calculated by multiplying the price per unit by the number of units sold.
cross price elasticity of demand when considering substitutes and compliments
The cross-price elasticity of demand is positive or negative depending on whether the two products are substitutes or complements. Substitute: An increase in the price of a substitute will lead to an increase in quantity demanded, so the cross-price elasticity of demand will positive. Complement: An increase in the price of a complement will lead to a decrease in the quantity demanded, so the cross-price elasticity of demand will be negative. If the cross-price elasticity of demand between beer and wine is 0.31, then beer and wine are substitutes.
At what price is total revenue maximized? Total revenue is maximized when price equals $1010. (Enter your response as a real number rounded to two decimal places.)
Total revenue is maximized when the demand curve is unit elastic. That is, total revenue is maximized at the price at the midpoint of a linear demand curve. Therefore, total revenue is maximized at a price of $10.00.
In addition, Gao and colleagues have estimated the income elasticity of demand for beer to be −0.09. If so, then beer is A. a normal good that is a necessity. B. an inferior good. C. a normal good that is a luxury. D. a luxury that may be a normal good or an inferior good. E. a normal good that may be a luxury or a necessity.
b. an inferior good Normal good If the quantity demanded of a good increases as income increases, then the good is a normal good. Normal goods are often further subdivided into luxury goods and necessity goods: Luxury: A good is a luxury if the quantity demanded is very responsive to changes in income, so that a 10 percent increase in income results in more than a 10 percent increase in quantity demanded. Necessity: A good is a necessity if the quantity demanded is not very responsive to changes in income, so that a 10 percent increase in income results in less than a 10 percent increase in quantity demanded. Inferior good A good is inferior if the quantity demanded falls when income increases. If the income elasticity of demand for beer is −0.09, then beer is an inferior good.
In this example, pepper and salt are ____
compliments The cross-price elasticity of demand is positive or negative depending on whether the two products are substitutes or complements. An increase in the price of a substitute will lead to an increase in quantity demanded, so the cross-price elasticity of demand will positive. An increase in the price of a complement will lead to a decrease in the quantity demanded, so the cross-price elasticity of demand will be negative. In this example, an increase in the price of pepper decreases the quantity of salt demanded, so pepper and salt are complements.
Which of the following is a primary determinant of the price elasticity of supply? The price elasticity of supply is affected by A. whether the good produced is a luxury or a necessity. B. the share of the good in consumer budgets. C. the definition of the market. D. the passage of time. E. whether the good produced has close substitutes available.
d. passage of time Whether supply is elastic or inelastic depends on the ability and willingness of firms to alter the quantity they produce as price changes. Often, firms' ability to alter the quantity of the product they supply is affected by the passage of time.
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 demand for Post Raisin Bran cereal is _______, and the demand for all types of breakfast cereals is _______
elastic, inelastic Demand is elastic when the percentage change in quantity demanded is greater than the percentage change in price, so the price elasticity of demand is greater than 1 in absolute value. Demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price, so the price elasticity is less than 1 in absolute value. Therefore, the −2.5 price elasticity of demand for Post Raisin Bran cereal is elastic and the −0.9 price elasticity of demand for all types of breakfast cereals is inelastic.
Gao and colleagues have estimated that the cross-price elasticity of demand between beer and spirits is 0.15. If the price of spirits increases by 10 percent, then the quantity of beer demanded will _____ by ______ percent. (Enter your response rounded to one decimal place.)
increase, 1.5 Cross-price elasticity of demand The percentage change in quantity demanded of one good divided by the percentage change in the price of another good. If the cross-price elasticity of demand between beer and spirits is 0.15 and the price of spirits increases by 10 percent, then the quantity of beer demanded will increase by 1.5 percent.
Between 1950 and 2017, the price of wheat fell dramatically from $19.23 per bushel to $3.85 per bushel. Suppose between 1950 and 2017, the supply of wheat increased substantially due to increases in productivity, shifting the wheat supply curve to the right. With this supply shift, the amount by which the price of wheat falls will be larger the more ___________ the demand for wheat.
inelastic Elastic demand Demand is elastic when the percentage change in quantity demanded is greater than the percentage change in price. Inelastic demand Demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price. If the supply of wheat increases, then this will decrease the market price of wheat. If the price elasticity of demand for wheat is inelastic, then this decrease in price will be larger than if the price elasticity of demand for wheat were more elastic.
when demand is elastic what happens to price and total revenue
price and total revenue move inversely: An increase in price reduces total revenue, and a decrease in price raises total revenue.
when demand is inelastic what happens to price and total revenue
price and total revenue move in the same direction: An increase in price raises total revenue, and a decrease in price reduces total revenue.
Economist X. M. Gao and two colleagues have estimated that the cross-price elasticity of demand between beer and wine is 0.31. If so, then beer and wine are ________.
substitues The cross-price elasticity of demand is positive or negative depending on whether the two products are substitutes or complements. Substitute: An increase in the price of a substitute will lead to an increase in quantity demanded, so the cross-price elasticity of demand will positive. Complement: An increase in the price of a complement will lead to a decrease in the quantity demanded, so the cross-price elasticity of demand will be negative. If the cross-price elasticity of demand between beer and wine is 0.31, then beer and wine are substitutes.
Suppose the price of pepper increases by 25 percent and, as a result, the quantity of salt demanded (holding the price of salt constant) decreases by 6 percent. The cross-price elasticity of demand between pepper and salt is ________. (Enter your response rounded to two decimal places and include a minus sign if appropriate.)
-0.24 Cross-price elasticity of demand The percentage change in quantity demanded of one good divided by the percentage change in the price of another good: Cross-price elasticity of demand= Percentage change in quantity demanded of one goodPercentage change in price of another good. Therefore, the cross-price elasticity of demand between pepper and salt is: Cross-price elasticity of demand=−625=−0.24.
