Homework 5

If the price increases by 10 percent and the quantity demanded falls by 5 percent, the absolute value of the price elasticity of demand will be Multiple Choice 1. 0.5 2. 5.0 3. 50 4. −5.0

1. 0.5

If demand is elastic, then Multiple Choice 1. an increase in price will reduce total revenue. 2. an increase in price will increase total revenue. 3. a decrease in price will reduce total revenue. 4. a decrease in price will have no effect on total revenue.

1. an increase in price will reduce total revenue.

If the elasticity of demand is 3, and the price rises by 15 percent, then Multiple Choice 1. the quantity demanded will increase by 5 percent. 2. the quantity demanded will fall by 45 percent. 3. the quantity demanded will rise by 4.5 percent. 4. the percentage change in quantity demanded will fall as income rises.

2. the quantity demanded will fall by 45 percent.

A demand curve that is perfectly inelastic is Multiple Choice 1. horizontal. 2. vertical. 3. upward-sloping. 4. downward-sloping.

2. vertical.

For product X, the price elasticity of demand has an absolute value of 3.5. This means that quantity demanded will increase by Multiple Choice 1. 1 percent for each 3.5 percent decrease in price, ceteris paribus. 2. 1 unit for each $3.50 decrease in price, ceteris paribus. 3. 3.5 percent for each 1 percent decrease in price, ceteris paribus. 4. 3.5 units for each $1 decrease in price, ceteris paribus.

3. 3.5 percent for each 1 percent decrease in price, ceteris paribus.

Suppose that in a week the price of Greek yogurt decreases from $1.75 to $1.25 per container. At the same time, the quantity of Greek yogurt demanded increases from 10,000 to 18,000 containers per week. What is the price elasticity of demand for Greek yogurt? Instructions: Round your response to one decimal place.

Price elasticity (E) = % change in quantity demanded/ (divided by)% change in price % change in quantity = change in quantity/average quantity Price: went from 1.75 to 1.25 Change: 0.5 Average: 1.5 = 0.5/1.5 = 0.333333 = 33.33% Quantity: went from 10000 to 18000 Change: 8000 Average: 14000 = 0.5714 = 57.14% Answer: 57.14/33.33 = 1.7%

Refer to the figure and table to answer the following questions. In the graph, the horizontal axis is labeled Quantity Demanded (ounces per show) and the vertical axis is labeled Price (dollars per ounce). The horizontal axis ranges from 0 to 30 in increments of 2 units and the vertical axis ranges from 0 to 0.50 in increments of 0.05 unit. The graph shows a falling curve. Coordinates shown by the curve are as follows: A (1, 0.50), B (2, 0.45), C (4, 0.40), D (6, 0.35), E (9, 0.30), F (12, 0.25), G (16, 0.20), H (20, 0.15), I (25, 0.10) and J (30, 0.05). All the values are approximated. Instructions: In part a, round your responses to one decimal place. In part b, round your responses to two decimal places. a. Compute the price elasticity between points C and D and points H and I. C to D = H to I = b. Compute the total revenue at points C, D, H, and I. Point C = $ Point D = $ Point H = $ Point I = $ c. If there is a price decrease, total revenue will increase when demand is (Click to select) inelastic or elastic.

a. C-D Quantity: went from 4 to 6 Change: 2 Average: 5 = 2/5 = 0.4 Price: went from 0.40 to 0.35 Change: 0.05 Average: 0.375 = 0.05/0.375 = 0.1333 Answer: 0.4/0.133 = 3.0 H-I Quantity: went from 20 to 25 Change: 5 Average: 22.5 = 5/22.5 = 0.222 Price: went from 0.15 to 0.10 Change: 0.05 Average: 0.125 = 0.05/0.125 = 0.4 Answer: 0.22/0.4 = 0.55 = 0.6 b. Total revenue = Price × Quantity sold 1.60; 2.10; 3.00; 2.50 c. elastic