Homework #6

If a 5% rise in price results in an 8% change in quantity demanded, the product is:

elastic.

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

increase

If a good does not have many substitutes, then the demand for this good will be:

inelastic.

Consider two substitute goods: coffee and tea. As a result of a change in the price of coffee from $2 to $3, the quantity demand for tea increased from 1,200 to 1,400 cups. Calculate cross-elasticity of demand for tea using the midpoint formula.

0.38

When the price elasticity of demand is equal to one, this indicates demand is perfectly elastic. True or False

False

If an increase in the price of a good leads to no change in the quantity demanded, this means the demand for this good is:

Perfectly Inelastic

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 = $2,100; inelastic

If the cross price elasticity of demand for two goods is a negative number, this indicates the two goods are complements.

True

If the income elasticity of demand is a positive number, this indicates the good is a normal good. True or False

True

To determine whether two goods are substitutes or complements, one would look at the:

cross-price elasticity of demand.

Suppose that when your income is $1,000 a month, you consume 20 packages of noodle soup. When your income is $2,000, you consume 10 packages of noodle soup. Using the midpoint formula, the income elasticity of demand is:

-1.0

Suppose demand for gasoline is highly inelastic whilst supply is elastic. If the government imposes $0.50 tax (per gallon) on suppliers, how much is paid by buyers and suppliers?

0.45 paid by buyers; 0.5 paid by sellers

When the government levies a tax, the buyers pay more of the tax revenue (compared to the sellers) when:

the demand for the good is inelastic.

It is generally true that the more substitutes a good has:

the more elastic is the demand curve of that good.

Consider the market for milk. If the price elasticity of supply is equal to 0.5, this implies that a 1% increase in the price of milk leads to a:

0.5% increase in the quantity of milk supplied.

Suppose the government imposes an "alcohol tax" on the sellers. The more elastic the demand curve, the:

less tax revenue will be generated.