Microeconomics Ch6

The Demand for Notebook Computers. Total revenue at point V equals the:

area 0TVN.

The price elasticity of demand measures the

responsiveness of quantity demanded to a change in price.

Raina consumes 100% more mechanical pencils when the price of felt-tip pens increases by 50%. For Raina, pencils and pens are _____, and the cross-price elasticity of demand is _____.

substitutes; 2

The Demand Curve. If the price is $3, total revenue is _____. If the price is $4, total revenue is _____.

$21; $24

The Demand Curve. If the price is $5, total revenue is:

$25

Suppose the price of e-books is initially $20 but decreases to $15. The absolute value of the percentage change in price (by the midpoint method) is approximately _____%.

28

The Demand for Shirts. The price elasticity of demand for the segment BC, by the midpoint method, is:

3

Price Elasticity. What is the price elasticity of demand (using the midpoint formula) between $2.25 and $2.00?

5.67

Supply Curves. Which graph shows a perfectly inelastic supply curve?

A

The price of pretzels increases and the demand for tortilla chips decreases, so we can assume that these two goods are:

complementary

As you move down a linear demand curve, the price elasticity of demand will:

decrease

Linear Demand Curve II. If price was initially set at $8 and then increased to $10, total revenue would:

decrease, as the price effect is dominated by the quantity effect.

Yovanka has diabetes, and she will pay any amount of money for insulin. What is the BEST characterization of Yovanka's demand for insulin?

perfectly price-inelastic

There is NO total revenue test for price elasticity of supply because:

price and quantity supplied are usually positively related.

Decreases in input costs and a longer time since a price change will tend to:

increase the price elasticity of supply.

A demand curve that is perfectly inelastic is:

vertical

Gas prices recently increased by 25%. In response, purchases of gasoline decreased by 5%. According to this finding, the price elasticity of demand for gas is

0.2

Paolo owns a pizza shop. The price of pizza recently increased from $3 to $5 a slice. Paolo responded by increasing the quantity of slices he supplied from 100 to 150 slices per day. By the midpoint method, Paolo's price elasticity of supply is:

0.8

Suppose at $10 the quantity demanded is 100. When the price falls to $8, the quantity demanded increases to 130. The price elasticity of demand (using the midpoint formula) between $10 and $8 is approximately:

1.17

If the price of burritos increases from $4 to $6 and customers decrease their consumption from 20 to 10 burritos, what is the price elasticity of demand (by the midpoint method)?

1.67

If the price of chocolate-covered peanuts increases and the demand for strawberry-flavored soft drinks decreases, this indicates that these two goods are _____ goods.

Complementary

Estimating Price Elasticity. Between the two prices, P1 and P2, which demand curve has the HIGHEST price elasticity?

D3

[True/False] You are the manager of a supermarket, and you know that the cross-price elasticity of peanut butter to jelly is exactly -2.0. Because of a bad grape harvest, grape jelly prices are expected to rise by 10% next year. To account for the change in demand, you should stock 10% more peanut butter.

False

Suppose the cross-price elasticity between two goods is zero. What does this tell you about these two goods?

If the cross-price elasticity between the two goods is zero then that means that the two goods are unrelated to each other. Goods that are substitutes will have a positive cross-price elasticity of demand. Goods that are complements will have a negative cross-price elasticity of demand.

Which statement is TRUE? When the income elasticity of demand is positive, the good is inferior. When the income elasticity of demand is negative, the good is normal. Income elasticity of demand measures how much the quantity demanded of a good is affected by changes in consumers' incomes. Income elasticity of demand measures the effect of the change in one good's price on the quantity demanded of the other good.

Income elasticity of demand measures how much the quantity demanded of a good is affected by changes in consumers' incomes.

A hotel has a fixed capacity of 100 rooms in the short run. Which statement BEST describes the short-run elasticity of supply for rooms at this hotel?

The elasticity of supply is zero in the short run because the short-run supply curve is vertical.

If total revenue goes down when the price falls, demand is said to:

be price-inelastic

The price elasticity of demand for ground beef has been estimated to be 1.0. If mad cow disease strikes the United States and a large percentage of the cattle are removed from the market, how will that affect total expenditures on ground beef, all other things equal?

Total expenditures will remain unchanged.

[True/False] The price elasticity of demand for gasoline is likely to be higher in the long run than in the short run.

True

The city government is losing millions of dollars on its buses and subways. The government proposes to increase the fare by 20% to raise revenue and has asked for your advice. You know that the price elasticity of demand for mass transit in the city is approximately equal to 0.75. What do you think of the proposal to increase the fare to raise revenue for the city? Be as specific as possible.

With an elasticity of 0.75 it means that for every percentage increase, the demand for using mass transit will reduce by 15% (20% increase in price x 0.75=0.15 reduction in demand). However, revenue will increase as a result of the price hike so the proposal to increase the fares will result in more revenue to the city government.

Suppose the income elasticity for cross-country bus trips is -2 and the income elasticity for cross-country plane trips is +2. Does this make sense? Explain your answer.

Yes this makes sense because when the income elasticity of a good - cross-country plane trip - is positive then it is considered a normal good compared to an inferior good, such as a cross-country bus trip, which happens when the income elasticity of demand is negative.

Sonik, a wireless phone company, tested the effect of a price reduction for text messaging. It lowered prices from $0.08 to $0.04 per message and found that the number of messages sent tripled. This means that the:

demand for text messaging is elastic in this price range.

A price ceiling below equilibrium will cause a larger shortage when demand is _____ and supply is _____.

elastic; elastic

The long-run price elasticity of supply of crude oil is _____ the short-run price elasticity of supply of crude oil.

greater than

The income elasticity of demand of a normal good is always:

greater than 0.

Suppose the income of canned pinto bean consumers rises. All else equal, we can conclude that the:

income elasticity of demand is positive if beans are a normal good.

The Demand Curve. Between prices $4 and $5, demand is _____, and total revenue will _____ if price increases.

inelastic; increase

If your purchases of shoes decrease from 11 pairs per year to 9 pairs per year when your income increases from $19,000 to $21,000 a year, other things equal, for you, shoes are considered a(n) _____ good.

inferior

The Demand for Shirts. By the midpoint method, the price elasticity of demand for the segment EF is:

less than the price elasticity of demand for segment DE.

If your income increases and your consumption of bagels increases, other things equal, bagels are considered a(n) _____ good.

normal