MICROECONOMICS CHAPTER 6

If price and total revenue vary in opposite directions, demand is:

relatively elastic

How would the following changes in price affect total revenue? That is, would total revenue increase, decrease, or remain unchanged? PRICE FALLS AND DEMAND IS OF UNIT ELASTICITY:

remain unchanged

A period of time too short to change plant capacity but long enough to use the fixed-sized plant more intensively or less intensively.

short run

Cross elasticity is positive

substitute good

PRICE: $5; $4; $3; $2; $1 QUANTITY DEMANDED: 10; 13; 15; 19; 25 At a price of $3, the total revenue of sellers will be:

$45

Complete the total revenue column from the demand-schedule data given below. Price: $5; $4; $3; $2; $1; Quantity demanded: 1; 2; 3; 4; 5; Total revenue =

$5; $8; $9; $8; $5

Suppose the cross elasticity of demand for products A and B is +3.6. What can you conclude about how products A and B are related?

A and B are substitutes

Suppose the cross elasticity of demand for products C and D is -5.4. What can you conclude about products C and D?

C and D are complements

MOVIES: +3.4 DENTAL SERVICES: +1.0 CLOTHING: +0.5 The values indicates that: a. a 1 percent increase in income will increase the quantity of movies demanded by 3.4 percent. b. a 10 percent increase in income will increase the demand for clothing by 20 percent. c. a 5 percent increase in the price of dental services will decrease the demand for dental services by 5 percent. d. movies and dental services are normal goods, but clothing is an inferior good.

a. a 1 percent increase in income will increase the quantity of movies demanded by 3.4 percent.

MOVIES: +3.4 DENTAL SERVICES: +1.0 CLOTHING: +0.5 A negative income-elasticity coefficient means that: a. the good is inferior such that if income falls, the quantity demanded of the good will rise. b. the good is inferior such that if the price falls, the quantity demanded of the good will rise. c. the good is inferior such that if income falls, the quantity demanded of the good will fall. d. the good is normal such that if the price falls, the quantity demanded of the good will rise.

a. the good is inferior such that if income falls, the quantity demanded of the good will rise.

The elasticity of demand for a product is likely to be greater: a. if the product is a necessity, rather than a luxury good. b. the greater the amount of time over which buyers adjust to a price change. c. the smaller the proportion of one's income spent on the product. d. the smaller the number of substitute products available.

b. the greater the amount of time over which the buyers adjust to a price change.

A supply curve that is a vertical straight line indicates that: a. production costs for this product cannot be calculated. b. the relationship between price and quantity supplied is inverse. c. a change in price will have no effect on the quantity supplied. d. an unlimited amount of the product will be supplied at a constant price.

c. a change in price will have no effect on the quantity supplied

Economists distinguish among the immediate market period, the short run, and the long run by noting that: a. supply is most elastic in the short run and least elastic in the immediate market period. b. demand is most elastic in the short run, and least elastic in the long run. c. supply is most elastic in the long run and least elastic in the immediate market period. d. supply is most elastic in the short run and least elastic in the long run.

c. supply is most elastic in the long run and least elastic in the immediate market period.

How to find the percent change in quantity demanded

change in price of X / original price of X

Cross elasticity is negative

complementary goods

Measures the sensitivity of consumer purchases of one product (call it X) to a change in the price of some other product (call it Y).

cross elasticity of demand

A company doing marketing research finds that a 10 percent increase in its product's price would create a 15 percent decrease in the quantity demanded of its product. Based on this information, demand for the company's product is: Using this same information, the company should ________ the price of its product.

elastic; lower

A supply curve that is parallel to the horizontal axis suggests that: a. the industry is organized monopolistically. b. the relationship between price and quantity supplied is inverse. c. a change in demand will change price in the same direction. d. a change in demand will change the equilibrium quantity but not price.

d. a change in demand will change the equilibrium quantity but not price

How would the following changes in price affect total revenue? That is, would total revenue increase, decrease, or remain unchanged? PRICE FALLS AND DEMAND IS INELASTIC:

decrease

How would the following changes in price affect total revenue? That is, would total revenue increase, decrease, or remain unchanged? PRICE RISES AND DEMAND IS ELASTIC:

decrease

If demand decreases, then total revenues will :

decrease

Demand is _______ if a specific percentage change in price in the denominator results in a larger percentage change in quantity demanded in the numerator. (Ed > 1)

elastic

Elastic or inelastic? BOTTLED WATER:

elastic

Elastic or inelastic? CREST TOOTHPASTE:

elastic

Elastic or inelastic? DIAMOND BRACELETS:

elastic

Price and total revenue move in the opposite direction when demand is

elastic

A firm produced and sells two goods, A and B. Good A is known to have many close substitutes; Good B makes up a significant portion of most families' budgets. From these facts, we would expect that the demand for Good A would be _______, which that of Good B would be ______.

elastic; elastic also

The length of time over which producers are unable to respond to a change in price with a change in quantity supplied.

immediate market period

Measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good.

income elasticity of demand

How would the following changes in price affect total revenue? That is, would total revenue increase, decrease, or remain unchanged? PRICE FALLS AND DEMAND IS ELASTIC:

increase

How would the following changes in price affect total revenue? That is, would total revenue increase, decrease, or remain unchanged? PRICE RISES AND DEMAND IS INELASTIC:

increase

How would the following changes in price affect total revenue? That is, would total revenue increase, decrease, or remain unchanged? PRICE RISES AND SUPPLY IS ELASTIC:

increase

How would the following changes in price affect total revenue? That is, would total revenue increase, decrease, or remain unchanged? PRICE RISES AND SUPPLY IS INELASTIC:

increase

Cross elasticity is zero

independent (unrelated) goods

A specific percentage change in price produces a smaller percentage change in quantity demanded (Ed < 1)

inelastic

Elastic or inelastic? KETCHUP:

inelastic

Elastic or inelastic? MICROSOFT'S WINDOWS OPERATING SYSTEM:

inelastic

Elastic or inelastic? TOOTHPASTE:

inelastic

Suppose that the price of movie tickets changes. The price change leads to a 20 percent decrease in the quantity demanded of movie tickets. This causes the total revenue from movie tickets to increase by 10 percent. Is the demand for movie tickets elastic, inelastic, or unit-elastic?

inelastic

Airlines charge business travelers more than leisure travelers because there is a more: (elastic or inelastic / demand or supply)

inelastic demand for business travel

Income elasticity is negative

inferior goods

Suppose that the price of product X rises by 20 percent and the quantity supplied of X increases by 15 percent. The coefficient of price elasticity of supply for good X is:

less than 1, and therefore supply is inelastic

A time period long enough for firms to adjust their plant sizes and for new firms to enter (or existing firms to leave) the industry.

long run

The total revenue received by sellers of a good is computed by:

multiplying the price times the quantity sold

Research has found that an increase in the price of beer would reduce the amount of marijuana consumed. This research indicates that the cross elasticity of the two products is: (positive or negative / complements or substitutes)

negative, and beer and marijuana are complements

Cross elasticity of demand measures how sensitive purchases of a specific product are to changes in:

the price of some other product

Income elasticity is positive

normal or superior goods

The formula for demand elasticity is

percent change in quantity demanded of product X / percent change in price of product X

Formula for income elasticity of demand

percentage change in quantity demanded / percentage change in income

Formula for cross elasticity of demand

percentage change in quantity demanded of product X / percentage change in price of product Y

Formula for price elasticity of supply.

percentage change in quantity supplied of product X / percentage change in price of product X

In extreme cases, where a price change results in no change in the quantity demanded.

perfectly inelastic

Consumers' responsiveness (or sensitivity) to a price change is measured by a product's ______.

price elasticity of demand

The degree of ______ depends on how quickly and easily producers can shift resources between alternative uses.

price elasticity of supply

Formula for total revenue.

price times quantity sold

What are the major determinants of price elasticity of demand?

proportion of income, luxuries versus necessities, time, and substitutability

The formula for cross elasticity of demand is percentage change in:

quantity demanded of X / percentage change in price of Y

A percentage change in price and the resulting percentage change in quantity demanded are the same (Ed = 1)

unit elasticity

Gus buys cupcakes every Saturday morning. When he walks into the bakery, he always orders by saying, "Give me $10 worth of cupcakes." What does this tell you about Gus's elasticity of demand for cupcakes? Gus's demand for cupcakes is:

unit-elastic

Suppose that the total revenue received by a company selling basketballs is $600 when the price is set at $30 per basketball and $600 when the price is set at $20 per basketball. Without using the midpoint formula, identify whether demand is elastic, inelastic, or unit-elastic over this price range.

unit-elastic