Microeconomics - Elasticity-Practice- test2

The income elasticity of demand measures

how much the quantity demanded responds to changes in consumers' income.

The cross-price elasticity of demand measures

how much the quantity demanded of one good responds to the price of another good.

Price elasticity of demand measures

how much the quantity demanded responds to changes in the price.

Income elasticity of demand

measures how much the quantity demanded of a good responds to a change in consumers' income. It is computed as the percentage change in the quantity demanded divided by the percentage change in income.

If the price elasticity of demand for a good is unitary and price rises by 20 %, what happens to sales of the good?

sales fall by 20%

There are 3 goods: sneakers, boots and socks. Relating two of them will always yield a positive cross elasticity of demand. Which two?

sneakers and boots, because they are substitutes.

Ey = + 0.4: this good is a normal good

a rise in income of 10% would lead to demand rising by 4%

Goods which are substitutes

Cross Elasticity will have a positive sign (positive relationship)

Goods which are complements

Cross Elasticity will have negative sign (inverse relationship)

Formula of Income elasticity of demand

Income elasticity of demand = Percentage change in quantity demanded/Percentage change in income

Types of Goods

Normal Goods and Inferior Goods.

Significance of Price Elasticity of Demand

Significance of Price Elasticity of Demand

Ey = - 0.6: this good is an inferior good

a rise in income of 10% would lead to demand falling by 6%

Example of Cross Elasticity of Demand

% Qd of good A __________________ % Price of good B

If Ey = 2, then by what % must incomes of consumers rise in order to double sales of this good?

50%

If Ed = 1, then demand is said to be unit elastic

An increase in price will have no impact on total revenue • A decrease in price will have no impact on total revenue

If Ed < 1, then demand is said to be inelastic

An increase in price will increase total revenue • A decrease in price will decrease total revenue

If Ed > 1, then demand is said to be elastic

An increase in price will reduce total revenue • A decrease in price will increase total revenue

Income elasticity of demand

Higher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods.

Ey = + 1.6: this good is a normal good

a rise in income of 10% would lead to demand rising by 16%

Ey = - 2.1: this good is an inferior good

a rise in income of 10% would lead to a fall in demand of 21%

Cross Elasticity

measures the responsiveness of demand for one good to changes in the price of a related good - either a substitute or a complement

In most markets, supply is

more elastic in the long run than in the short run

IGiven: Ed = 0 a perfectly inelastic demand. if a 100$ tax was placed on production, how much of it would truly be paid by the producer?

none at all, since the buyer has no choice, the burden is passed completely to him in the form of a higher market price

Price elasticity of demand is calculated as

the percentage change in quantity demanded divided by the percentage change in price.

If a demand curve is elastic

total revenue falls when the price rises

If it is inelastic

total revenue rises as the price rises

Inferior Goods

with income elasticities that are negative

Normal Goods

with income elasticities that are positive

If profit equals revenue, then cost must equal

zero