Module 3.8

Suppose the cross-price elasticity of demand between grapefruit juice and orange juice is approximately 6. What does this mean? A 1 percent increase in the price of grapefruit juice leads to a 6 percent increase in orange juice consumption. If the price of grapefruit juice rises by $1, 6 more cartons of orange juice will be purchased. A 6 percent decrease in the price of grapefruit juice leads to a 1 percent increase in orange juice consumption. The demand for orange juice is 6 times greater than the demand for grapefruit juice.

A 1 percent increase in the price of grapefruit juice leads to a 6 percent increase in orange juice consumption.

Consider the following pairs of items: a. shampoo and conditioner b. iPhones and earbuds c. a laptop computer and a desktop computer d. beef and pork e. air-travel and weed killer Which of the pairs listed will have a negative cross-price elasticity? Answers: a and b only c and d only e only a, b, and c only

a and b only

Demand for a luxury item, such as a yacht, is likely to be Answers: both income inelastic and price inelastic. income inelastic and price elastic. both income elastic and price elastic. income elastic and price inelastic.

both income elastic and price elastic.

Which of the following goods would have the most inelastic demand? Answers: big screen TVs ski vacations luxury cars bread

bread

If the price of steel increases drastically, the quantity of steel demanded by the building industry will fall significantly over the long run because Answers: buyers of steel are more sensitive to a price change if they have more time to adjust to the price change. profits will fall by a greater amount in the long run than in the short run. buyers of steel are less sensitive to a price change if they have more time to adjust to the price change. sales revenue in the building industry will fall sharply.

buyers of steel are more sensitive to a price change if they have more time to adjust to the price change.

Income elasticity measures how a good's quantity demanded responds to Answers: change in buyers' incomes. change in the goods price. producers' incomes. change in the price of another good.

change in buyers' incomes.

The larger the share of a good in a consumer's budget, holding everything else constant, the Answers: more vertical is a consumer's demand curve. more price inelastic is a consumer's demand. more price elastic is a consumer's demand. more unit elastic is a consumer's demand.

more price elastic is a consumer's demand.

If you expect the economy is going to boom and average income in the economy will rise in the foreseeable future, the type of firm that would be able to increase its sales if your expectations are met is Answers: one that sells a luxury good. one that sells a price-inelastic good. one that sells an inferior good. one that sells a necessity good.

one that sells a luxury good

The cross-price elasticity of demand measures the Answers: percentage change in the price of one good divided by the percentage change in the quantity demanded of another good. percentage change in the quantity demanded of one good divided by the percentage change in the price of another good. absolute change in the quantity demanded of one good divided by the absolute change in the price of another good. percentage change in the quantity demanded of one good in one location divided by the price of the same good in another location.

percentage change in the quantity demanded of one good divided by the percentage change in the price of another good.