Ch. 4 - Elasticity

Among the following groups—senior executives, junior executives, and students—which is likely to have the most and which is likely to have the least price-elastic demand for membership in the Association of Business Professionals? The group with the most price-elastic demand: The group with the least price-elastic demand:

1. Students 2. Senior executives

Price x quantity equals ___.

1. Total Revenue 2. Total Expenditure

Total expenditure equals:

1. Total Revenue: The dollar amount that consumers spend on a product 2. PxQ (The dollar mount that sellers receive)

If a 2 percent increase income leads to a 4 percent increase in the quantity of gasoline demanded, then the income elasticity of demand for gasoline is:

2 Reason: The income elasticity of demand is 2 = 4/2

If the price of cheese falls by 1 percent and the quantity demanded rises by 3 percent, then the price elasticity of demand for cheese is equal to

3

If the quantity supplied decreases by 6 percent in response to a 2 percent drop in prices, then the price elasticity of supply is:

3 Reason: The price elasticity of supply equals the percentage change in quantity supplied divided by the corresponding percentage change in price (in this case, 6÷2).

If quantity demanded goes up by 10 percent when price falls by 2 percent, then the price elasticity of demand is:

5 Reason: The price elasticity of demand is the percentage change in the quantity demanded divided by the percentage change in price (10/2)

if the price elasticity of demand is infinite, then demand is

perfectly elastic

If the price elasticity of supply is zero, then supply is _____.

perfectly inelastic

The income elasticity of demand for potatoes is

the percentage by which the quantity of potatoes demanded changes in response to a 1 percent change in income.

The elasticity of supply is:

the percentage change in quantity supplied in response to a 1 percent change in price.

The cross-price elasticity of demand is

the percentage change in the quantity demanded of one good in response to a 1 percent change in the price of another good.

Given that there are only so many operations the world's top brain surgeon can perform every year, the price elasticity of supply for his or her services is likely to be

very low Reason: When goods or services are produced using unique and essential inputs, the price elasticity of supply is likely to be very low.

Given that there are only so many people who can stand at the top of the Eiffel tower at any point in time, the price elasticity of supply for tickets to the Eiffel tower is likely to be

very low Reason: When goods or services are produced using unique and essential inputs, the price elasticity of supply is likely to be very low.

Given that it's costly to build new oil wells to drill for oil, the price elasticity of supply for crude oil is likely to be

very low in the short run Reason: When goods are produced using unique and essential inputs, the price elasticity of supply is likely to be very low.

If supply is perfectly inelastic with respect to price, then the price elasticity of supply is _____.

zero

What good has the lowest price elasticity of demand?

Food Reason: Food has few (if any) substitutes, so the price elasticity of demand is relatively low.

The price elasticity of supply for basmati rice (an aromatic strain of rice) is likely to be which of the following?

Higher in the long run than the short run, because farmers cannot easily change their decisions about how much basmati rice to plant once the current crop has been planted.

What is the formula for the price elasticity of demand?

P/Q x 1/slope

The price elasticity of demand is

The percentage change in quantity demanded that results from a 1% change in price.

Suppose your cousin makes cutting boards that he sells on Etsy.com. Can he increase his total revenue by increasing the price of his cutting boards?

Yes, but only if the price elasticity of demand is less than one.

If the demand for economy-class airline tickets is elastic with respect to price, then if the price of economy-class airline tickets increases, then total expenditure will ___.

decrease Reason: If demand is elastic with respect to price, total expenditure will decrease in response to a price increase.

Suppose the demand for first-class airline tickets is inelastic with respect to price. If the price of first-class airline tickets decreases, then total expenditure will _____.

decrease Reason: If demand is inelastic with respect to price, total expenditure will decrease in response to a price decrease.

If the price of sofas goes up by 10 percent and the quantity of sofas demanded falls by 15 percent, then the total expenditure on sofas will

decrease Reason: if the percentage increase in price is less than the percentage decrease in quantity demanded, then total expenditure will decrease.

If the cross-price elasticity of demand for bike helmets with respect to the price of bikes is -0.25, then if the price of bikes increases by 10 percent, the quantity of bike helmets demanded will

decrease by 2.5 percent.

The percentage change in quantity supplied that results from a 1 percent change in price is the

elasticity of supply

If the price elasticity of demand for beer is 1.19, and the price of beer goes up by 1 percent, then the quantity of beer demanded will ___.

go down by 1.19% Reason: the elasticity of demand is the percentage change in quantity demanded that results from a 1 percent change in price. In this case, quantity demanded goes down since price goes up.

If the price elasticity of supply for tobacco is 5, then if the price of tobacco goes down by 1 percent, the quantity of tobacco supplied will

go down by 5 percent Reason: The price elasticity of supply is the percentage change in quantity supplied that results from a 1 percent change in price. In this case, since price goes down, quantity supplied goes down.

If the price elasticity of supply for cotton is 1, then if the price of cotton goes down by 5 percent, the quantity of cotton supplied will

go down by 5 percent Reason: The price elasticity of supply is the percentage change in quantity supplied that results from a 1 percent change in price. So you multiply the elasticity of supply by 5 to get the percentage change in quantity supplied that results from a 5 percent change in price. In this case, since price falls, quantity supplied will go down.

If the price elasticity of demand for coffee is 0.25, and the price of coffee goes down by 1 percent, then the quantity of coffee demanded will

go up by 0.25 percent

If the price elasticity of supply for dishwashers is 0.2, then if the price of dishwashers goes up by 8 percent, the quantity of dishwashers supplied will

go up by 1.6 percent Reason: The quantity of dishwashers supplied will go up by 1.6 percent since 0.2×8=1.6.

If the price elasticity of supply for gasoline is 1.6, then if the price of gas goes up by 1 percent, the quantity of gasoline supplied will

go up by 1.6 percent Reason: The price elasticity of supply is the percentage change in quantity supplied in response to a 1 percent change in price. In this case, since price goes up, quantity supplied goes up.

When a good has many close substitutes, the price elasticity of demand tends to be relatively ___.

high

If Sal's Pizzeria uses tomato sauce, dough and cheese to make both pizza and calzones, then the price elasticity of supply for pizza at Sal's is likely to be relatively _____.

high Reason: In general, the easier it is to shift inputs away from the production of one good towards another, the more responsive will be the quantity supplied to a change in price.

The elasticity of demand for a given brand of ice cream is likely to be ___ than the elasticity of demand for ice cream in general.

higher Reason: since there are more substitution possibilities for a given brand of ice cream than for ice cream in general, the elasticity of demand for a given brand of ice cream is likely to be higher than the elasticity of demand for ice cream in general.

If the demand for economy-class airline tickets is elastic with respect to price, then if the price of economy-class airline tickets decreases, then total expenditure will _____.

increase Reason: If demand is elastic with respect to price, total expenditure will increase in response to a price decrease.

If the cross-price elasticity of demand for motorcycles with respect to the price of cars is 0.05, then if the price of cars increases by 10 percent, the, the quantity of motorcycles demanded will

increase by 0.5 percent. 0.05 x 10 (cross-price elasticity of demand)

If supply is perfectly elastic with respect to price, then the price elasticity of supply is _____.

infinite

The elasticity of demand for a good that has very few substitutes is usually relatively ___.

low

All else equal, the price elasticity of demand for small-budget items such as soap tends to be ___ than the price elasticity of demand for big-ticket items such as flat-screen TVs.

lower

If the quantity of spaghetti demanded decreases by 4 percent in response to a 12 percent increase in the price of pasta sauce, then the cross-price elasticity of demand for spaghetti with respect to the price of pasta sauce is:

-0.33 Reason: The cross-price elasticity of demand for spaghetti with respect to the price of pasta sauce is the percentage by which the demand for spaghetti changes in response to a 1 percent change in the price of pasta sauce, which in this case is calculated as -4/12 = -0.33

If a 6 percent decrease income leads to a 9 percent increase in the quantity of lottery tickets demanded, then the income elasticity of demand for lottery tickets is:

-1.5 Reason: The income elasticity of demand is 9/-6 = -1.5

If quantity demanded goes down by 3 percent when price rises by 6 percent, then the price elasticity of demand is:

.5 Reason: The price elasticity of demand is the percentage change in the quantity demanded divided by the percentage change in price (3/6)

If the quantity of Big Macs demanded decreases by 4 percent in response to an 8 percent decrease in the price of Whoppers, then the cross-price elasticity of demand for Big Macs with respect to the price of Whoppers is:

0.5 Reason: The cross-price elasticity of demand for Big Macs with respect to the price of Whoppers is the percentage by which the demand for Big Macs changes in response to a 1 percent change in the price of Whoppers, which in this case is calculated as −4/−8 = 0.5.

If the quantity supplied decreases by 2 percent in response to a 4 percent drop in prices, then the price elasticity of supply is:

0.5 Reason: The price elasticity of supply equals the percentage change in quantity supplied divided by the corresponding percentage change in price (in this case, 2÷4).

If a 5 percent increase income leads to a 2.5 percent decrease in the quantity of oatmeal demanded, then the absolute value of the income elasticity of demand for oatmeal is

0.5 Reason: 2.5/5 (income elasticity of demand)

A 2 percent increase in the price of milk causes a 4 percent reduction in the quantity demanded of chocolate syrup. What is the cross-price elasticity of demand for chocolate syrup with respect to the price of milk? Cross-price elasticity of demand: Two goods are ___ because when the cross-price elasticity of demand is:

1. -2 Reason: The reduction in the quantity demanded of chocolate syrup is 4 percent so it represents -4. The 2 percent increase in the price of milk is represented by 2. So -4/2 equals -2. 2. Complements 3. Negative, the goods are complements

The price elasticity of supply will tend to be higher when _____.

1. It's easy to find or produce substitute inputs 2. the time horizon is longer