CH 4 Elasticity

ΔP represents

a small change in the current price

calculate the price elasticity of demand

as the percentage change in quantity demanded divided by the corresponding percentage 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, if he charges more his revenue obviously will increase. Yes, but only if the price elasticity of demand is greater than one. Yes, but only if the price elasticity of demand is less than one.

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

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 0.25 percent. decrease by 2.5 percent. decrease by 25 percent. increase by 0.25 percent.

decrease by 2.5 percent.

If the price elasticity of demand is less than 1 and price decreases, then total expenditure will increase. decrease. stay the same.

decrease.

perfectly elastic demand

demand is perfectly elastic with respect to price if price elasticity of demand is infinite -Price elasticity of demand is thus infinite at every point along a horizontal demand curve, has a slope of zero

perfectly inelastic demand

demand is perfectly inelastic with respect to price if price elasticity of demand is zero -vertical demand curves, which means that its slope is infinite -Price elasticity of demand is thus exactly zero at every point along the curve

If consumers can easily switch to a close substitute when the price of a good increases, demand for that good is likely to be -elastic. -inelastic. -unit elastic. -perfectly inelastic.

elastic.

All else equal, compared to small-budget items such as paper towels, the price elasticity of demand for big-ticket items such as refrigerators is -higher. -lower. -very low. -equal.

higher

Low-income families spend a greater share of their budget on electricity than do high-income families. Thus, we would expect the price elasticity of demand for electricity to be _____ for low-income families than for high-income families. higher lower

higher Reason: All else equal, the larger the share of a consumer's budget spent on a good, the higher will be the price elasticity of demand for that good.

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. -lower -higher

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.

Revinue

income, especially when of a company or organization and of a substantial nature. (Rev=P*Q)

If the demand for first-class airline tickets is inelastic with respect to price, then if the price of first-class airline tickets increases, then total expenditure will _____. Multiple choice question. increase stay the same decrease

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

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 5 percent. increase by 0.05 percent. increase by 0.5 percent. decrease by 5 percent.

increase by 0.5 percent.

If the price elasticity of demand is less than 1 and price increases, then total expenditure will stay the same. decrease. increase.

increase.

If the price of lawnmowers goes up by 9 percent and the quantity of lawnmowers demanded falls by 5 percent, then the total expenditure on lawnmowers will -increase -decrease -remain unchanged

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

Changes in price and changes in total expenditure move in the same direction when the price elasticity of demand is less than 1. less than zero. greater than 1.

less than 1.

Given that most people spend a relatively small share of their budget on pencils, we would expect the elasticity of demand for pencils to be relatively _____. -high -low

low Reason: The smaller the share of people's budget an item accounts for, the lower will be the price elasticity of demand.

Suppose a local politician proposes that the price of lottery tickets be cut in half in order to reduce the total amount that people spend on lottery tickets. This plan will -only be effective if the demand for lottery tickets is inelastic with respect to price. -only be effective if the demand for lottery tickets is elastic with respect to price. -surely be effective since total expenditure obviously will fall if lottery tickets are cheaper.

only be effective if the demand for lottery tickets is inelastic with respect to price.

inelastic

the demand for a good is inelastic with respect to price if its price elasticity of demand is less than 1. ( not many substitutes)

unit elastic

the demand for a good is unit elastic with respect to price if its price elasticity of demand equals 1

total expenditure (or total revenue)

the dollar amount that consumers spend on a product (P × Q) is equal to the dollar amount that sellers receive

income elasticity of demand

the percentage by which a good's quantity demanded changes in response to a 1 percent change in income

cross-price elasticity of demand

the percentage by which the quantity demanded of the first good changes in response to a 1 percent change in the price of the second

Price elasticity of demand

the percentage change in the quantity demanded of a good or service that results from a 1 percent change in its price

If the quantity of spaghetti demanded decreases by 4 percent in response to an 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 3 0.33 -3

-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: 0.33 1.5 -0.33 -1.5

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

If a 12 percent decrease income leads to a 3 percent decrease in the quantity of pedicures demanded, then the income elasticity of demand for pedicures is: -0.25 4 -4 0.25

0.25 Reason: The income elasticity of demand is 0.25 = 3/12.

If the absolute value of slope of the demand curve is 2.5, price is $6 per unit, and the quantity demanded is 8 units, then the price elasticity of demand is 0.3 0.533 1.6 1.875

0.3 how is (6/8)*(1/2.5) (P/Q)*(1/slope)

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

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 2 -2 -0.5

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 income elasticity of demand for pasta is -1.0, then a 10 percent decrease income will lead to a _____ in the quantity of pasta demanded. 1 percent decrease 1 percent increase 10 percent decrease 10 percent increase

10 percent increase Reason: A 10 percent increase since -1.0×-10=10.

If the income elasticity of demand for iPhones is 1.3, then a 10 percent decrease income will lead to a _____ in the quantity of iPhones demanded. 1.3 percent increase 13 percent decrease 13 percent increase 1.3 percent decrease

13 percent decrease Reason: A 13 percent decrease since 1.3×-10=-13.

If a 10 percent decrease in the price of a good leads to a 20 percent increase in the quantity demanded, then what is the price elasticity of demand?

2

If the price elasticity of demand for pineapples is 0.75, then a 4 percent increase in the price of pineapples will lead to a 3 percent decrease in the quantity of pineapples demanded 3 percent increase in the quantity of pineapples demanded. 0.75 percent decrease in the quantity of pineapples demanded. 0.75 percent increase in the quantity of pineapples demanded.

3 percent decrease in the quantity of pineapples demanded

Suppose that, in an attempt to entice citizens to conserve energy, the government enacted regulations requiring that all air conditioners be more efficient in their use of electricity. After this regulation was implemented, government officials were then surprised to discover that people used even more electricity than before. Using the concept of price elasticity, which of the following statements best explains how this increase might have occurred? -The government ignored the possibility that the demand curve for electricity might be upward sloping. -In practice, people often pay little attention to the relevant costs and benefits when deciding how much of a good, like electricity, to use. -There is no way the observed change could have occurred if all consumers were fully informed, self-interested, and rational. -Because the regulation effectively reduced the price of cool air, consumers with sufficiently elastic demand might have bought substantially more of it.

?? not The government ignored the possibility that the demand curve for electricity might be upward sloping.

If the percentage change in the price of a good is less than the resulting percentage change in the quantity demanded of that good, then the demand for that good is -elastic -inelastic -unit elastic -perfectly inelastic

??? unit elastic not-inelastic

To increase total revenue, firms with ______ demand should lower price, and firms with ______ demand should increase price. -elastic; unit -elastic; inelastic -inelastic; elastic -unit; inelastic

???? elastic; inelastic not -inelastic; elastic

If the price elasticity of demand for cigarettes is 0.55, and the price of cigarettes increases by 10 percent, then the quantity of cigarettes demanded will fall by 0.55 percent. 5.5 percent. 55 percent. 550 percent.

????? 5.5 not-0.55 percent.

Which of the following is likely to have the highest price elasticity of demand? -Shoes -Running shoes -Nike running shoes -The price elasticity of demand will be the same for all of the answers listed.

Nike running shoes

Which of the following is the formula for the price elasticity of demand? -Q/P×1/slope -P/Q÷1/slope -∆Q/∆P×1/slope -P/Q×1/slope

P/Q×1/slope

In the figure (is a vertical line) demand is Perfectly inelastic with respect to price Unit elastic with respect to price perfectly elastic with respect to price

Perfectly inelastic with respect to price

If the cross-price elasticity of demand for ice cream with respect to the price of apple pie is negative, then the two goods are complements. inferior goods. substitutes. normal goods.

complements. -When the cross-price elasticity of demand for two goods is positive—as in the peanuts-cashews example—the two goods are substitutes. When it is negative, the two goods are complements.

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 _____. increase decrease stay the same

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

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 up by 119 percent go down by 119 percent go up by 1.19 percent go down by 1.19 percent

go down by 1.19 percent 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.

Changes in price and changes in total expenditure move in the opposite direction when the price elasticity of demand is less than zero. greater than 1. less than 1.

greater than 1.

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

high

If a store has a 10% off everything sale, then the store's total revenue will fall -f the demand for the store's products is elastic with respect to price. -no matter what because everything in the store is cheaper. =if the demand for the store's products is inelastic with respect to price.

if the demand for the store's products is inelastic with respect to price.

In the figure (is a horizontal line), demand is: perfectly elastic with respect to price. perfectly inelastic with respect to price. unit elastic with respect to price.

perfectly elastic with respect to price.

If the price elasticity of demand is infinite, then demand is perfectly inelastic. unit elastic. perfectly elastic.

perfectly elastic.

Q the

quantity demanded at that price

The total daily expenditure on a good is

simply the daily number of units bought times the price for which it sells.

perfectly elastic supply

supply is perfectly elastic with respect to price if elasticity of supply is infinite

perfectly inelastic supply

supply is perfectly inelastic with respect to price if elasticity is zero

P represents

the current price of a good

elastic

the demand for a good is elastic with respect to price if its price elasticity of demand is greater than 1 (many substitutes/ bigger change in quantity with price change)

price elasticity of supply

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

ΔQ represents

the resulting change in quantity demanded

If the price elasticity of demand for wine is 1.00, then the demand for wine is _____. inelastic unit elastic elastic

unit elastic Reason: If the price elasticity of demand equals 1, then demand is unit elastic with respect to price.

the slope of the demand curve is equal to

ΔP/ΔQ, ΔQ/ΔP