Chapter 5
The suppliers of ____________are more likely to have a tax imposed on their production.
Gasoline
Is the demand for a container of salt likely to be inelastic or elastic? Why?
Inelastic because salt is a necessary dietary component
Determinants of Elasticity
is the good a necessity
Elasticity of Demand
will always have a negative value
Inelastic
q<p
Inelastic
ED < 1
Total Revenue
PxQ
Which of the following is likely to have the largest elasticity of supply?
The producer of vanilla ice cream
Elastic
responsive to price changes
elasticity of demand formula
% change in quantity demanded / % change in price
% change formula
(ending value - beginning value / beginning value) x 100
Which of the following statements about the effects of a government setting maximum prices is true?
A maximum price will cause a shortage of a good to be produced only if the maximum price is below the equilibrium price.
Which of the following statements about the effects of rent control is true?
A maximum price will cause a shortage of a good to be produced only it the maximum price is below the equilibrium price.
Many major U.S. cities have adopted rent controls for some housing. An effective rent control is what kind of price control?
A price ceiling with a maximum price above equilibrium price
If population increases in a city with effective rent controls (and nothing else changes), which of the following describes what will happen in the market for rental housing?
An increase in demand, but no change in quantity supplied.
Determinants of Elasticity
Are there many substitutes
Elastic
As price increases, quantity decreases by a larger percentage.
Elastic
As prices decrease, quantity increased by a larger percentage.
Which of the following goods would be the most likely to be subject to a government-imposed tax?
Bottles of alcohol
When will a minimum wage be an effective price control? When it is a _________.
Minimum "price" that is above equilibrium price
If the country enters a period of prosperity, resulting in consumer incomes increasing by 4% and the income elasticity of a good is 0.8, what will happen to the demand for that good as a result?
Demand will increase by 3.2%
Elastic
ED > 1
Unit of Elastic
Ed = 1
A business should ___________ (increase/decrease) the price of a good with an inelastic demand if it wants to increase revenues.
Increase
An increase in an effective minimum legal price will do what to prices and quantities actually sold in a market? Prices will __________ and the quantities actually sold will ___________.
Increase; decrease
An increase in an effective maximum legal price will do what to prices and quantities actually sold in a market? Prices will __________ and the quantities actually sold will ___________.
Increase; increase
If the income elasticity of a good is 0.8, what do we know about the good?
It is a normal good.
You are running a small business and are thinking about ways to increase your profits. Assume you are facing an elastic demand. Would you raise or lower your prices?
Lower because revenues would increase
Assume that as your income increases, your consumption of burgers decreases. We can assume that your income elasticity of demand for burgers is what?
Negative
A government may impose a price ceiling if which of the following is true?
Producers can persuade legislators that higher prices are needed
A firm has a choice of raising or lowering its price. If the firm wishes to increase its revenues (the price times the quantity sold), what should it do?
Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold.
Who is likely to be in favor of a price ceiling on a good?
The consumers of the good who can still purchase it after the ceiling is imposed
When price decreases, quantity increases. Price elasticity of demand measures how much ___________.
The quantity increases when price decreases
An increase in an inelastic demand will cause _______ change in the equilibrium price than the same increase in an elastic demand.
a greater
An increase in an inelastic demand will cause (a greater or lesser or same) change in the equilibrium quantity than the same increase in an elastic demand.
a lesser
to switch how much effort does it take to identify
alternative or alter our behavior
Elasticity of Demand
as price changes, quantity changes in the opposite direction
unitary/unit elastic
as price decrease, quantity increases by the same percent
inelastic
as price decreases, quantity increase by a smaller percentage
Inelastic
as price increase, quantity decreases by a smaller percentage
unitary/unit elastic
as price increases, quantity decreases by the same percent
Determinants of Elasticity
how much of the budget does it take up
Determinants of Elasticity
how much time for adjustment to price change
If a man spends approximately 45% of his income on air travel and his sister only spends about 2% of her income on air travel (and that is the only difference), would the man's demand for air travel be less or more elastic than his sister's?
more
The price elasticity of demand will be _________________ if demand is elastic.
more than one
Elasticity of Demand
negative slope
Inelastic
not very responsive to price changes
inelastic
p down q up; tr down
Elastic
p down q up; tr goes up
Elastic
p up q down; tr goes down
inelastic
p up q down; tr up
An example of price controls given in your text concerns minimum wage increases. On a supply and demand diagram (with wages on the vertical axis and number of workers on the horizontal), would minimum wage be considered a price ceiling or a price floor?
price floor
unitary/unit elastic
proportionately responsive to price changes
Elastic
q>p
if it makes a small portion of the budget
we are less responsive
More substitutes means
we are more elastic
If we need it
we are more inelastic
