Chapter 6

In May 2011, the average price of gasoline in the United States was $3.76 per gallon, and consumers purchased nearly 5 percent less gasoline than they had during May 2010, when the average price of gasoline was $2.79 per gallon. Based on these figures, from May 2010 to May 2011, the demand for gasoline was

inelastic (meaning people buy the same amount whether the price drops or rises)

If price elasticity of demand is negative,

the products are complements.

Which of the following is NOT a determinant of a good's price elasticity of demand?

the slope of the demand curve

In December 2014, the average price of gasoline in the United States was $2.50 per gallon and consumers bought 7 percent more gasoline than they had during April 2014, when the average price was $3.60 per gallon. Based on these numbers, what was the price elasticity of demand for gasoline from April 2014 to December 2014?

-0.23

If a 6 percent increase in income leads to a 4 percent increase in quantity demanded for audio books the income elasticity of demand is

0.67.

Suppose a hurricane decreased the supply of oranges so that the price of oranges rose from $120 a ton to $180 a ton and quantity sold creased from 800 tons to 240 tons. What is the absolute value of the price elasticity of demand?

1.4 (change in quantity demanded over change in price) (first price - second price divided by first price plus second price) same with demand and divide the demand over price)

Suppose when the price of jean-jackets increased by 10 percent, the quantity supplied increased by 16 percent. Based on this information the price elasticity of supply of jean-jackets is

1.6.

The price elasticity of supply of hot dog buns is estimated to be 1.5. Holding everything else constant, this means that a 10 percent decrease in the price of hot dog buns will cause the quantity of hot dog buns supplied to decrease by

15 percent

Of the following, which is the best example of a good with a perfectly inelastic demand?

A diabetic's demand for insulin. (regardless of its price, a diabetic is always going to buy insulin because he or she needs insulin to survive.)

Refer to Figure 6-2. As price falls from PA to PB, the quantity demanded increases most along D1: therefore,

D1 is more elastic than D2 or D3 (the more horizontal the line, the more elastic. The more vertical the line, the more inelastic).

Suppose you are considering buying stock in the stock market, and your objective is to maximize your net worth. Furthermore, your study of the market reveals that the economy will be slowing down over the next several months. Under these conditions, it would be best to purchase stock in companies that produce

Inferior goods

Which of the pairs listed above will have a positive cross-price elasticity?

Laptop computer and desktop computer; beef and pork

The more narrowly we define a market, the more elastic the demand for a product will be.

Narrowly defined markets tend to have more elastic demand than broadly defined markets because it is easier to find close substitutes for narrowly defined goods.

Suppose the demand curve for a product is represented by a typical downward-sloping curve. Now suppose the demand for this product increases. Which of the following statements accurately predicts the resulting increase in price?

The more elastic the supply curve, the smaller the price increase (because it is more horizontal).

Assume that the demand curve for sunblock and downward sloping. Which of the following statements about the slope of the demand curve for sunblock and the price elasticity of demand for sunblock is true?

The slope is constant, but the price elasticity of demand is not constant at all points along the demand curve for sunblock. (the line is straight, but because it is downward sloping, the price elasticity of demand is different along the line.)

Which of the following statements is true?

The supply of oil is very inelastic over short periods but becomes more elastic over time. A given shift in supply results in a smaller increase in the price of oil when the supply is more elastic. (because the line is horizontal so the price doesnt change as much)

When a firm lowers its price its total revenue may either increase or decrease.

This is true because you could profit less by lowering your prices or you could see so much more at the lower price that you actually make more money.)

If a 5 percent increase in income leads to a 10 percent increase in quantity demanded for airline travel, then airline travel is

a luxury

Which of the following items is likely to have the highest income elasticity of demand?

a luxury cruise to several European countries. (people don't need this so if it is too expensive, demand will respond by decreasing.)

Economists estimated that the cross-price elasticity of demand for beer and wine is 0.31 and the income elasticity of wine is 5.03. This means that

beer and wine are substitutes and wine is a luxury good.

For people who live near a bus route, a subway station, or a commuter rail line, public transportation provides a substitute to driving their own cars. So, for these people, the __________ between gasoline and public transportation is positive.

cross-price elasticity of demand.

In order to prove that Motrin and Ibuprofen are substitutes, one should measure the _________ and get a __________.

cross-price elasticity; positive number.

The price elasticity of demand for beef is estimated to be 0.60 (in absolute value). This means that a 20 percent increase in the price of beef, holding everything else constant, will cause the quantity of beef demanded to

decrease by 12 percent. (price increase causes demand to decrease. 20 percent of 60 is 12.)

If n 8 percent decrease in the price of lobster leads to a 15 percent decrease in the quantity of lobster supplied, then the supply of lobster is

elastic

A perfectly elastic demand curve is

horizontal

When the price of tortilla chips rose by 10 percent, the quantity of tortilla chips sold fell by 4 percent. This indicates that the demand for tortilla chips is

inelastic (the amount sold did not change much when the price changed).

If a good has a negative income elasticity of demand, this indicates that the good is

inferior.

If demand is perfectly elastic, the absolute value of the price elasticity coefficient is

infinity

Refer to Table 6-3. Katie Graham owns a kayak rental service in Santa Barbara. Table 6.3 below shoes her estimated demand schedule for kayak rentals per week. She would like to increase her sales revenue by changing the price she charges for rentals. At present she charges $75. Based on the information in the table, Katie

is not able to increase her revenue by changing her price because the demand for kayak rentals is unit-elastic. (the revenue does not change. She will make the same amount of money regardless of what she charges. This is unit-elastic).

A supply curve that is vertical

is perfectly inelastic.

Opera Estate Girls' School is considering increasing its tuition to raise revenue. If the school believes that raising tuition will increase revenue,

it is assuming that the demand for attending the school is inelastic (they think that the same amount of people will come to school there even if the price changes. If demand doesn't change or changes very little, it is inelastic.

Inelastic supply occurs when the elasticity of supply value is

positive and less than 1.

The price elasticity of supply is usually a positive number because

quantity supplied increases in response to price increases.

If a firm raised its price and discovered that its total revenue fell, then demand for its product is

relatively elastic (if it was inelastic, the revenue would not have fallen)

When the price of tortilla chips rose by 10 percent, the quantity of tortilla chips sold fell 4 percent, and the sale of dips (like salsa and bean dip) fell 8 percent. This set of facts indicates that

the cross-price elasticity between tortilla chips and dip is -0.8, so the two are complements.

Refer to Figure 6-1. The section of the demand curve labeled "A" represents

the elastic section of the demand curve (it is the left section or the section closest to the y axis or the price side)

If the demand for cell phone service is inelastic, then

the percentage change in quantity demanded is less than the percentage change in price (in absolute value).

To calculate the price elasticity of supply we divide

the percentage change in quantity supplied by the percentage change in price

If the demand for iPods is price elastic, then

the percentage change is quantity demanded is greater than the percentage change is price (in absolute value).

If price elasticity of demand is positive,

the products are substitutes.

The income elasticity of demand measures

the responsiveness of quantity demanded to changes in income

The price elasticity of supply measures

the responsiveness of quantity supplied to changes in price

Holding everything else constant, the demand for a good tends to be more elastic if

there are more substitutes (people have more options and can take their money elsewhere with more options.)

If the slop of a demand curve is equal to -0.1 then

we do not know whether the demand is elastic or inelastic

Along a downward sloping, linear demand curve, total revenue is the greatest

where demand is unit-elastic.

The cross-price elasticity between Gillette razors and a related good is -3.4, What happens to the demand for the related good if the price of Gillette razors falls by 10 percent?

The quantity demanded of the related good rises by 34 percent.

Refer to Figure 6-1. A perfectly inelastic demand curve is shown in

Panel A (a vertical line)

Refer to Figure 6-1. A perfectly elastic demand curve is shown by

Panel B (a horizontal line)

Refer to Figure 6-5. Suppose the diagram shows the supply curve for a product in the short run and in the long run. Which supply curve represents supply in the short run and which represents supply in the long run?

SA represents supply in the short run and SB represents supply in the long run.

Refer to Figure 6-5. The diagram shows two supply curves, SA and SB. As price rises from P0 to P1, which supply curve is more elastic?

SB (because it is more horizontal)/

Economists use the concept of _________ to measure how one economic variable, such as quantity, responds to a change in another economic variable, such as price.

elasticity

If the absolute value of the price elasticity of demand for DVD movies is 0.8 then the elasticity of demand for the DVD for the movie The Hangover should be

greater than 0.8 in absolute value.

The larger share of a good in a consumer's budget (the more he or she spends on the item), holding everything else constant, the

more price elastic is a consumer's demand (the consumer needs the best price because they spend so much on it. So they will be elastic and look at several options.)

Last year, Joan bought 50 pounds of hamburger when her household income was $40,000. This year, her household income was only $30,000 and Joan bought 60 pounds of hamburger. Holding everything else constant, Joan;s income elasticity of demand for hamburger is

negative, so Joan considers hamburger to be an inferior good.

Which of the following pairs of goods is likely to have a negative cross-price elasticity of demand?

pancakes and syrup (negative cross-price elasticity means the products go together).

The cross-price elasticity of demand measures the

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

If a supply curve is a horizontal line, supply is said to be

perfectly elastic

Carrie Bradshaw claims that when it comes by buying shoes, "price is no object." If this is true, then her demand for shoes is

perfectly inelastic (she will buy the shoes regardless of the price)

Assume that the market for barley is in equilibrium and the demand for barley is inelastic. Predict what happens to the revenue of barley farms if a prolonged drought reduces the supply of barley. The drought will cause the farm revenue to

rise because the percentage decrease in quantity sold is less than the percentage increase in price.

If the quantity supplied of walkie-talkies increases by 5 percent when prices increase by 12 percent, then

supply of walkie-talkies is inelastic because the quantity demanded did not change much

The price elasticity of demand is equal to

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

If the demand for a steak is unit-elastic, then

the percentage change in quantity demanded is EQUAL to the percentage change in price.

If the price elasticity of demand is equal to zero then the demand curve for insulin is

vertical