EC 201 Chapter 5 Practice

Graph C shows the supply curve for olive oil. The figure depicts a supply curve that is: -elastic. -inelastic. -perfectly inelastic. -perfectly elastic.

perfectly elastic

If the price of a good falls and this causes the quantity demanded of another good to increase, then the items are considered to be ___________ (substitutes or complements) and the cross-price elasticity is ___________ (positive or negative)

complements, negative

Answer the following question with regard to business strategy and public policy. If there is worry that consumers may drastically change their consumption in response to a price change, a business ___________ (should or should not) increase their price.

should not

Based on your answer in part a, gasoline and HEVs are __________ (unrelated, substitutes, complements)

substitutes

If the price of a good falls and this causes the quantity demanded of another good to fall, then the items are considered to be ___________ (substitutes or complements) and the cross-price elasticity is ___________ (positive or negative)

substitutes, positive

Why does this decrease in total revenue occur? -Customers are less responsive to price changes due to the lack of viable alternatives to the product. -Customers are very responsive to price changes and switching to viable alternatives to the product. -The percent decrease in quantity demanded outweighs the percent increase in price. -The percent increase in price outweighs the percent decrease in quantity demanded.

-Customers are very responsive to price changes and switching to viable alternatives to the product. -The percent decrease in quantity demanded outweighs the percent increase in price.

The state of Massachusetts recently saw a 10% increase in the price of electricity, which brought about a 2% fall in the quantity of electricity consumed. The price elasticity of demand is equal to _____, and demand is described as _____. -5; inelastic -0.2; elastic -5; elastic -0.2; inelastic

-0.2; inelastic

If income rises by 10% and the quantity demanded of an item falls by 30%, the income elasticity of demand for this item is: -3. -0.33. 0.33. 0.67.

-3

The price of chicken breast rises from $3.30 per pound to $3.63 per pound. In response to this price change, the quantity demanded for chicken breast falls by 40%. The absolute value of the price elasticity of demand for chicken breast is _____, and the price elasticity of demand is _____. -0.24; elastic -4.2; inelastic -0.24; inelastic -4.2; elastic

-4.2; elastic

Ashley Furniture sells 13,000 couches per month at a price of $800 per couch. When the price falls to $600, the quantity sold rises to 18,500. Use the midpoint formula to calculate the absolute value for price elasticity of demand for couches at Ashley Furniture. -1.22 -0.59 -0.82 -1.69

1.22

In 2022, Netflix increased its monthly price for new subscribers by $1. In response, one individual tweeted the following: "So tired of being a college student. Can't wait until I have a stable job and won't have to give up Netflix cause they raised their price by $1". What does this statement indicate about the income elasticity of demand for Netflix? -Netflix violates the law of demand. -Netflix is a perfectly inelastic good. -Netflix is an inferior good. -Netflix is a normal good.

-Netflix is a normal good.

According to the U.S. Department of Energy, the average price of gasoline in the U.S. fell by 14% in 2015. The number of hybrid electric vehicles (HEV) sold in the U.S. fell by 36% in the same year. Calculate the cross-price elasticity of demand for HEVs and gasoline. Round answer to one place after the decimal. Cross-price elasticity =

2.6

Select each factor which helps determine the price elasticity of supply for a product. -flexibility of inputs or resources used to make a product -the ability to store product -ease of firms to enter or exit the market

All of the above

Consumers now have easy access to internet shopping because of smartphones. Technology has caused demand to become more ___________ (elastic or inelastic)

Elastic

Technology has caused demand to become more elastic for goods you can purchase at stores like Barnes and Noble and Best Buy. This is because the cost of getting price information from other retailers is now ____________ (lower or higher)

Lower

To stay competitive, Best Buy uses a strategy called ______________ (price matching or price setting) where they offer to sell items at competitor prices.

Price matching

The figure shows four different demand curves for four different products. Which of the products has a perfectly inelastic demand curve?

Product A

Classify each pair of goods as substitutes, complements, or independent -wine and cheese -shoes and sandals -beef and chicken -tables and chairs -peanut butter and lumber -shampoo and conditioner

Substitutes: -shoes and sandals -beef and chicken Independent: -peanut butter and lumber Complements: -wine and cheese -tables and chairs -shampoo and conditioner

Which of these items is most likely to have perfectly inelastic price elasticity of demand? a lifesaving medical treatment your economics textbook oranges a cup of coffee

a lifesaving medical treatment

With a demand curve that is elastic, a one percent change in price: -causes a smaller than one percent change in quantity demanded. -causes a larger response in quantity demanded compared to an inelastic demand curve. -causes a greater than one percent change in quantity demanded. -causes a smaller response in quantity demanded compared to an inelastic demand curve.

-causes a larger response in quantity demanded compared to an inelastic demand curve. -causes a greater than one percent change in quantity demanded.

When a popular comedian announces a tour, tickets often sell out quickly. However, it is quite common for the tour coordinator to later announce additional shows in the form of matinees and late-evening performances. Why would the tour coordinator include unpublicized additional shows in the tour schedule? -Attendees to the shows consider many other comedians' performances to be close substitutes. -People who purchased a ticket consider the comedian's show to be an inferior good. -Additional shows create extra capacity and increase the tour's price elasticity of supply. -The tour coordinator knows that the price elasticity of demand for tickets is perfectly elastic.

-Additional shows create extra capacity and increase the tour's price elasticity of supply.

The demand for disposable diapers is inelastic. Which statement would explain this phenomenon? -Disposable diapers are a necessity for most parents of infants. -Disposable diaper purchases consume a large portion of most parents' income. -Parents have a lot of time to adjust to price changes. -There are many substitutes for disposable diapers.

-Disposable diapers are a necessity for most parents of infants.

An article in Forbes noted that the Intercounty Connector toll road that connects two counties in Maryland was not generating as much toll revenue as predicted. At that time, the toll rate was $8 for a passenger car making a round trip from end to end on the tollway during rush hour. What additional information would you need to know in order to determine if the toll should be increased or decreased? -The price elasticity of demand -The income elasticity of drivers using the tollway -The number of vehicles using the tollway per day -The price elasticity of supply

-The price elasticity of demand

The cross-price elasticity of demand between Fanta and Dr. Pepper has been estimated at 0.61. If the price of Dr. Pepper falls by 10%, the quantity demanded of Fanta will: -decrease by 6.1%. -not change because many people prefer Fanta to Dr. Pepper. -decrease by less than 6.1%. -increase.

-decrease by 6.1%

You are an economist for a prestigious private university, and the Board of Trustees tasks you with determining how much a tuition increase would impact university enrollment for different types of students. The proposed tuition increase is 10%. The absolute value of the price elasticity of demand for legacy students, that is, students whose parents graduated from the university, is 0.15 and for nonlegacy students it is 0.33. The demand curve for legacy students is _____ elastic than the demand curve for nonlegacy students. The rise in tuition would lower legacy student enrollment by _____%. -less; 3.3 -more; 3.3 -more; 1.5 -less; 1.5

-less; 1.5

Gasoline prices have been rising. As time passes, people will adjust to the higher price, and the demand for gasoline becomes: -steeper. -higher. -more inelastic. -more elastic.

-more elastic.

Much like toilet paper, toothpaste is a necessity. The income elasticity of demand for toothpaste is likely to be _____ and _____. -negative; below −1 -positive; close to 0 -positive; above 1 -negative; close to 0

-positive; close to 0

A measure of how responsive buyers are to price changes is the: -cross-price elasticity of demand. -price elasticity of demand. -income elasticity of demand. -price elasticity of supply.

-price elasticity of demand.

Almonds are a crop that grows on trees. Farmers do not need to replant trees every year to produce a crop of almonds. It takes at least five years after planting for trees to bear fruit. Several factors such as weather, disease, and long term projections about price impact the supply of almonds available. Barley is a grass that must be planted each year to produce a crop. The growing season is short, about three to four months. Several factors influence farmers' decisions to plant barley each year, including price, weather, and disease. a. Based on this information, -it is impossible to infer anything about the price elasticity of supply for these two crops. -barley has a more inelastic supply in the short run because barley is more dependent on price in the short run. -the crops have the same price elasticity of supply because they are both agricultural commodities. -almonds have a more inelastic supply in the short run because little can be done to change production in the short run.

-almonds have a more inelastic supply in the short run because little can be done to change production in the short run.

In the markets for grocery and household items, some consumers have more elastic responses than others. Stores recognize this and often offer price reductions in the form of coupons. The price elasticity of demand for people who use coupons is _____ elastic than for other consumers because coupon users _____. -more; are willing to search for a low-cost alternative -more; have higher incomes than the average consumer -less; have higher incomes than the average consumer -less; are willing to search for a low-cost alternative

-more; are willing to search for a low-cost alternative

If quantity demanded responds substantially to a relatively small change in price, demand is: -price-elastic. -positively sloped. -insensitive to changes in price. -price-inelastic.

-price-elastic.

In a small town in Kansas, the owner of the town's only gas station claims that he will sell the same quantity of gas no matter how high or low the price. If his assertion is correct, the demand curve for gas at his station must be _____, and the price elasticity is _____. -vertical; infinite -horizontal; zero -horizontal; infinite -vertical; zero

-vertical; zero

In 2017, Hurricane Irma had a significant, negative impact on the orange harvest in the state of Florida. The U.S. Department of Agriculture predicted that the quantity of oranges produced would be 21% lower than the previous year. If the price elasticity of demand for oranges is -1.5, what impact would Hurricane Irma have on the price of oranges?

change in the price of oranges: 14%

The EpiPen is a lifesaving device used by individuals with severe allergies. The U.S. manufacturer of the EpiPen raised its price by nearly 25% per year for nearly a decade. For each 25% increase in the price, quantity demanded would __________ (increase, decrease) by ____________ (less than, more than, or exactly) 25%.

decrease, less than

Answer the following question with regard to business strategy and public policy. If the goal of a government entity is to raise funds by taxing a good or service, it is easier to raise revenue if the demand curve for the good/service is ________________ (perfectly elastic, inelastic, elastic)

inelastic

Europe has eight different companies selling devices similar to the EpiPen. If these devices were available for use in the U.S. market, you would expect price elasticity of demand to become ___________(less inelastic or more inelastic) This would also lead Mylan to charge a ________ (higher or lower) price.

less inelastic, lower

If the income elasticity of demand for a good is _____, the good is said to be _____. -positive; a substitute -negative; a complement -negative; inferior -positive; inferior

negative; inferior

You are a pricing manager at a generic pharmaceutical distributor. The CEO of the company calls a meeting of all the managers and states that it is critical to increase revenue soon or you may have to start laying off employees. You know that the price elasticity of demand for your leading generic drug is 1.5 and you sell it for three times what it costs. As the pricing manager, you should -argue that the numbers must be off because the company is charging three times the cost of the leading generic drug and therefore must be making a profit. -suggest increasing the price on the leading generic drug to increase revenue. -suggest laying off employees because elasticity of the leading generic drug is unit elastic, so there is no way to increase revenue by changing price. -suggest decreasing the price on the leading generic drug to increase revenue.

-suggest decreasing the price on the leading generic drug to increase revenue.

A city economist is consulting with the public utility companies to determine an optimal pricing plan. When the price of water usage falls by 1%, the quantity demanded rises by 0.44%. The absolute value of the price elasticity of demand for water usage is _____. -44.0 -1.00 -2.27 -0.44

0.44

Janelle recently received a promotion at her job, increasing her income from $940 per week to $1,060 per week. As a result, she decides to purchase 9% more sushi per week. Computed using the midpoint method, the income elasticity of Janelle's demand for sushi is: -1.00. -0.75. -1.33. -0.90.

0.75

You may have observed that items such as different brands of aspirin, tomato sauce, or gasoline are typically priced the same as each other. This is particularly true when consumers can find these goods in close proximity to each other. For example, prices are often the same at gas stations that are on opposite sides of the street. Prices are also generally the same for products next to each other on the same grocery store shelf. The aforementioned examples are goods that are likely to be ____________ (complements or substitutes). You would expect the value of the cross-price elasticity to be _________ (insignificant, large, or small) because the opportunity cost of getting information on price is low.

substitutes, large