Eco Chapter 5

The maximum value of total revenue corresponds to a price of

$50

. Using the midpoint method, demand is unit elastic when price changes from

$6 to $9

Using the midpoint method, what is the price elasticity of supply between points D and E?

0.53

For which of the following goods is the income elasticity of demand likely highest?

Diamonds

A discovery that increases wheat yields per acre hurts farmers by increasing supply and lowering their total revenues.

True

If the demand for donuts is elastic, then a decrease in the price of donuts will

a. increase total revenue of donuts sellers

The equilibrium quantity will

decrease in both the milk and steak markets.

Suppose demand is given by the equation: QD = 50 - 5P Using the midpoint method, what is the price elasticity of demand between $1 and $2?

The price elasticity of demand is .18

The price elasticity of demand measures

buyers' responsiveness to a change in the price of a good.

Goods with many close substitutes tend to have

more elastic demands.

A key determinant of the price elasticity of supply is the

time horizon.

Which of the following could be the price elasticity of demand for a good for which a decrease in price would increase total revenue?

2.6

Using the midpoint method, between prices of $70 and $80, price elasticity of demand is about

3.00

Which of the following is likely to have the most price elastic demand?

Häagen-Dazs® vanilla bean ice cream

Which of the following statements is valid when the market supply curve is vertical?

Market quantity supplied does not change when the price changes.

Suppose the price elasticity of demand for a product is 1. If a supplier wants to increase revenue, what change should it make to price, if any?

No Change, revenue is maximized

Using the midpoint method, if the price falls from $160 to $120, the price elasticity of demand is

elastic

. Assume that a 4 percent increase in income results in a 2 percent increase in the quantity demanded of a good. The income elasticity of demand for the good is

positive, and the good is a normal good

If the cross-price elasticity of two goods is positive, then the two goods are

substitutes

For a good that is a luxury, demand

tends to be elastic.

Cross-price elasticity of demand measures how

the quantity demanded of one good changes in response to a change in the price of another good.

Suppose the price elasticity of demand for good A is 1.25. If the price of good A increases by 20%, what will be the resulting percentage change in quantity demanded for good A?

Quantity demanded will fall by 20%

If the price of walnuts rises, many people would switch from consuming walnuts to consuming cashews. But if the price of salt rises, people would have difficulty purchasing something to use in its place. These examples illustrate the importance of

the availability of close substitutes in determining the price elasticity of demand.

A linear, downward-sloping demand curve has a constant elasticity but a changing slope

. False

Along the elastic portion of a linear demand curve, total revenue rises as price rises.

. False

Demand for a good is said to be inelastic if the quantity demanded increases substantially when the price falls by a small amount.

. False

Drug interdiction, which reduces the supply of drugs, will likely be a less effective policy than educating consumers to reduce their demand for drugs because the drug interdiction policy will lower drug prices and reduce the quantity of drugs demanded.

. False

If the price elasticity of demand is equal to 0, then demand is unit elastic

. False

If we observe that when consumers' incomes rise by 10%, the quantity demanded of ice cream increases by 5%, then ice cream is an inferior good.

. False

If we observe that when the price of chocolate increases by 10%, total revenue increases by 10%, then the demand for chocolate is unit price elastic.

. False

In general, demand curves for necessities tend to be price elastic.

. False

Normal goods have negative income elasticities of demand, while inferior goods have positive income elasticities of demand

. False

Supply is said to be inelastic if the quantity supplied responds substantially to changes in the price and elastic if the quantity supplied responds only slightly to price.

. False

Supply tends to be more elastic in the short run and more inelastic in the long run.

. False

Suppose that when the price rises by 20% for a particular good, the quantity demanded of that good falls by 10%. The price elasticity of demand for this good is equal to 2.0.

. False

The demand for gasoline will respond more to a change in price over a period of five weeks than over a period of five years.

. False

When demand is inelastic, a decrease in price increases total revenue

. False

For a particular good, a 10 percent increase in price causes a 5 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?

. The market for the good is broadly defined.

Suppose that two supply curves pass through the same point. One is steep, and the other is flat. Which of the following statements is correct?

. The steeper supply curve represents a supply that is inelastic relative to the supply represented by the flatter supply curve.

. If the price increases in the region of the demand curve between points C to B, we can expect total revenue to

. decrease.

If the price decreased from $36 to $12, total revenue would

. increase by $4,800, and demand is elastic between points X and Z.

Total revenue when the price is P1 is represented by

areas B + D.

When the price of candy bars is $1.20, the quantity demanded is 490 per day. When the price falls to $1.00, the quantity demanded increases to 500. Given this information and using the midpoint method, we know that the demand for candy bars is

inelastic

Total consumer spending on milk will

increase, and total consumer spending on steak will decrease

. If, holding the supply curve fixed, there were an increase in demand that caused the equilibrium price to increase from $6 to $7, then sellers' total revenue would

increase.

Income elasticity of demand measures how

the quantity demanded changes as consumer income changes

. The price elasticity of supply measures how much

the quantity supplied responds to changes in the price of the good

If marijuana were legalized, it is likely that there would be an increase in the demand for marijuana. If demand for marijuana is inelastic and the supply of marijuana is perfectly elastic, this will result in

the same price and higher total revenue from marijuana sales

Suppose the cross-price elasticity of demand between peanut butter and jelly is −2.50. This implies that a 20 percent increase in the price of peanut butter will cause the quantity of jelly purchased to

fall by 50 percent

Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers are to a change in price, the

flatter the demand curve will be.

The change in equilibrium price will be

greater in the milk market than in the steak market

The change in equilibrium quantity will be

greater in the steak market than in the milk market.

. If the price elasticity of supply is 0.7, and price increased by 24 percent, quantity supplied would

increase by 16.80 percent.

Milk has an inelastic demand, and steak has an elastic demand. Suppose that a mysterious increase in bovine infertility decreases both the population of dairy cows and the population of beef cattle by 50 percent The equilibrium price will

increase in both the milk and steak markets.

When large changes in price lead to no changes in quantity demanded, demand is perfectly

inelastic, and the demand curve will be vertical.

The supply of a good will be more elastic, the

longer the time period being considered.

. Metta says that she will spend exactly $25 each month on new apps for her mobile device, regardless of the price of apps. Metta's demand for apps is

unit elastic

The section of the demand curve at point B represents the

unit section of the demand curve

. Using the midpoint method, if the price of good X is $10 and the price of good Y increases from $8 to $10, the cross price elasticity of demand is about

-2.57

You are in charge of the local city-owned aquatic center. You need to increase the revenue generated by the aquatic center to meet expenses. The mayor advises you to increase the price of a day pass. The city manager recommends reducing the price of a day pass. You realize that

. the mayor thinks demand is inelastic, and the city manager thinks demand is elastic

If a supply curve is perfectly vertical, what is the value of the price elasticity of supply?

0

If a 16 percent increase in price for a good results in a 7 percent decrease in quantity demanded, the price elasticity of demand is

0.44

Suppose a market has the demand function Qd=20-0.5P. Using the midpoint method, what is the price elasticity of demand between $30 and $40?

7

Using the midpoint method, what is the price elasticity of demand between $12 and $15?

9

If the cross-price elasticity of demand between two goods is negative, what is the relationship between the two goods?

The goods are complements

Using the midpoint method, what is the price elasticity of supply between $25 and $35?

The price elasticity of supply is 1.20

Suppose demand is given by the equation: QD = 80/P At what point along this demand curve will total revenue be maximized?

Total revenue is constant at $80 along this entire demand curve

Suppose demand is given by the equation: QD = 50 - 5P At what price will total revenue be maximized?

Total revenue will be maximized at the midpoint of a linear curve -$5 with this demand curve

a. The elastic section of the graph is represented by section _______. b. The inelastic section of the graph is represented by section _______. c. The unit elastic section of the graph is represented by section _______. d. The portion of the graph in which a decrease in price would cause total revenue to fall would be _________. e. The portion of the graph in which a decrease in price would cause total revenue to rise would be _________. f. The portion of the graph in which a decrease in price would not cause a change in total revenue would be _________. g. The section of the graph in which total revenue would be at a maximum would be _______. h. The section of the graph in which elasticity is greater than 1 is _______. i. The section of the graph in which elasticity is equal to 1 is ______. j. The section of the graph in which elasticity is less than 1 is _______.

a. A to B b. B to C c. B d. B to C e. A to B f. b g. B h. A to B i. B J. B to C

Suppose the demand function for good X is given by: where is the quantity demanded of good X, is the price of good X, and is the price of good Y, which is related to good X. Good X and Good Y are related as

complements

With regard to elasticity, if a firm has a longer time to adjust to a price increase, supply will be more

elastic

Suppose that when the price of good X increases from $610 to $710, the quantity demanded of good Y decreases from 51 to 15. Using the midpoint method, the cross-price elasticity of demand is about

-7.20, and X and Y are complements.

. Using the midpoint method, the income elasticity of demand for good Y is

−2.33, and good Y is an inferior good.

. If a 39 percent change in price results in a 35 percent change in quantity supplied, then the price elasticity of supply is about

. 0.90, and supply is inelastic

The demand for soap is more elastic than the demand for Dove soap.

. False

The flatter the demand curve that passes through a given point, the more inelastic the demand.

. False

The price elasticity of demand is defined as the percentage change in price divided by the percentage change in quantity demanded.

. False

Using the midpoint method, what is the price elasticity of supply between point B and point C?

1.44

Between point A and point B, price elasticity of demand is equal to

1.5

Using the midpoint method, if the price falls from $160 to $120, the absolute value of the price elasticity of demand is

2.33

Using the midpoint method, the price elasticity of demand between point X and point Y is

2.5

If the price elasticity of supply is 0.6, and a price increase led to a 3.7 percent increase in quantity supplied, then the price increase is about

6.17 percent

Suppose the price elasticity of supply for cheese is 0.6 in the short run and 1.4 in the long run. If an increase in the demand for cheese causes the price of cheese to increase by 15 percent, then the quantity supplied of cheese will increase by

9 percent in the short run and 21 percent in the long run

Which of the following is consistent with the elasticities given in Table 5-1? a. A is a luxury and B is a necessity.

A is a luxury and B is a necessity

Along which of these segments of the supply curve is supply most elastic?

AB

Using the midpoint method, which of the three supply curves represents the least elastic supply?

Supply curve A

Using the midpoint method, what is the price elasticity of demand between $2 and $4?

The price elasticity of demand is .43

Which of the following is not a determinant of the price elasticity of demand for a good?

The flatness of the supply curve for the good

A "Just Say No" drug education policy that successfully educates consumers to reduce their demand for drugs will lower drug prices and reduce the quantity of drugs demanded.

True

Cross-price elasticity is used to determine whether goods are substitutes or complements

True

Elasticity measures how responsive quantity is to changes in price.

True

Between which two quantities listed is demand unit elastic?

between 20 and 30

Suppose the demand function for good X is given by: Qdx = 15 − 0.5Px − 0.8Py where Qdx is the quantity demanded of good X, Px is the price of good X, and Py is the price of good Y, which is related to good X. Using the midpoint method, if the price of good X is constant at $10 and the price of good Y decreases from $10 to $8, the cross-price elasticity of demand is about

d. −2.57, and X and Y are complements.

Between point A and point B on the graph, demand is

elastic, but not perfectly elastic

When her income increased from $10,000 to $20,000, Heather's consumption of macaroni decreased from 10 pounds to 5 pounds and her consumption of soy-burgers increased from 2 pounds to 4 pounds. Using the midpoint method, we can conclude that for Heather, macaroni

is an inferior good with an income elasticity of -1 and soy-burgers are normal goods with an income elasticity of 1

Suppose demand is perfectly inelastic, and the supply of the good in question decreases. As a resul

the equilibrium price increases, and the equilibrium quantity is unchanged.

At a price of $70 per unit, sellers' total revenue equals

$1,050

A manufacturer produces 350 units when the market price is $10 per unit and produces 460 units when the market price is $14 per unit. Using the midpoint method, for this range of prices, the price elasticity of supply is

0.81

If rectangle D is larger than rectangle A, then which of the following is not correct? a. Demand is elastic between prices P1 and P2 .

An increase in price from P1 to P2 will cause an increase in total revenue

Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 0.55. Which of the following events is consistent with a 20 percent decrease in the quantity of the good demanded?

An increase of 36.36 percent in the price of the good

For which pairs of goods is the cross-price elasticity most likely to be positive?

Pens and pencils

Goods with close substitutes tend to have more elastic demands than do goods without close substitutes.

True

If demand is perfectly inelastic, the demand curve is vertical, and the price elasticity of demand equals 0.

True

If the cross-price elasticity of demand for two goods is negative, then the two goods are complements.

True

In general, demand curves for luxuries tend to be price elastic.

True

Measures of elasticity enhance our ability to study the magnitudes of changes in quantities in response to changes in prices or income

True

Price elasticity of demand along a linear, downward-sloping demand curve decreases as price falls.

True

Price elasticity of supply measures how much the quantity supplied responds to changes in the price.

True

The demand for desserts tends to be more inelastic than the demand for red velvet cake.

True

The midpoint method is used to calculate elasticity between two points because it gives the same answer regardless of the direction of the change.

True

You and your college roommate eat three packages of Ramen noodles each week. After graduation last month, both of you were hired at several times your college income. You still enjoy Ramen noodles very much and buy even more, but your roommate plans to buy fewer Ramen noodles in favor of foods she prefers more. When looking at income elasticity of demand for Ramen noodles, yours would

be positive, and your roommate's would be negative.

Between which two quantities listed is demand most inelastic?

between 50 and 40

Demand is said to be price elastic if

buyers respond substantially to changes in the price of the good.

When the price of good A is $50, the quantity demanded of good A is 500 units. When the price of good A rises to $70, the quantity demanded of good A falls to 400 units. Using the midpoint method, the price elasticity of demand for good A is

c. 0.67, and an increase in price will result in an increase in total revenue for good A.