ECO Mod 5
Suppose the price elasticity of supply has been calculated for LaCroix sparkling water at 1.3 and the price increases by 15%. What would happen to the quantity supplied?
It would increase by 19.5%
Suppose the price elasticity of supply has been calculated as 0.80 for a particular product and the price increases by 5%. What would happen to the quantity supplied?
It would increase by 4%.
If product X's price increases from $400 to $450 and product Y's quantity demanded increases from 15 to 20. Using the midpoint method, calculate the cross price elasticity of demand. Are they substitutes or complements?
The cross-price elasticity of demand is 2.43 and they are substitutes.
Which of the following describes a product with an inelastic demand?
an appointment with a medical specialist
elasticity:
an economics concept that measures responsiveness of one variable to changes in another variable
Good news for an industry that typically produces price inelastic goods can
be bad news for individual producers because when these factors shift the supply curve to the right it decreases total revenues.
Demand is relatively inelastic if ________.
buyers do not respond much to a change in price
Suppose that you know that the price elasticity of demand is 0.9. If we decrease the price of the this product, then that the total revenue will
decrease.
Suppose that you know that the price elasticity of demand is 1.4.
decrease.
a large change in price results in a small change in quantity demanded, then demand is
price inelastic.
A tax is imposed on chewing gum purchases. Consumers end up paying all of the tax through a price increase while the producers pay none of the tax. This happened because the demand curve
is perfectly inelastic.
A tax is imposed on chewing gum purchases. Consumers end up paying all of the tax through a price increase while the producers pay none of the tax. This happened because the demand curve Responses
is perfectly inelastic.
Slope and elasticity have different calculations and different meanings. The difference is that elasticity
is the percentage change between two variables and slope is the change between two variables.
All price elasticities of demand have a negative sign which reflects the inverse relationship of the
law of demand.
Analyze the following diagram: Demand "B" represents a demand curve that is
relatively elastic.
Elastic supply occurs if the change in quantity supplied is ________ a change in price.
relatively responsive to
The wage elasticity of labor demand calculation is
the % change in quantity of labor demanded divided by the % change in wage.
Total revenue is defined as ________ and represented by the formula ________.
the price of a product times the number of units sold; TR=P x Qd
As we move along a typical negatively sloping, linear demand curve
the slope is constant.
in the figure below, which of the following statements is true regarding elasticity?
the upper part (when price is higher) of a demand curve is considered more elastic.
If a large change in price results in a small change in quantity demanded, then demand is
price inelastic.
What is the price elasticity of demand for generic shoes if prices increase by 10% price and quantity demanded of generic shoes decreases by 15%? ________ , which means the demand for generic shoes would be ________.
-1.5; elastic
Suppose the price for an Lyft ride in Austin, TX decreases from $15 to $12 causing the quantity of rides demanded to increase from 1000 to 1600. Using the midpoint method, the price elasticity of demand for an Lyft ride is ________.
-2.08
If the price of LG flat screen TVs falls from $4000 to $3500 and as a result sales (quantity demanded) increase from 800,000 per year to 1,300,000. The price elasticity of the demand for LG flat screen TVs would be ________ when using the point approach and ________ using the mid-point approach.
-3.57; -5
Suppose that when the store increases the price of peanut butter from $3.3 to $4, quantity demanded decreased from 220 to 170. What is the change in total revenue as a result of this price change. Make sure to include a negative sign in your answer if necessary.
-46
If the price of Sperry shoes goes up from $100 to $120 and the quantity supplied increases from 800 to 900 pairs, then the Elasticity of Supply would be (use the point method instead of the midpoint method). Responses
0.625
If the price of a product changes by $2 (from $7 to $9) and the quantity demanded changes by 10 units (from 50 to 40 units) then the price elasticity of demand using the midpoint approach is
0.89
Consider a product that has perfectly elastic demand. Which of the following is most likely to be true about the price elasticity of demand
1
When Acme Corporation priced anvils at $50 each, it sold 35 anvils per month. Demand increased for anvils raising the price of anvils to $55 each. Acme responded by increasing its quantity supplied to 42 anvils per month. Using the point method for calculating elasticity, what is Acme's price elasticity of supply? Responses
2.0
Suppose a veggie burger goes up in price from $6 to $9. The percentage change or growth rate in price is ________.
3/6 or 50%
Demelza purchased her favorite perfume three months ago, J'adore by Dior, for $75. She logs online to purchase one for her friend's birthday and it is now $100. What is the percentage change in the perfume price? (use the point approach)
33%
Suppose that when the price of peanut butter decreases from $4 to $3.7, quantity supplied decreases from 270 to 180.
5.1333333333333
Consider consumers' dependence on gas. Which statement tends to be true about how elasticity affects equilibrium when a shift in supply decreases the amount of gas available to consumers?
A higher price and a lower quantity will result for both inelastic and elastic demand for gas in equilibrium. However, the short run will have a much higher price increase and a smaller quantity reduction while the long run price will be much lower price increase and a larger quantity reduction.
Kelly's salary was bumped up this year after she accepted the new position of Vice President of Marketing. Her income increased from $65,000 to $83,000. Last year Kelly purchased 2 used cars. This year she purchased 0 used cars. Assuming that all of the other things remain constant, what type of a good is a used car and what type of income elasticity of demand (using the midpoint formula) does Kelly have?
A used car is an inferior good and the income elasticity of demand is -8.22.
Percentage change
Change in quantity/quantity
If the % change in quantity demanded divided by the % change in price in gasoline is less than 1, the demand for gasoline is considered
Correct. If the elasticity is less than 1, the curve is considered to be inelastic.
The ________ is the rate of change of one variable relative to the other variable along a line or curve. Responses
Correct. Slope measures the rate of change in one variable to a change in the other variable.
Automobiles would be considered
Elastic
Restaurant meals would be considered
Elastic
Which of the following questions would be asked by an economist studying elasticity?
How responsive are consumers and producers to changes in price?
Given that total revenue = price x quantity, what will happen to total revenue if price increases when demand is elastic?
It will decrease.
You are the manager of the public transit system. You are informed that the system faces a deficit, but you cannot cut service, which means you cannot cut costs. Your only hope is to increase revenue by increasing fares. You are advised that the estimated price elasticity of demand for the first few months after a price change is about −0.3 and that it is expected to become -1.5 in 2 years. Select the statement that best describes the results of raising the fare price.
In the long run, total revenue will fall as the demand becomes price elastic.
Tap water would be considered
Inelastic
midpoint elasticity approach:
Most accurate approach to solving for elasticity in which the percent changes in quantity demanded and price are measured relative to the average quantity demanded and price; the initial quantity demand is subtracted from the new quantity demanded; then divided by the average of the two quantities demanded; similarly, the initial price is subtracted from the new price, then divided by the average of the two prices
If the price of both organic eggs and non-organic eggs increases, which one would have the highest responsiveness of quantity demanded to this change in price?
Organic eggs
Percent change in quantity
Percent change in quantity (Q2-Q1/Q2/Q2 -2) x 100
Price Elasticity of Demand=
Percent change in quantity divided by percent change in price.
Price elasticity of demand=
Percentage change in quantity demanded/ percentage change in price.
If a change in price creates a larger change in quantity demanded, then we would say that the demand is
Price elastic.
You read an article stating that HTC's latest cell phone price has increased from $450 to $550. At the same time the quantity demanded for the Samsung Galaxy 7s increases from 1000 to 1850. Calculate the cross price elasticity of demand using the midpoint method. Are these two cell phones complements or substitutes?
The cross-price elasticity of demand is 2.98 and they are substitutes.
Consider that your income has increased this year from $50,000 to $60,000. You bought 3 pairs of designer jeans last year and decide to purchase 5 pairs this year. Keeping all other factors the same, which statement is correct regarding your income elasticity of demand and the designer jeans?
The income elasticity of demand is 2.75 and the designer jeans are considered a normal good.
So what does the number -0.7 tell us about the elasticity of demand?
The negative sign reflects the law of demand: at a higher price, the quantity demanded for cigarettes declines
What does this concept represent?
The percentage change in quantity demanded divided by the percentage change in price
The price elasticity of supply is defined as the
The percentage change in quantity supplied divided by the percentage change in price.
Suppose there is a major technological advance in the production of a good that causes production costs, and thus prices, to fall. If demand for the product is relatively inelastic, what will happen in the market?
The price decrease will be relatively greater than the increase in quantity.
Using the midpoint method, calculate the price elasticity of demand of Good Z using the following information: When the price of good Z is $10 (P1), the quantity demanded of good Z is 85 units (Q1). When the price of good Z rises to $15 (P2), the quantity demanded of good Z falls to 60 units (Q2).
The price elasticity of demand for good Z = 0.86.
Which of the following two goods illustrate a cross-price elasticity likely greater than zero?
The substitute goods of blueberries and strawberries.
Referring to Figure 3 above, which of the following statements is true?
The upper part of a demand curve is considered more elastic.
Suppose that the price of peanut butter decreases from $4.5 to $3.6. As a result, quantity supplied decreases from 240 to 190.
This supply curve is elastic.
You are the manager of the public transit system. You are informed that the system faces a deficit, but you cannot cut service, which means you cannot cut costs. Your only hope is to increase revenue by increasing fares. You are advised that the estimated price elasticity of demand for the first few months after a price change is about −0.3. Select the statement that best describes the results of raising the fare in the short run.
Total revenue rises immediately after the fare increase, since demand over the immediate period is price inelastic.
What happens to total revenue (TR) if the price decreases on a product with demand that is price elastic?
Total revenue will rise.
What happens to total revenue (TR) if the price decreases on a product with demand that is price elastic? Responses
Total revenue will rise.
What happens to total revenue (TR) if the price rises on a product with demand that is price inelastic?
Total revenue will rise.
elastic demand:
a high responsiveness of quantity demanded or supplied to changes in price
point elasticity approach:
a less-common way to compute the price elasticity of supply that computes the percentage change in quantity supplied by dividing the change in quantity supplied by the initial quantity, and the percentage change in price by dividing the change in price by the initial price. Thus, the formula for the point elasticity approach is [(Qs2 - Qs1)/Qs1] / [(P2 - P1)/P1].
Price elasticity of demand is
a measurement of the sensitivity of quantity demanded to changes in price.
If wages increase by 10%, a(n) ________ worker is likely to supply 7% more labor because elasticity of labor supply is assumed to be ________.
adult; inelastic.
Which of the following items is most likely to have price elasticity of demand above 1.0?
airline tickets
When income increases and demand for a good falls, the good is considered a
an inferior good.
point elasticity approach:
approximate method for solving for elasticity in which the percent changes are measured relative to the initial quantity demanded and price; the initial quantity demanded is subtracted from the new quantity demanded, then divided by the initial quantity demanded; similarly, the initial price is subtracted from the new price, then divided by the initial price.
A life sustaining medicine would most likely have a price elasticity of demand ________.
close to zero
A negative cross-price elasticity of demand between two products would indicate they are
complements.
Suppose that the price of one product increases from $13 to $46. As a result, quantity demanded for another product changes from 250 to 190. Based on this information you can tell that these two products are:
complements.
If the demand for a product is inelastic but the supply is elastic, the ________ will bear the tax incidence.
consumer
if the demand for a product is inelastic but the supply is elastic, the ________ will bear the tax incidence.
consumer
The government imposes an excise tax on house paint. The house paint tax incidence takes place within a market where the supply of house paint is elastic and the demand for house paint is inelastic. Who pays the most of the excise tax?
consumers of house paint
The ________ is negative for complementary goods and positive for substitute goods.
cross-price elasticity of demand
Suppose the price of apples increases by 20%, resulting in consumers purchasing 15% more pears. Given this information, it appears that
cross-price elasticity of pears is 0.75.
You are the manager of a restaurant and would like to increase revenue. The servers suggest decreasing the price of drinks and food. The servers' recommendation is based on the assumption that
demand for drinks and food is elastic.
Suppose the government adopts a public policy to fight obesity using an excise tax. When considering elasticity, consumers would probably pay more of this tax on fast food than the producers if
demand is inelastic and supply is elastic.
tax incidence:
distribution of the tax burden between buyers and sellers
The price for a cell phone case is $25 with the quantity demanded at 10,000 a day. As time goes on the price for a cell phone case increases to $30 and the quantity demanded decreases to 5,000 a day. Based on the price elasticity of demand using the midpoint method, this cell phone case is
elastic
The price of a Pop Socket is $10.00, and the quantity demanded is 5,000 per day. When the price falls to $8.00, the quantity demanded increases to 7,000 per day. Based on this information and using the midpoint method, the demand for Pop Sockets must be ________.
elastic
If the government wanted to encourage savings by offering a tax break, such a policy would increase savings most effectively if the supply curve for financial capital is
elastic.
Teenage workers are assumed to have an ________ labor supply; therefore a 5% increase in wages would result in ________ percentage change in quantity of labor supplied.
elastic; greater
The size of the change in the quantity demanded of a good or service due to a change in its price is measured by the elasticity of demand. When the percentage change in the quantity demanded for a good or service is more than the percentage change in price, the demand for that good or service is ________ and the measured price elasticity is
elastic; greater than 1
The size of the change in the quantity demanded of a good or service due to a change in its price is measured by the elasticity of demand. When the percentage change in the quantity demanded for a good or service is more than the percentage change in price, the demand for that good or service is ________ and the measured price elasticity is ________.
elastic; greater than 1
If the demand curve for energy is at first inelastic, then changes over time and becomes increasingly elastic, then the demand curve is
getting flatter.
Although slightly more complicated to calculate, one reason the midpoint (arc) elasticity approach is considered more accurate is that it
gives the same answer regardless of which price and which quantity should be in the denominator.
Elasticities are often ________ in the long run than in the short run.
higher
Consumers suffer when
higher costs are passed on to them for products with inelastic demand.
A perfectly elastic supply curve is
horizontal.
Joe received a promotion this year at work and now has an income which has increased by 21% since last year. Joe has now increased his quantity demanded of red wine by 7%. In this example, Joe's
income elasticity is .33 and the good is an inferior good.
uppose you buy a new car instead of a used car when your income rises. This implies the
income elasticity of demand for the used car is negative.
Consider a product with price elasticity of demand < 1.0. A 5% increase in the price of this product will cause total revenue to ________. Responses
increase
The demand for cotton is inelastic and the supply curve has moved to the left because of a bug infestation. This will cause the equilibrium price to ________ and equilibrium quantity to ________.
increase; decrease
An increase in demand will shift the demand curve to the right, therefore ________ the equilibrium price.
increasing
A smoker who is willing to pay whatever it takes to support a smoking habit likely has ________ demand.
inelastic
Physician visits would be considered
inelastic
Suppose new firms enter the energy drink market space moving the supply curve to the right. Consumers who purchase energy drinks will be better off if the product is considered ________. Responses
inelastic
inelastic demand:
inelastic demand:
Higher costs can typically be passed on to consumers when a product is considered
inelastic.
Suppose that the income increases from $2450 to $3150. As a result, quantity demanded changes from 220 to 190. Based on this information you can tell that this products is:
inferior.
If you divide the change in quantity demanded by the initial quantity, you are calculating the (point approach)
percentage change.
Analyze the following diagram: Demand "D" represents a demand curve that is
perfectly inelastic.
When the local grocery store puts peanut butter on sale, reducing its price from $4.20 per item to $3.70 per item, the quantity sold increases from 190 per week to 270 per week. This response illustrates which of the following concepts?
price elasticity of demand
A new technological breakthrough increases production for an industry and shifts the supply curve to the right. If the firm ________, then the firm will likely increase revenues with this new technology.
produces products that are price elastic
A new technological breakthrough increases production for an industry and shifts the supply curve to the right. If the firm ________, then the firm will likely increase revenues with this new technology. Responses
produces products that are price elastic
Percent change in price
quantity (p2-p1/p2/p2 -2) x 100
When the government imposes and collects an excise tax from producers of a product, this
shifts the supply curve upward.
In the ________, the consensus is the elasticity of savings is relatively inelastic, making the supply curve of savings relatively ________. Responses
short run; steep
more elastic:
the calculated elasticity is greater in absolute value, meaning the quantity response is greater to the same change in price
Now let's look at the second part of the formula. How do we find the percentage change in price using the midpoint formula?
the change in price divided by the average price, multiplied by 100
Let's look at the first part of the formula. How do we find the percentage change in quantity using the midpoint formula?
the change in quantity divided by the average quantity, multiplied by 100
The price elasticity of demand is zero and the demand curve is vertical when
the demand is perfectly inelastic.
perfectly (or infinitely) elastic:
the extremely elastic situation of demand or supply where quantity changes by an infinite amount in response to any change in price; horizontal in appearance
perfectly inelastic:
the highly inelastic case of demand in which a percentage change in price, no matter how large, results in zero change in the quantity; thus, the price elasticity of demand is zero; vertical in appearance
When a 10% increase in income causes a 4% increase in quantity demanded of a good
the income elasticity is .4 and the good is a normal good.
When a 10% increase in income causes a 4% increase in quantity demanded of a good Responses
the income elasticity is .4 and the good is a normal good.
wage elasticity of labor supply:
the percentage change in hours worked divided by the percentage change in wages
The price elasticity of demand is defined as
the percentage change in quantity demanded divided by the percentage change in price.
cross-price elasticity of demand:
the percentage change in the quantity of good A that is demanded as a result of a percentage change in good B
interest elasticity of savings:
the percentage change in the quantity of savings divided by the percentage change in interest rates
When elasticity of demand is equal to one, the change in the quantity demanded and the change in price are exactly proportional. This type of elasticity is described as ________.
unitary elastic
A product is considered relatively elastic ________.
when many substitutes to the product exist
unitary elasticity:
when the calculated elasticity is equal to one indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied
inelastic supply:
when the calculated elasticity of supply is less than one, indicating that a 1 percent increase in price paid to the firm will result in a less than 1 percent increase in production by the firm; this indicates a low responsiveness of the firm to price increases (and vice versa if prices drop)