ECON Chapter 6
If the University Chamber Music Society decides to raise ticket prices to provide more funds to finance concerts, the Society is assuming that the demand for tickets is
inelastic.
Blossom, Inc., sells 500 bottles of perfume a month when the price is $7. A huge increase in resource costs forces Blossom to raise the price to $9, and the firm only manages to sell 460 bottles of perfume. Using the midpoint formula, the price elasticity of demand coefficient is
0.33 and inelastic.
(Last Word) Suppose that a firm has "pricing power" and can segregate its market into two distinct groups based on differences in elasticities of demand. The firm might charge
a higher price to the group that has the less elastic demand.
(Last Word) Based on the concept of price elasticity of demand, which of the following cases is most likely to occur?
colleges charging lower tuition for low-income students
Refer to the information and assume the stadium capacity is 5,000. The supply of seats for the game (price per ticket | Quantity Demanded) ($13 | 1,000, $11 | 2,000, $9 | 3,000, $7 | 4,000, $5 | 5,000, $3 | 6,000)
is perfectly inelastic.
Elasticity of supply will increase when
it becomes easier to substitute one factor of production for another in a manufacturing process.
We would expect the cross elasticity of demand between dress shirts and ties to be
negative, indicating complementary goods.
If the income elasticity of demand for store brand macaroni and cheese is −3.00, this means that
store brand macaroni and cheese is an inferior good.
If a firm can sell 3,000 units of product A at $10 per unit and 5,000 at $8, then
the price elasticity of demand is approximately 2.25.
The price elasticity of demand coefficient measures
buyer responsiveness to price changes.
If a firm's demand for labor is elastic, a union-negotiated wage increase will
cause the firm's total payroll to decline.
To economists, the main differences between "the short run" and "the long run" are that
in the long run all resources are variable, while in the short run at least one resource is fixed.
Suppose that as the price of Y falls from $2.00 to $1.90, the quantity of Y demanded increases from 110 to 118. Then the absolute value of the price elasticity (using the midpoint formula) is approximately
1.37.
Suppose the price elasticity of demand for bread is 0.2. If the price of bread falls by 10 percent, the quantity demanded will increase by
2 percent and total expenditures on bread will fall.
Which of the following is not characteristic of a product with relatively inelastic demand? a. The good is regarded by consumers as a necessity. b. There are a large number of good substitutes for the good. c. Buyers spend a small percentage of their total income on the product. d. Consumers have had only a short time period to adjust to changes in price.
There are a large number of good substitutes for the good.
The main determinant of elasticity of supply is the
amount of time the producer has to adjust inputs in response to a price change.
When the percentage change in price is greater than the resulting percentage change in quantity demanded,
an increase in price will increase total revenue.
Refer to the diagram and assume a single good. If the price of the good decreases from $6.30 to $5.70, consumer expenditure would (On a Price Quantity graph, prices $5.70 and $6.30 go through both D1 and D2, D1 has both Quantities 188 and 212 and D2 has both Quantities 384 and 416).
decrease if demand were D2 only.
If the demand for farm products is price inelastic, a bumper crop (an unusually good harvest) will cause farm revenues to
decrease.
The total-revenue test for elasticity
does not apply to supply, because price and total revenue have a positive correlation.
We would expect a. the demand for Coca-Cola to be less price elastic than the demand for soft drinks in general. b. the demand for Coca-Cola to be more price elastic than the demand for soft drinks in general. c. no relationship between the price elasticity of demand for Coca-Cola and the price elasticity of demand for soft drinks in general. d. none of these answers hold true.
the demand for Coca-Cola to be more price elastic than the demand for soft drinks in general.
The narrower the definition of a product,
the larger the number of substitutes and the greater the price elasticity of demand.
The Illinois Central Railroad once asked the Illinois Commerce Commission for permission to increase its commuter rates by 20 percent. The railroad argued that declining revenues made this rate increase essential. Opponents of the rate increase contended that the railroad's revenues would fall because of the rate hike. It can be concluded that
the railroad felt that the demand for passenger service was inelastic and opponents of the rate increase felt it was elastic.
The concept of price elasticity of demand measures
the sensitivity of consumer purchases to price changes.
Which of the following is not characteristic of the demand for a commodity that is elastic? a. The relative change in quantity demanded is greater than the relative change in price. b. Buyers are relatively sensitive to price changes. c. Total revenue increases if price is increased. d. The elasticity coefficient is greater than one.
Total revenue increases if price is increased.
Refer to the diagram and assume that price increases from $2 to $10. The coefficient of the price elasticity of supply (midpoint formula) relating to this price change is about (On a Price Quantity graph the slope goes from Q5, P$2 to Q7, P$10)
0.25, and supply is inelastic.
The cross elasticity of demand between Quaker State motor oil and Texaco motor oil is likely to be
a positive number.
If quantity demanded is completely unresponsive to price changes, demand is
perfectly inelastic.
Assume that a 6 percent increase in income in the economy produces a 3 percent increase in the quantity demanded of good X. The coefficient of income elasticity of demand is
positive, and therefore X is a normal good.
Suppose that a 10 percent increase in the price of normal good Y causes a 20 percent increase in the quantity demanded of normal good X. The coefficient of cross elasticity of demand is
positive, and therefore these goods are substitutes.
We would expect the cross elasticity of demand between Pepsi and Coke to be
positive, indicating substitute goods.
The supply curve of antique reproductions is
relatively elastic.
Gigantic State University raises tuition for the purpose of increasing its revenue so that more faculty can be hired. GSU is assuming that the demand for education at GSU is
relatively inelastic.
Suppose the income elasticity of demand for toys is +2.0. This means that
a 10 percent increase in income will increase the purchase of toys by 20 percent.
You are the sales manager for a software company and have been informed that the price elasticity of demand for your most popular software is less than 1. In order to increase total revenues from that product, you should
increase the price of the software.
Suppose we find that the price elasticity of demand for a product is 3.5 when its price is increased by 2 percent. We can conclude that quantity demanded
decreased by 7 percent.
If 100 shirts are sold when the unit price is $10, while 75 shirts are sold when the unit price is $15, one can conclude that in this price range,
demand for the shirts is inelastic.
A union argues that a price cut will boost the revenues of the firm, while management argues that the opposite is true. This suggests that the price elasticity of demand is
elastic from the union's perspective, inelastic from management's perspective.
It is argued that, with a rising demand for college education, if the supply were to become more elastic, then college tuition costs would
increase more slowly.
If the price elasticity of demand for a product is unity, a decrease in price will
increase the quantity demanded, but total revenue will be unchanged.
Refer to the diagram. The decline in price from P1 to P2 will (On a Price Quanity graph, a demand line is at a decline and separated into 4 sections, A falls below P1 and to the left of the first quantity line, B below P2 and to the left of the first quantity line, C below P1 and to the left of the second quantity line, and finally D below P2 and to the left of the second quantity line)
increase total revenue by D − A.
If in the short run the demand for mass transit is inelastic and in the long run the demand is elastic, then a price
increase will increase total revenue in the short run but decrease total revenue in the long run.
The demand for a luxury good whose purchase would exhaust a big portion of one's income is
relatively price elastic.
The demand for a necessity whose cost is a small portion of one's total income is
relatively price inelastic.
Suppose that the price of peanuts falls from $3 to $2 per bushel and that, as a result, the total revenue received by peanut farmers changes from $16 to $14 billion. Thus,
the demand for peanuts is inelastic.
