Economics Elasticity Chp 6
Regardless of the price of ice cream, Charlie spends $5 a week on ice cream. What can we conclude about Charlie's demand for ice cream? a His price elasticity of demand for ice cream is equal to one. b His income elasticity of demand for ice cream is equal to zero. c His income elasticity of demand for ice cream is equal to one. d His price elasticity of demand for ice cream is equal to zero.
a His price elasticity of demand for ice cream is equal to one. If total expenditure by consumers (TR for producers) remains the same after a price change, then demand is unit-elastic. * chart
A bank increased its fees for processing personal checks from 18 cents to 24 cents per check. In a statement accompanying the announcement, the bank said that customers who could find ways to reduce the number of checks they write would see no increase in their overall account fee. What is the implication of this statement? a Some account holders have a unit-elastic demand for check writing. b The income elasticity of demand for check writing is less than one. c The income elasticity of demand for check writing is greater than one. d Account holders are indifferent to the check writing fee.
a Some account holders have a unit-elastic demand for check writing. If total expenditure by consumers (TR for producers) remains the same after a price change, then demand is unit-elastic.
What happens to the elasticity of demand as we move down to the right along a straight-line demand curve? a The demand becomes relatively less elastic. b It changes from a positive number to a negative number. c The demand becomes relatively more elastic. d It changes from a negative number to a positive number
a The demand becomes relatively less elastic.
If the demand for a product is perfectly inelastic, then which of the following is most likely to be true? a The product is extremely important to those who buy it. b The product has many substitutes. c The demand curve for the product is horizontal. d The coefficient of price elasticity of demand for that product is infinity (∞).
a The product is extremely important to those who buy it.
If the price elasticity of demand for an annual magazine subscription is 1.6 in the range between $26 and $30, what happens in the market for this subscription when the price rises over this range? a There will be a decrease in the total revenue the magazine collects on its subscriptions. b Magazines will become a normal good. c There will be an increase in the total revenue the magazine collects on its subscriptions. d Magazines will become an inferior good.
a There will be a decrease in the total revenue the magazine collects on its subscriptions. *chart Total revenue decreases because of a price increase. This implies that demand at price $26 is price-elastic. The negative quantity effect outweighs the positive price effect.
An increase in the labor costs of producing a product, combined with a relatively inelastic demand curve, will result in a a relatively small reduction in output. b a relatively small increase in equilibrium price. ' c a decrease in total revenue. d a leftward shift in the demand curve.
a a relatively small reduction in output. *chart
Karen operates a boutique. She knows that the price elasticity of demand for one of her products is 2.0. If the price of this product were to increase by 10%, a quantity demanded would rise by 20%. b quantity demanded would fall by 20%. c quantity demanded would rise by 5%. d quantity demanded would fall by 5%.
a quantity demanded would rise by 20%. E = ∆Q%/∆P% ∆Q% = E × ∆P% ∆P% = 10% ∆Q% = 2 × 20% = 20%
The sign (negative or positive) on the cross-price elasticity of demand for wine and chocolate tells us a whether wine and chocolate are substitutes or complements. b whether wine is a normal good. c whether chocolate is a normal good. d how the burden of an excise tax on either good would be split between consumers and producers.
a whether wine and chocolate are substitutes or complements.
Jenny spends $45 a month on her favorite wine, merlot. When the price falls by 20% she spends 10% more on her favorite wine. What does this indicate about Jenny's demand for her favorite wine? a Jenny's demand for merlot is price inelastic. b Jenny's demand for merlot is price elastic. c Jenny's preference for merlot has decreased. d To determine price elasticity we have to know the initial and subsequent price/quantity figures.
b Jenny's demand for merlot is price elastic. Be careful here. This is a trap. If the price falls and total expenditure increases, regardless of percent increase, then demand is elastic. The trap here is the confusion between percentage change in quantity demanded versus the percentage change in total expenditure. If the problem had stated "Jenny buys 10% more bottles of wine", then her demand would be inelastic.
Compute the price and sales (quantity) effect of the decrease in price. The price effect is ______; the quantity effect is _______. a PE = $16.00 QE = -$9.60 b PE = -$16.00 QE = $9.60 c PE = $9.60 QE = -$16.00 d PE = -$9.60 QE = $16.00
b PE = -$16.00 QE = $9.60
What situation would make the demand for new cars relatively more price elastic? a, There is a plentiful supply of used cars. b. Car buyers are prosperous, and they are seeking luxury cars. c. Auto manufacturers have a difficult time hiring skilled workers. d. Auto manufacturers find it easy to hire skilled workers. New cars and used cars are substitutes.
a. There is a plentiful supply of used cars.
Since for most people eating in restaurants is a luxury while eating at home is a necessity, the demand for food eaten at home a is less sensitive to changes in price than the demand for food eaten in a restaurant. b is more sensitive to changes in price than the demand for food eaten in a restaurant. c cannot be compared with the demand for food eaten in restaurant in terms of price elasticity of demand. d has a higher price elasticity of demand than the demand for food eaten in a restaurant.
a. is less sensitive to changes in price than the demand for food eaten in a restaurant.
The demand for enrollment at RTC University is price inelastic. When the board of trustees faces a budget shortfall and needs to increase tuition revenue, they should a raise tuition because the increase in tuition will more than offset the fall in enrollment and total revenue will rise. b lower the tuition because the increase in enrollment will more than offset the lower tuition and total revenue will rise. c raise tuition because enrollment will increase along with the tuition. d raise tuition because enrollment will not change and the higher tuition per student will increase total revenue.
a. raise tuition because the increase in tuition will more than offset the fall in enrollment and total revenue will rise.
When the transit authority raises subway fares by 10%, ridership falls by 5%. What is the price elasticity of demand for subway rides? a 0.5 Demand is price elastic. b 0.5 Demand is price inelastic. c 2.0 Demand is price elastic. d 2.0 Demand is price inelastic.
b 0.5 Demand is price inelastic. E = ∆Q%/∆P% E = 5/10 = 0.5 < 1 Demand is inelastic.
The price of Good X rises from $5 to $6. Total revenue falls from $400 to $360. We can conclude that the coefficient of price elasticity of demand is (roughly), a 0.58. Demand is inelastic. b 1.57. Demand is elastic. c 0.58. Demand is elastic. d 1.57. Demand is inelastic.
b 1.57. Demand is elastic. *chart
As soon as the price of a good goes up, suppliers would like to produce more but may not be able to because they cannot immediately hire more skilled laborers and/or purchase new machinery. However, over time firms can hire more workers and purchase more machinery. Consequently, the price elasticity of supply a decreases over time. b increases over time. c remains constant over time. d may increase or decrease over time.
b increases over time.
If the government imposes a price ceiling in a market, the resulting shortage will be smaller when demand is ____________ and supply is ___________. a elastic; inelastic b inelastic; inelastic c elastic; elastic d perfectly inelastic; elastic
b inelastic; inelastic *chart
During a drought, the price elasticity of demand for water is less than one. During a flood, the price elasticity of demand for water is greater than one. This means that a the quantity of water people choose to consume is independent of the price. b the demand for water is inelastic during a drought and elastic during a flood. c the demand for water is elastic during a drought and inelastic during a flood. d the demand curve for water cannot have a constant slope.
b the demand for water is inelastic during a drought and elastic during a flood.
The sign (positive or negative) on the income elasticity of demand tells us a the number of substitutes available for the good. b whether the good is normal or inferior. c whether consumers or producers will bear the biggest burden of the tax. d the number of complements available for the good.
b whether the good is normal or inferior.
Bar owners often offer lower beer prices to women than they do to men. This will enhance bar revenues if a women have an inelastic demand for beer, and men have an elastic demand. b women have an elastic demand for beer, and men have an inelastic demand c both men and women have a negative income elasticity of demand for beer. d both men and women have a unit-elastic demand for beer.
b women have an elastic demand for beer, and men have an inelastic demand
If a good has many close substitutes, its price elasticity of demand will be a constant. b larger than if there existed few close substitutes. c smaller than if there existed few close substitutes. d unit-elastic.
b. larger than if there existed few close substitutes.
The cross-price elasticity of demand for Coke and Pepsi is a equal to zero. b larger than zero. c less than zero. d cannot be estimated.
b. larger than zero. Coke and Pepsi are substitute goods. If price of Coke goes up demand for Pepsi will increase. Cross price elasticity is positive.
Price elasticity of demand measures as the ratio of a the change in quantity demanded to the change in quantity supplied. b. the percentage change in quantity demanded to percentage change in price. c. the change in price to the change in quantity demanded. d. the proportional change in price to proportional change in quantity demanded.
b. the percentage change in quantity demanded to percentage change in price.
Given the demand schedule for ice cream in the table above, as the price per cone rises from $2.50 to $3.00, the quantity effect is ______, the price effect is ______, and TR ______ (increases, decreases) from $______ to $______. Draw the demand curve and the price and quantities lines in the chart area below. a $500 -$200 increases $1,200 $1,500 b -$200 $500 increases $1,200 $1,500 c -$500 $200 decreases $1,500 $1,200 d $200 -$500 decreases $1,500 $1,200
c -$500 $200 decreases $1,500 $1,200
Given the changes in the equilibrium price and quantity because of the increase in supply, what is the coefficient of the price elasticity of demand? a E = 0.37 b E = 0.47 c E = 0.67 d E = 1.67
c E = 0.67 *chart
What determines the price elasticity of supply? a The amount of an excise tax imposed on a good b The difference between the equilibrium price of a good and the price established by a price floor c The ease with which suppliers can expand production of the good d The number of substitutes consumers can find for the good
c The ease with which suppliers can expand production of the good
a a relatively small reduction in output. a a relatively small increase in output. b a relatively large decrease in equilibrium price. c an increase in total revenue. d a rightward shift in the demand curve.
c an increase in total revenue. *chart
Two goods are complements if the a income elasticity of each is positive. b income elasticity of each is negative. c cross-price elasticity is negative. d cross-price elasticity is positive.
c cross-price elasticity is negative.
If the government imposes a price floor in a market, the resulting surplus will be larger when demand is ____________ and supply is ___________. a elastic; inelastic b inelastic; inelastic c elastic; elastic d perfectly inelastic; elastic
c elastic; elastic *chart
When income rises, demand for movie tickets also rises. The income elasticity of demand for movie tickets is a equal to zero. b larger than zero. c less than zero. d cannot be estimated.
c less than zero. Movie ticket is a normal good. When income rises demand for movie tickets increases. Income elasticity of demand is positive.
When the price of rice rises, people buy less beans. The cross-elasticity of demand for rice and beans must be a equal to zero. b larger than zero. c less than zero. d cannot be estimated.
c less than zero. Rice and beans are complements. When price of rise rises, demand for beans decreases. Cross-price elasticity is negative.
The income elasticity of Good A is positive, and the cross-price elasticity between Good A and Good B is negative. Good A is a(n) a normal good and a substitute for Good B. b inferior good and a substitute for Good B. c normal good and a complement for Good B. d inferior good and a complement for Good B.
c normal good and a complement for Good B.
Since Karen understands the concept of price elasticity of demand, to increase her revenues, a she should increase the price of the product in question, but by less than 10%. b she should increase the price of the product in question, but by more than 10%. c she should reduce the price of the product in question. d since price elasticity does not affect revenues, she should neither increase or reduce the price. Instead she should advertise the product.
c she should reduce the price of the product in question. Since the quantity demanded falls by 20 percent when Karen raises her price by 10%, then demand is price elastic: E = ∆Q%/∆P% = 20/10 = 2.00 If demand is price elastic, then to raise TR price must be reduced.
Before the price increased from $3.00 to $3.50 per gallon, a gasoline station sold 2,000 gallons of gasoline per day at price of $3.00 per gallon. Gasoline sales decreased to 1,900 gallons a day when the price increased to $3.50. The coefficient of price elasticity of demand for gasoline, E, is... a 0.33. This indicates that the demand for gasoline is elastic. b 0.20. This indicates that the demand for gasoline is elastic. c 0.33. This indicates that the demand for gasoline is inelastic. d 0.20. This indicates that the demand for gasoline is inelastic.
c. 0.33. This indicates that the demand for gasoline is inelastic.
If the price elasticity of demand for a good is 2.5, and the price of the good rises from $18 to $22, then the quantity demanded will a decrease by 25 percent. b increase by 2.5 percent. c decrease by 50 percent. d decrease by 8 percent.
c. decrease by 50 percent.
Along the demand curve in the figure below, the coefficient of price elasticity of demand a is constant and equal to its slope. b is larger at P₂ than at P₁. c is smaller at P₂ than at P₁. d is equal to 1.
c. is smaller at P₂ than at P₁.
The following table shows the weekly supply schedule for ice cream in Littleburg. Using the midpoint method, what is the price elasticity of supply between the price of $2.50 and $3.00 per cone? a 0.00 b 0.82 c 1.00 d 1.57
d 1.57 *chart
What do you have to know in order to calculate the price elasticity of supply? a The number of consumers in the market for the good b The number of firms supplying the good c The amount of total revenue collected on sales of the good d How much of the good will be offered for sale at each of two different prices
d How much of the good will be offered for sale at each of two different prices
What do you have to know in order to calculate the price elasticity of supply? a The number of consumers in the market for the good b The number of firms supplying the good c The amount of total revenue collected on sales of the good d How much of the good will be offered for sale at each of two different prices
d How much of the good will be offered for sale at each of two different prices ECP = ∆QA%/∆PB% ∆QCOKE% = ECP × ∆PPEPSI% ∆QCOKE% = 30%
Compute the total revenue before and after the shift in supply. Which one of the following is correct? a Total revenue has increased from $33.6 to $40, indicating that demand is price elastic. b Total revenue has increased from $33.6 to $40, indicating that demand is price inelastic. c Total revenue has decreased from $40 to $33.6, indicating that demand is price elastic. d Total revenue has decreased from $40 to $33.6, indicating that demand is price inelastic.
d Total revenue has decreased from $40 to $33.6, indicating that demand is price inelastic. TR₁ = $2.00 × 20 = $40.00 TR₂ = $1.20 × 28 = $33.60
Which of the following statements is correct? a When the price of a good increases, total revenue tends to decrease due to the price effect and tends to increase due to the quantity effect. b The cross-price elasticity of demand measures the extent to which the quantity effect outweighs the price effect. c A price increase always increases total revenue, because the seller collects a higher price on each unit sold. d When the price of a good increases, total revenue tends to increase due to the price effect and tends to decrease due to the quantity effect.
d When the price of a good increases, total revenue tends to increase due to the price effect and tends to decrease due to the quantity effect.
Two goods are substitutes if the a price elasticity of each is greater than one. b income elasticity of each is positive. c cross-price elasticity is negative. d cross-price elasticity is positive.
d cross-price elasticity is positive.
Frank Miller, a graduate of Purdue University, operates a medium size farm planting corn. He notices that many times whenever there is a bumper (abundant, plentiful) harvest of corn in the nation his total revenues, hence his profits, actually decrease. This indicates that, a agriculture is an unpredictable and risky business. b Frank should cut his operating costs further. c demand for corn is price elastic. d demand for corn is price inelastic.
d demand for corn is price inelastic. *chart
The demand for a good becomes relatively more elastic as a the time allowed for adjustment is shortened. b the good becomes more of a necessity. c fewer substitutes for the good become available. d more substitutes for the good become available.
d more substitutes for the good become available.
When the price of insulin rises, even diabetics who do not have insurance and pay the full cost of their medication do not cut back on how much they demand. We describe this type of demand as a perfectly price elastic. b elastic. c unit-elastic. d perfectly price inelastic.
d perfectly price inelastic.
When demand is perfectly elastic, a the demand curve is vertical. b suppliers do not respond to price changes. c consumers do not respond to price changes. d the demand curve is horizontal.
d the demand curve is horizontal.