Economics quiz 3

How much the demand for one good changes in response to a change in the price of a different good is measured by-

cross-price elasticity

A linear demand curve....

has a constant slope, but changing elasticity

When a small percentage change in price causes a large percentage change in the quantity demanded, we say that they have a-

highly elastic demand

Which is most likely to have an income elasticity between 0 and 1?

milk

Ice cream is _________________ than frozen treats because ________________....

more price elastic; the scope of the market is less broadly defined

Spring break vacations are _________________ than tuition payments because ________________......

more price elastic; they are more of a luxury good

Assuming elasticity is reported in absolute value, an inelastic demand has a measured elasticity-

of less than one

A good whose demand is unitary elastic refers to-

one in which the absolute value of the percentage change in the quantity demanded exactly equals the absolute value of the corresponding percentage change in price

We need to calculate the price elasticity of demand because-

producers need to know that consumers are more sensitive to price changes for some goods and services than for others

A box of corn flakes cereal is likely to be-

very price elastic, since there are many close substitutes available

Farmfresh brand apple juice is likely to be-

very price elastic, since there are many close substitutes available

Demand tends to be more elastic...

when price is high and more inelastic when price is low

A price increase will cause an increase in revenue-

when the price effect outweighs the quantity effect

If the price of a good increases by 10 percent, its quantity demanded drops by 50 percent. The price elasticity of demand is-

5

If the price of butter changes by 5 percent, we observe a 25 percent change in the quantity demanded of margarine. The cross-price elasticity of these goods is-

5

An increase in price-

-causes a quantity effect. -causes a price effect. -causes a decrease in revenue that results from selling fewer units of the good, and a simultaneous increase in revenue that results from receiving a higher price for each unit sold.

A perfectly inelastic demand-

-means people will not respond to any change in price -means quantity demanded will stay constant regardless of the price. -is demonstrated by a perfectly vertical demand curve

If the price effect outweighs the quantity effect of a price decrease, then-

-total revenue will decrease. -the good is price inelastic. -the measured elasticity must be less than 1.

If the price of cereal changes by 10 percent, we observe a 2 percent change in the quantity of milk demanded. The cross-price elasticity of these goods is-

.2

If a good has a highly elastic demand curve, then-

a small percentage change in price will cause a large change in quantity demanded

Income elasticity will be positive for-

all normal goods

A perfectly inelastic demand-

means people will not respond to any change in price

When two goods are substitutes, we expect their cross-price elasticity of demand to-

be positive

If the price of a Domino's pizza decreases, while the price of a Pizza Hut pizza doesn't, we expect the quantity of Pizza Hut pizza demanded to-

decrease as some people switch from Pizza Hut to the relatively cheaper Domino's

A decrease in price-

does not necessarily have to experience a quantity effect when the demand curve is downward sloping

Ray just got a raise, and decided to splurge on a fancy dinner to celebrate. The change to Ray's demand for fancy dinners could be captured by the-

income elasticity of demand

If the price of a cup of Dunkin' Donuts coffee rises, while the price of a Starbucks latte doesn't, we expect the quantity of lattes demanded to-

increase as some people switch from coffee to the relatively cheaper latte

Knowing the price elasticity of demand is important in business because-

it allows a manager to determine whether a price increase will cause total revenue to rise or fall

The mid-point method of calculating elasticity is often used because-

it allows us to have a consistent way to estimate the elasticity of demand between two points, regardless of the direction of the movement

A cup of coffee is ______________ than dinner out at a fancy restaurant because _________________....

less price elastic; it is a smaller portion of one's income

A movie ticket is _________________ than a ticket to a Broadway show because ______________...

less price elastic; it is a smaller portion of one's income

Classical music is _______________ than Beethoven's music because _______________...

less price elastic; the scope of the market is more broadly defined

Dolls are __________________ than Barbie dolls because ___________________....

less price elastic; the scope of the market is more broadly defined

Cars are _________ than yachts because _______________.......

less price elastic; they are more of a necessity good

Whether a cross-price elasticity of demand is positive or negative-

tells us whether the goods are substitutes or complements

A perfectly elastic demand is one in which-

the demand curve is perfectly horizontal

If the quantity effect outweighs the price effect of a price increase, then-

the good is price elastic

Bob got laid off six months ago. He used to go to the movies once a month, but he's only been twice since losing his job. This type of behavior can be measured using-

the income elasticity of demand

Mathematically, price elasticity of demand is-

the percentage change in the quantity of a good that is demanded in response to a given percentage change in price

If the cross-price elasticity of two goods is 0.25, then we know that-

those goods are substitutes because their elasticity is greater than zero

A good is unit elastic if-

total revenue stays the same as a result of a price increase