Microecon Chapter 5: Elasticity and Its Application

Normal Good

A good characterized by a negative income elasticity

Inferior Good

A good characterized by a positive income elasticity.

Income Elasticity of demand

A measure of how much the quantity demanded of a good responds to a change in the consumers' income.

Price Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change int he price of that good.

Cross-Price elasticity of demand

A measure of how much the quantity demanded of one good responds to a change in the price of another good.

Total Revenue

The amount paid by buyers and received by sellers of a good computed as PxQ

Inelastic

When the quantity demanded or supplied responds only slightly to a change in one of its determinants.

Elastic

When the quantity demanded or supply responds substantially to a change in one of its determinants.

Price elasticity of supply

A measure of how much the quantity supplied of a good responds to a change in the price of that good.

Elasticity

A measure of the responsiveness of the quantity demanded or quantity supplied to a change in one of its determinants.

In general, a flatter demand curve is more likely to be a. price elastic b. price inelastic c. unit price elastic d. none of the above

a. price elastic

Technological improvements in agriculture that shift the supply of agricultural commodities to the right tend to a. reduce total revenue to farmers as a whole because the demand for food is inelastic b. reduce total revenue to farmers as a whole because the demand for food is elastic c. increase total revenue to farmers as a whole because the demand for food is inelastic d. increase total revenue to farmers as a whole because the demand for food is elastic

a. reduce total revenue to farmers as a whole because the demand for food is inelastic

If a supply curve for a food is price elastic, then a. the quantity supplied is sensitive to changes in the price of that good b. the quantity supplied is insensitive to changes in the price of that good. c. the quantity demanded is sensitive to changes in the price of that good. d. the quantity demanded is insensitive to changes in the price of that good. e. none of the above.

a. the quantity supplied is sensitive to the changes in the price of that good.

If a fisherman must sell all of his daily catch before it spoils for whatever price he is offered, once the fish are caught, the fisherman's price elasticity of supply for fresh fish is a. zero b. one c. infinite d. unable to be determined from this information

a. zero

Suppose that at a price of $30 per month, there are 30,000 subscribers to cable television in Small Town. If Small Town Cablevision raises its price to $40 per month, the number of subscribers will fall to 20,000. At which of the following price does Small Town Cabelvision earn the greatest total revenue? a. either $30 or $40 per month because the price elasticity of demand is 1.0 b. $30 per month c. $40 per month d. $0 per month

b. $30 per month

If consumers always spend 15% of their income on food, then the income elasticity of demand for food is a. 0.15 b. 1.00 c. 1.15 d.1.50 e. none of the above

b. 1.00

If supply is price inelastic, the value of the price elasticity of supply must be a. zero b. less than 1 c. greater than 1 d. infinite e. none of the above

b. less than 1

If a small percentage increase in the price of a good greatly reduces the quantity demanded for that good, the demand for that good is a. price inelastic b. price elastic c. unit price elastic d. income inelastic e. income elastic

b. price elastic

If there is excess capacity in a production facility, it is likely that the firm's supply curve is a. price inelastic b. price elastic c. unit price elastic d. none of the above

b. price elastic

If the income elasticity of demand for a good is negative, it must be a. a luxury good b. a normal good c. an inferior good d. an elastic good

c. an inferior good

If the cross-price elasticity between two goods is negative, the two goods are likely to be a. luxuries b. necessities c. complements d. substitutes

c. complements

If demand is linear (a straight line), then price elasticity of demand is a. constant along the demand curve b. inelastic in the upper portion and elastic in the lower portion c. elastic in the upper portion and inelastic in the lower portion d. elastic throughout e. inelastic throughout

c. elastic in the upper portion and inelastic in the lower portion

In general, a steeper demand curve is more likely to be a. price elastic b. price inelastic c. unit price elastic d. none of the above

c. price inelastic

The price elasticity of demand is defined as a. the percentage change in price of a good divided by the percentage change n the quantity demanded of that good. b. the percentage change in income divided by the percentage change in the quantity demanded. c. the percentage change in the quantity demanded of a good divided by the percentage change int he price of that good. d. the percentage change in the quantity demanded divided by the percentage change in income. e. none of the above.

c. the percentage change in the quantity demanded of a good divided by the percentage change in the price of that good.

If an increase in the price of a good has no impact on the total revenue in that market demand must be a. price inelastic b. price elastic c. unit price elastic d. all of the above

c. unit price elastic

Suppose that at a price of $30 per month, there are 30,000 subscribers to cable television in Small Town. If Small Town Cablevision raises its price to $40 per month, the number of subscribers will fall to 20,000. Using the midpoint method for calculating the elasticity, what is the price elasticity of demand for cable television in Small Town? a. 0.66 b. 0.75 c. 1.0 d. 1.4 e. 2.0

d. 1.4

Which of the following would cause a demand curve for a good to be price inelastic? a. There are a great number of substitutes for the good. b. The good is inferior. c. The good is a luxury. d. The good is a necessity.

d. The good is a necessity.

A decrease in supply (shift to the left) will increase total revenue in that market if a. supply is price elastic b. supply is price inelastic c. demand is price elastic d. demand is price inelastic

d. demand is price inelastic

If consumers think that there are very few substitutes for a good, then a. supply would tend to be price elastic b. supply would tend to be price inelastic c. demand would tend to be price elastic d. demand would tend to be price inelastic e. none of the above is true.

d. demand would tend to be price inelastic

The demand for which of the following is likely to be the most price inelastic? a. airline tickets b. bus tickets c. taxi rides d. transportation

d. transportation