Microeconomics Elasticity and Its Application

Refer to Figure 5-2. The section of the demand curve from A to B represents the

elastic section of the demand curve.

When small changes in price lead to infinite changes in quantity demanded, demand is perfectly

elastic, and the demand curve will be horizontal

Marcus says that he would smoke one pack of cigarettes each day regardless of the price. If he is telling the truth, Marcus's

demand for cigarettes is perfectly inelastic

Refer to Table 5-2. Using the midpoint method, if the price falls from $200 to $150, the price elasticity of demand is

elastic

For a good that is a luxury, demand

tends to be elastic.

Refer to Table 5-3. Using the midpoint method, the income elasticity of demand for good Y is

−2.33, and good Y is an inferior good.

Refer to Figure 5-3. At a price of $70 per unit, sellers' total revenue equals

$1,050

Refer to Figure 5-1. Between point A and point B, price elasticity of demand is equal to

1.5

Refer to Figure 5-5. Using the midpoint method, the price elasticity of demand between point X and point Y is

2.5

If the price elasticity of demand for a good is 2.0, then a 10 percent increase in price results in a

20 percent decrease in the quantity demanded.

Last year, Maria made $54,000 and bought five purses. This year, Maria makes $60,000 and purchased seven purses. Holding other factors constant and using the midpoint method, it follows that Maria's income elasticity of demand is about

3.17, and Maria regards purses as normal goods.

Which of the following could be the price elasticity of demand for a good for which a decrease in price would increase total revenue?

4

Studies indicate that the price elasticity of demand for cigarettes is about 0.4. A government policy aimed at reducing smoking changed the price of a pack of cigarettes from $2 to $6. According to the midpoint method, the government policy should have reduced smoking by

40 percent

Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 0.75. Which of the following events is consistent with a 10 percent decrease in the quantity of the good demanded?

A 13.33 percent increase in the price of the good

Refer to Table 5-1. Which of the following is consistent with the elasticities given in Table 5-1?

A is a luxury, and B is a necessity.

Refer to Figure 5-4. If rectangle D is larger than rectangle A, then which of the following is not correct?

An increase in price from P1 to P2 will cause an increase in total revenue.

For which of the following goods is the income elasticity of demand likely highest?

Diamonds

Your younger sister needs $50 to buy a new bike. She has opened a lemonade stand to make the money she needs. Your mother is paying for all of the ingredients. She currently is charging 25 cents per cup, but she wants to adjust her price to earn the $50 faster. If you know that the demand for lemonade is elastic, what is your advice to her?

Lower the price to increase total revenue.

If the price of natural gas rises, when is the price elasticity of demand likely to be the highest?

One year after the price increase

For a particular good, a 2 percent increase in price causes a 12 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?

The good is a luxury

Which of the following is not a determinant of the price elasticity of demand for a good?

The steepness or flatness of the supply curve for the good

Which of the following is likely to have the most price elastic demand?

Tommy Hilfiger jeans

For which of the following goods is the income elasticity of demand likely lowest?

Water

Refer to Figure 5-4. Total revenue when the price is P1 is represented by

areas B + D.

You and your college roommate eat three packages of Ramen noodles each week. After graduation last month, both of you were hired at several times your college income. You still enjoy Ramen noodles very much and buy even more, but your roommate prefers other food and now buys fewer Ramen noodles. When looking at income elasticity of demand for Ramen noodles, yours would

be positive, and your roommate's would be negative.

A good will have a more inelastic demand, the

broader the definition of the market.

Demand is said to be price elastic if

buyers respond substantially to changes in the price of the good.

The price elasticity of demand measures

buyers' responsiveness to a change in the price of a good.

If the demand for donuts is elastic, then a decrease in the price of donuts will

increase total revenue of donut sellers.

When the price of candy bars is $1.00, the quantity demanded is 500 per day. When the price falls to $0.80, the quantity demanded increases to 600. Given this information and using the midpoint method, we know that the demand for candy bars is

inelastic.

Goods with many close substitutes tend to have

more elastic demands.

Suppose demand is perfectly elastic, and the supply of the good in question decreases. As a result,

the equilibrium quantity decreases, and the equilibrium price is unchanged.

You are in charge of the local city-owned aquatic center. You need to increase the revenue generated by the aquatic center to meet expenses. The mayor advises you to increase the price of a day pass. The city manager recommends reducing the price of a day pass. You realize that

the mayor thinks demand is inelastic, and the city manager thinks demand is elastic.

Income elasticity of demand measures how

the quantity demanded changes as consumer income changes

Refer to Figure 5-3. Using the midpoint method, between prices of $20 and $30, price elasticity of demand is about

0.33

The demand for grape-flavored Hubba Bubba bubble gum is likely

elastic because there are many close substitutes for grape-flavored Hubba Bubba.

Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers are to a change in price, the

flatter the demand curve will be.

Refer to Figure 5-5. If the price decreased from $36 to $12, total revenue would

increase by $4,800, and demand is elastic between points X and Z

Demand is said to be inelastic if

the quantity demanded changes only slightly when the price of the good changes.