Principles of Microeconomics FGCU CH.5

Inferior Goods Ey < 0

- As incomes rise, consumers buy fewer inferior goods - As incomes fall, consumers buy more inferior goods

Normal Goods 0 < Ey < 1

- As incomes rise, consumers buy more normal goods - As incomes fall, consumers buy fewer normal goods

Luxury Goods Ey > 1

- As incomes rise, purchases of luxury goods rise by more than the change in income

Elasticity of Demand (negative)

- The more INELASTIC the demand, the greater the tax burden on CONSUMERS - The more ELASTIC the demand, the greater the tax burden on PRODUCERS

Elasticity of Supply (positive)

- The more INELASTIC the supply,the greater the tax burden on PRODUCERS - The more ELASTIC the supply, the greater the tax burden on CONSUMERS

Cross Elasticity Eab is greater than 0

The goods are substitutes -- a price increase for good a increases demand for good b

Cross Elasticity Eab is less than 0

The goods are compliments -- if price increase for good a the demand decreases for good b

Ed is less than 1

Inelastic

Elasticity of Supply, Es is less than 1

Inelastic

Total Revenue

Price x Quantity

A grocery store announced a 50% decrease in the price of local honey. Sales increased by 200%. Based on the information, the price elasticity of honey is: - 4 - 0.4 - 0.04 - 0.25

4

Price Elasticity of Demand

ALWAYS NEGATIVE because law of demand

Progressive Tax

As incomes rise, income is taxed at a higher percentage (EX: Federal Income Tax)

If demand is inelastic, the tax burden falls primarily on the _____ and dead-weight loss is _____. - seller; small - buyer; large - seller; large - buyer; small

Buyer; Small

If the cross elasticity of demand for two goods is negative, that means that they are: - inferior goods - complementary goods -substitute goods - luxury goods

Complementary goods

Which of the following is a possible measurement of inelastic demand? - 0.7 - 1.0 - 2.3 - 1.5

0.7

Determinants of Elasticity

1. Number of substitutes available 2. The cost of proportion of one's budget 3. Whether a good is a necessity or a luxury 4. The period to respond to changes in price Elastic goods have many substitutes, are a large portion of one's budget, tend to be luxury goods, and/or have a long time horizon for responses

Using the midpoint method, what is the price elasticity of demand for a product whose price increased from $2 to $4 and whose quantity demanded decreased from 10 units to 5 units? - 0.5 - 1.0 - 0.4 - (-0.5)

1.0

If the price rises from $2 to $3 and the quantity demanded falls from 500 units to 300 units, the price elasticity of demand using the midpoint method is: - 0.08 - 0.80 - 1.50 - 1.25

1.25

Suppose that the quantity demanded for a product falls by 9% as people's incomes fall by 3%. What is the income elasticity for this good? - 0.33 - (-3.00) - 3.00 - (-0.33)

3.00

Walmart is thinking about offering a 25% discount on a brand of shoes. If the elasticity of demand is two, then the discount would increase sales by: - 25% - 2% - 50% - 200%

50%

Which of these would result in a higher price elasticity? - a shorter period of time - a good becoming a necessity - fewer subsitutes - a longer time period

A longer time period

Tax burdens are higher on consumers when: - demand is inelastic and supply is elastic - demand is elastic and supply is inelastic - demand and supply are inelastic - demand and supply are elastic

Demand is inelastic and supply is elastic

Ed is greater than 1

Elastic

Es is greater than 1

Elastic

If a product's price rises by 6% and its quantity demanded falls by 8%, then we can say that demand for this product is: - elastic - unitary elastic - inelastic - perfectly inelastic

Elastic

Suppose the price elasticity of demand is 3.0 and the price elasticity of supply is 0.08. The burden of an excise tax: - falls entirely on producers - is shared evenly by consumers and producers - falls primarily on consumers - falls primarily on producers

Falls primarily on producers

The greater the percentage of the budget spent on a good, the: - higher is the elasticity if demand - greater is the elasticity of demand - less responsive is quantity demanded to a change in price - lower is the elasticity of demand

Higher is the elasticity of demand

The greater the percentage of the budget spent on a good, the: - less responsive is quantity demanded to a change in price - higher is the elasticity of demand - lower is the elasticity of demand - greater is the inelasticity of demand

Higher is the elasticity of demand

Which of the following products would have the highest price elasticity of demand? - cigarettes - hot dogs sold by a street vendor - blood thinning medication prescribed to stroke victims - gasoline

Hot dogs sold by street vendors

When the price of hamburgers increased from $1.50 to $2.75, the quantity demanded decreased from 375 units sold to 250 units sold. Using the midpoint method, hamburgers are said to be: - inelastic - elastic - unitary elastic - monetary elastic

Inelastic

Suppose your income falls from $35,000 to $33,000 and that your quantity demanded of a good increases from 40 units to 55 units. The good is said to be a(n): - substitute good - inferior good - normal good - luxury good

Inferior good

If hot dogs and relish are complements, their cross elasticity of demand is: - 0 - greater than 0, less than 1 - greater than 0 - less than 0

Less than 0

Midpoint Method

MP = Q2-Q1 / (Q2+Q1/2) / P2-P1 / (P2+P1/2)

In general, the flatter the supply curve is, the: - more elastic is supply - shorter the period - less elastic is supply - fewer adjustments to price changes that firms can make

More elastic is supply

In general, the flatter the supply curve, the: - fewer the adjustments to price changes that firms can make - less elastic is supply - shorter the period - more elastic is supply

More elastic is supply

If soda and potato chips are complements, then their cross elasticity of demand is: - 0 - greater than 1 - negative - positive

Negative

If the income elasticity of demand for tea is 0.50, tea is a: - substitute for coffee - complement of coffee - luxury good - normal good

Normal Good

If the demand for Quilted Northern bath tissue is elastic, then the: - percentage change in quantity demanded is less than the percentage change in price - percentage change in quantity demanded is greater than the percentage change in price - elasticity coefficient is less than 1 - percentage change in quantity demanded equals the percentage change in price

Percentage change in quantity demanded is greater than the percentage change in price

If the cross price elasticity of demand for good A with respect to good B is 2.3, then good A is a(n): - inferior good - complement for good B - substitute for good B - normal good

Substitute for good B

A vertical demand curve represents demand that is: - unitary elastic - perfectly inelastic - inelastic - elastic

Perfectly inelastic

Short Run

Period in which the number of firms does not change but each firm can adjust output levels

Long Run

Period long enough for new firms to enter

Market Period

Period so short that output and number of firms are fixed

Knowing a product's price elasticity of demand allows economists to: - respond quickly to tariff changes - predict how changes in consumers' income will affect sales - predict the amount by which quantity demanded will change in response to a change in price - predict the amount by which quantity supplied will change in response to a change in price

Predict the amount by which quantity demanded will change in response to a change in price

Most income taxes are: - regressive - progressive - flat - lump sum

Progressive

A tax in which the percentage of income tax rises as income falls is known as a: - progressive tax - regressive tax - lump-sum tax - flat tax

Regressive tax

Which of the following is NOT a determinant of elasticity? - availability of substitute products - sales tax rate placed on an item - time - whether the item is a necessity or a luxury

Sales tax rate placed on an item

Regressive Tax

Tax becomes smaller as incomes rise (EX: FICA Income Tax)

Flat Tax

Tax is a fixed percentage regardless of income (EX: Medicare Tax is 2.9%)

Income Elasticity of Demand, Ey

The sign determines whether goods are normal, luxury, or inferior with respect to income

One practical reason that economists use percentages to measure elasticity is: - that more complicated calculations tend to be more accurate - to convert elasticities to the dollar units - to convert units to the metric system - to be able to compare characteristics of unrelated products

To be able to compare characteristics of unrelated products

Ed is equal to 1

Unitary elastic

Es is equal to 1

Unitary elastic

Elastic Good

When price changes - quantity demanded changes a lot (EX: crest whitening bubble gum flavored toothpaste) -- sensitive to price change and is very responsive

Inelastic Good

When price changes - quantity demanded doesn't change that much (EX: gas or surgery) -- less sensitive to price change and not very responsive