Quiz 5
The demand curve for a good is very unlikely to be perfectly vertical because
- scarcity and limited income restrict the ability of consumers to afford goods as they become very expensive. - as the price of a good rises to high enough levels, the incentive for other suppliers to invent new substitutes for the good increases.
Suppose that Starbucks reduces the price of its premium coffee from $2.20 to $1.80 per cup, and as a result, the quantity sold per day increased from 350 to 450. Over this price range, the absolute value of the price elasticity of demand for Starbucks coffee is
1.25
If a 25% change in price results in a 40% change in quantity supplied, then the price elasticity of supply is about
1.60, and supply is elastic.
If the elasticity of demand for cigarettes is 0.4, then an increase in the price of a pack of cigarettes from $1.00 to $1.30 would reduce quantities demanded by about
12 percent
Suppose the Pleasant Corporation cuts the price of its American Girl dolls by 10 percent, and as a result, the quantity of the dolls sold increases by 25 percent. This indicates that the price elasticity of demand for the dolls over this range is
2.5
A 10 percent increase in gasoline prices reduces gasoline consumption by about
2.5 percent after one year and 6 percent after five years.
If the price of apples decreases by 2 percent and causes apple consumption to increase by 4 percent, the price elasticity of demand is ____, indicating the demand is ____.
2; elastic
Suppose you are the manager of a local water company, and you are instructed to get consumers to reduce their water consumption by 10 percent. If the price elasticity of demand for water is −.25, by how much would you have to raise the price of water?
40 percent
If the price elasticity of demand for opera tickets is estimated to be 4.5, then a 10 percent increase in opera ticket prices would be expected to cause a
45 percent decrease in quantity demanded.
Suppose the price elasticity of supply for cheese is 0.6 in the short run and 1.4 in the long run. If an increase in the demand for cheese causes the price of cheese to increase by 15%, then the quantity supplied of cheese will increase by
9% in the short run and 21% in the long run.
The production of methamphetamine (meth) is a social problem in the Midwest. Iowa is considering two potential programs: Operation Methbust would increase the number of sheriffs' deputies to search out and destroy methamphetamine labs. Operation Say No to Meth would increase the training required of public school teachers so that they could better educate students about the health risks of using meth. Assuming that each program were successful, which of the following statements is correct?
Both Operation Methbust and Say No would reduce the equilibrium quantity of meth; Operation Methbust would increase the equilibrium price, whereas Say No would reduce the equilibrium price of meth.
Which of the following statements helps to explain why government drug interdiction increases drug-related crime?
Drug addicts will have an even greater need for quick cash to support their habits.
Scenario 5-5Suppose the government is concerned about firms in the United States importing illegal caviar. As a result, the government increases border patrols to catch illegal shipments. U.S. Customs agents perform DNA testing on the caviar to determine if it comes from endangered species of fish. If so, the government destroys the caviar. Refer to Scenario 5-5. What would we expect to observe in the caviar market?
Total revenues to caviar firms will increase if the demand for caviar is inelastic.
Elasticity is
a measure of how much buyers and sellers respond to changes in market conditions.
If you compared the short-run demand and long-run demand for education at your college, you would almost certainly find that
a tuition increase would reduce enrollment more in the long run than in the short run.
Compared to the long run, consumers typically ____ to price changes in the short run.
are less demand sensitive
If demand price elasticity measures 2, this implies that consumers would
buy 2 percent more of the product in response to a 1 percent drop in price.
Holding all other forces constant, when the price of gasoline rises, the number of gallons of gasoline demanded would fall substantially over a ten-year period because
buyers tend to be much more sensitive to a change in price when given more time to react.
Scenario 5-3The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both goods are considered to be normal goods by a majority of consumers. Suppose that a large income tax increase decreases the demand for both goods by 10%. Refer to Scenario 5-3. The equilibrium price will
decrease in both the aged cheddar cheese and bread markets.
Scenario 5-4Milk has an inelastic demand, and beef has an elastic demand. Suppose that a mysterious increase in bovine infertility decreases both the population of dairy cows and the population of beef cattle by 50 percent. Refer to Scenario 5-4. The equilibrium quantity will
decrease in both the milk and beef markets.
If a 10 percent rise in price leads to a reduction in quantity demanded of more than 10 percent,
demand is elastic
The discovery of a new hybrid wheat would increase the supply of wheat. As a result, wheat farmers would realize an increase in total revenue if the
demand of wheat is elastic
When studying how some event or policy affects a market, elasticity provides information on the
direction and magnitude of the effect.
A local Krispy Kreme doughnut shop reduced the price of its doughnuts from $4 per dozen to $3.50 per dozen, and as a result, the daily sales increased from 300 to 400 dozen. This indicates that the price elasticity of demand for the doughnuts was
elastic
When quantity demanded responds strongly to changes in price, demand is said to be
elastic
Other things equal, the demand for a good tends to be more inelastic, the
fewer the available substitutes.
Scenario 5-4Milk has an inelastic demand, and beef has an elastic demand. Suppose that a mysterious increase in bovine infertility decreases both the population of dairy cows and the population of beef cattle by 50 percent. Refer to Scenario 5-4. The change in equilibrium quantity will be
greater in the beef market than in the milk market.
If the price of apples rises from $.50 to $1.50 and quantity demanded falls from 1,000 to 900, we can conclude that the price elasticity for apples is
inelastic
The supply of oil is likely to be
inelastic in the short run and elastic in the long run.
When a good is more broadly defined (for example, Starbucks Caramel Macchiato versus coffee),
it will have fewer available substitutes so demand will be less elastic.
The demand for a product is likely to be more elastic when
more good substitutes for the product are available.
Which of the following is likely to have the most price elastic demand?
music downloads
If the price of natural gas rises, when is the price elasticity of demand likely to be the highest?
one year after the price increases
The demand for Chocolate Chip Cookie Dough ice cream is likely quite elastic because
other flavors of ice cream are good substitutes for this particular flavor.
If a demand curve for a good were completely vertical, it would be considered
perfectly inelastic
The price elasticity of demand measures how much
quantity demanded responds to a change in price
A drug interdiction program that successfully reduces the supply of illegal drugs in the United States likely will
raise the price, reduce the quantity, increase total revenues, and increase crime.
A successful advertising campaign would likely
reduce price elasticity of demand by stressing the uniqueness of the product
If a large percentage increase in the price of a good results in a small percentage reduction in the quantity demanded of the good, demand is said to be
relatively inelastic.
The price elasticity of demand for gasoline measures the
responsiveness of customers to changes in the price of gasoline.
The price elasticity of supply measures how responsive
sellers are to a change in price.
Given the market for illegal drugs, when the government is successful in reducing the flow of drugs into the United States,
supply decreases, demand is unaffected, and price increases.
Some firms eventually experience problems with their capacity to produce output as their output levels increase. For these firms,
supply is more elastic at low levels of output and less elastic at high levels of output.
Demand will be more elastic when
the number of good substitutes is large.
If the demand for flashlights is highly inelastic, this indicates that
the quantity of flashlights purchased by consumers is not very responsive to a change in the price of flashlights.
Generally, a firm is more willing and able to increase quantity supplied in response to a price change when
the relevant time period is long rather than short.
When the price elasticity of demand is large, then
the responsiveness of quantity demanded to a change in price is large.
Demand will be more inelastic when
the time the consumer has to adjust to price changes is short.
A key determinant of the price elasticity of supply is the
time horizon
Knowing that the demand for wheat is inelastic, if all farmers voluntarily did not plant wheat on 10 percent of their land, then
wheat farmers would experience an increase in their total revenue.