Ch. 5: Using Supply & Demand

Income increases, so does the demand of a good: income elasticity would be: Normal Good

Positive

The sign of the elasticity of supply will always be _______, just like the sign of the elasticity of demand will always be _________.

Positive, Negative

Rank the following in order from the least elastic demand to most elastic: 1. Allergy medicine that is prescribed by a physician 2. Any over-the-counter allergy medicine 3. Sudafed Cold and Allergy Medicine

1,2,3

If there is a drought, what would you expect to happen to farmers' revenues?

A drought will decrease supply, increasing the price of agricultural products. If agricultural products have an inelastic demand, then the increase in price will lead to an increase in farmers' incomes.

An increase in an inelastic demand will cause (a greater or lesser or same) change in the equilibrium quantity than the same increase in an elastic demand. A. A greater B. A lesser C. The same

A. A greater

When the federal government subsidizes higher education in the form of direct subsidies to universities, it results in: A. An increase in the supply of higher education B. A decrease in the supply of higher education C. An increase in the demand for higher education D. A decrease in the demand for higher education

A. An increase in the supply of higher education

A government may impose a price ceiling if which of the following is true? A. Consumers can persuade legislators that lower prices are needed B. Producers can persuade legislators that lower prices are needed C. Consumers can persuade legislators that higher prices are needed D. Producers can persuade legislators that higher prices are needed

A. Consumers can persuade legislators that lower prices are needed

A major city was thinking about increasing its bus fares and commissioned a study to estimate the price elasticity of demand. The study estimated that elasticity was 0.4. What action should the city have taken to increase revenue from bus fares? In the question above, if the city examined the elasticity of bus fares again, what would they likely find? A. Elasticity is now greater than 1 B. Elasticity is now less than 1 C. Elasticity is 0 Consumers have an opportunity to find alternatives to bus transportation, so they are likely to be more responsive in two years.

A. Elasticity is now greater than 1

An increase in an effective minimum legal price will do what to prices and quantities actually sold in a market? Prices will __________ and the quantities actually sold will ___________. A. Increase; decrease B. Increase; increase C. Decrease; decrease D. Decrease; increase

A. Increase; decrease

Is the demand for a container of salt likely to be inelastic or elastic? Why? Multiple answers: You can select more than one option A. Inelastic because salt is a necessary dietary component B. Elastic because there are lots of substitutes for salt C. Inelastic because for most people salt is a very small part of their budget D. Elastic because people only buy salt in the long-run

A. Inelastic because salt is a necessary dietary component C. Inelastic because for most people salt is a very small part of their budget

If the income elasticity of a good is 0.8, what do we know about the good? A. It is a normal good. B. It is an inelastic good. C. It is an inferior good. D. It is an elastic good.

A. It is a normal good.

If you were selling a product with an elasticity of 1.6 and you wanted to increase your revenue, what should you do to the price? A. Lower price B. Increase price C. Do not change price

A. Lower Price

Which of the following is likely to have the largest elasticity of supply? A. The producer of vanilla ice cream B. The producer of yachts C. A dentist

A. The producer of vanilla ice cream

If the government taxes car producers, that will happen in the market for cars? A. The supply curve will shift to the left. B. The demand curve will shift to the right. C. There will be a movement along the supply curve to the left. D. There will be a movement along the demand curve to the right.

A. The supply curve will shift to the left.

Sometimes consumers purchase goods because of "conspicuous consumption"; i.e., they want others to know that they can afford to buy the goods. There are many examples of these goods, such as Rolex watches, Coach purses, and flying first class. What would you expect the income elasticity of demand to be for these goods? A. These are luxury goods, so income elasticity would be greater than 1. B. These are normal goods, so income elasticity would be greater than 1. C. These are inferior goods, so income elasticity would be greater than 1

A. These are luxury goods, so income elasticity would be greater than 1.

A major city was thinking about increasing its bus fares and commissioned a study to estimate the price elasticity of demand. The study estimated that elasticity was 0.4. What action should the city have taken to increase revenue from bus fares? A.Increase fares B. Decrease fares C. Do not change fares

A.Increase fares

If the country enters a period of prosperity, resulting in consumer incomes increasing by 4% and the income elasticity of a good is 0.8, what will happen to the demand for that good as a result? A. Demand will increase by 1.2% B. Demand will increase by 3.2% C. Demand will increase by 4.8%

B. Demand will increase by 3.2%

he suppliers of ____________are more likely to have a tax imposed on their production. A. Jewelry B. Gasoline

B. Gasoline

An increase in an effective maximum legal price will do what to prices and quantities actually sold in a market? Prices will __________ and the quantities actually sold will ___________. A. Increase; decrease B. Increase; increase C. Decrease; decrease D. Decrease; increase

B. Increase; increase

Situation A: When a $10 per unit tax is imposed on the producer of Bippies (a candy), the equilibrium price increases by $4. Situation B: When a $10 per unit tax is imposed on the producer of Bippies, the equilibrium price increases by $2. Based on the two situations above, Bippies in Situation A has a _________ elastic supply OR has a _________ elastic demand than exists in Situation B. A. More; more B. More; less C. Less; less D. Less; more

B. More; less

Who is likely to be in favor of a price ceiling on a good? A. All consumers of that good B. The consumers of the good who can still purchase it after the ceiling is imposed C. All producers of the good D.The producers of the good who can still sell it after the ceiling is imposed

B. The consumers of the good who can still purchase it after the ceiling is imposed

Suppose you know that the price elasticity of demand for your product is 0.5, and you are thinking about raising your price by 8%. How much can you expect quantity to decrease? A. 8% B. 5% C. 4% D. We can't tell how much quantity will decrease.

C. 4%

An increase in an inelastic demand will cause _______ change in the equilibrium price than the same increase in an elastic demand. A. A lesser B. The same C. A greater D. One cannot tell

C. A greater

Many major U.S. cities have adopted rent controls for some housing. An effective rent control is what kind of price control? A. A price ceiling with a maximum price above equilibrium price B. A price floor with a minimum price above equilibrium price C. A price ceiling with a maximum price below equilibrium price D. A price floor with a minimum price below equilibrium price

C. A price ceiling with a maximum price below equilibrium price

If the government imposes an effective price ceiling in a market, what will be the result? A. Equilibrium B. A surplus C. A shortage D. Demand will shift left and supply will shift right

C. A shortage

When the federal government subsidizes higher education in the form of Pell grants to students, it results in A. An increase in the supply of higher education B. A decrease in the supply of higher education C. An increase in the demand for higher education D. A decrease in the demand for higher education

C. An increase in the demand for higher education

When will a minimum wage be an effective price control? When it is a _________. A. Maximum "price" that is above equilibrium price B. Maximum "price" that is below equilibrium price C. Minimum "price" that is above equilibrium price D. Minimum "price" that is below equilibrium price

C. Minimum "price" that is above equilibrium price

The price elasticity of demand will be _________________ if demand is elastic. A. Equal to one B. Less than one C. More than one

C. More than one

A firm has a choice of raising or lowering its price. If the firm wishes to increase its revenues (the price times the quantity sold), what should it do? A. Raise price when demand is elastic, because the quantity demanded will increase. B. Lower price when demand is elastic, because the quantity demanded will decrease. C. Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold. D. Lower price when demand is inelastic, because the revenues lost from the lower price will be smaller than the revenues gained from the increase in quantity sold.

C. Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold.

Which of the following statements about the effects of rent control is true? A. A maximum price will always cause a surplus of a good to be produced. B. A maximum price will always cause a shortage of a good to be produced. C. A maximum price will cause a surplus of a good to be produced only if the maximum price is above the equilibrium price. D. A maximum price will cause a shortage of a good to be produced only it the maximum price is below the equilibrium price.

D. A maximum price will cause a shortage of a good to be produced only it the maximum price is below the equilibrium price.

If population increases in a city with effective rent controls (and nothing else changes), which of the following describes what will happen in the market for rental housing? A. An increase in the number of rental housing units available, but no change in rent. B. An increase in quantity supplied and quantity demanded. C. An increase in supply, but no change in quantity demanded. D. An increase in demand, but no change in quantity supplied.

D. An increase in demand, but no change in quantity supplied.

Assume that as your income increases, your consumption of burgers decreases. We can assume that your income elasticity of demand for burgers is what? A. Between 0 and 1 B. Greater than 1 C. Equal to 1 D. Negative

D. Negative

When price decreases, quantity increases. Price elasticity of demand measures how much ___________. A. The price decreases B. The price increases C. The price decreases when quantity increases D. The quantity increases when price decreases

D. The quantity increases when price decreases

Suppose that there is currently a $2.00 per bottle tax on vodka that is levied on consumers. Legislators have decided to give consumers some relief by eliminating the tax. In order to keep tax revenues at their previous level, they decide to impose a $2.00 tax on producers. What is the net impact of these two actions? A. Consumers of vodka are made better off. B. Producers of vodka are made better off. C. The government is made better off. D. There is no change in either consumers' or producers' well-being.

D. There is no change in either consumers' or producers' well-being.

A business should ___________ (increase/decrease) the price of a good with an elastic demand if it wants to increase revenues.

Decrease

Compare the likely elasticity of demand for a college education with the likely elasticity of demand for a degree at one specific institution.

Demand for a product will always tend to be less elastic than the demand for a specific brand of the same product. There are more substitutes for a specific brand, and thus the specific brand demand should be more elastic, so the demand for a degree at a specific institution will be more elastic than the demand for a degree.

What is elasticity?

Demand is elastic when the percentage change in the quantity demanded is greater than the percentage change in the price of the good or service. The price elasticity of demand is greater than one.

What is inelasticity?

Demand is inelastic when the percentage change in the quantity demanded is less than the percentage change in the price of the good or service. The price elasticity of demand is less than one.

You are running a small business and are thinking about ways to increase your profits. Assume you are facing an elastic demand. Would you raise or lower your prices? A. Raise because revenues would increase B. Lower because revenues would increase C. Raise because revenues and costs would decrease D. Lower because revenues would increase and costs would decrease E. I do not know because I cannot tell how much costs would change in relationship to revenues.

E. I do not know because I cannot tell how much costs would change in relationship to revenues.

Example of elasticity of a good: Necessity

Prescribed medicine is an example of a good that is a necessity. We will be less sensitive to changes in prices of prescribed medicine than we might be to changes in prices of movie tickets.

Assume that the elasticity of demand is 1.6. Is demand elastic or inelastic?

Elastic

If the price were increased by 10 percent and the quantity demanded decreased by 15 percent, demand is____.

Elastic

________.is a minimum price set by law or regulation

Price Floor

T/F: Inelastic demand means that the quantity demanded does not change at all in response to a change in price.

False

A legal maximum on the price at which a good can be sold is called_____.

Price ceiling

Perfect elastic Demand:

Horizontal

Which product is more likely to have an elastic supply: ice cream or diamonds?

Ice Cream, It is a lot easier for a producer to make more ice cream than it is to mine more diamonds, so the producer of ice cream will be more sensitive to price changes - supply will be more elastic.

If a good has an income elasticity of 0.8, what do you expect to happen to the quantity demanded of this good if the country enters a recession?

If income elasticity is 0.8, then the good is a normal good, meaning that as income increases, so does demand for the good, and if income decreases, demand also falls. If we enter a recession, consumer incomes will fall; therefore, the demand for this good will also fall.

Explain in your own words what it means for demand to be elastic or inelastic.

If the percentage change in quantity demanded is greater than the percentage change in price, the ratio of the percentage change in quantity demanded to the percentage change in price is greater than one. The quantity demanded is very sensitive to changes in price and we describe demand is being elastic. If the percentage change in quantity demanded is less than the percentage change in price, the ratio of the percentage change in quantity demanded to the percentage change in price is less than one. The quantity demanded is less sensitive to changes in price and we describe demand is being inelastic.

A business should ___________ (increase/decrease) the price of a good with an inelastic demand if it wants to increase revenues.

Increase

If the price were increased by 10 percent and the quantity demanded decreased by 5 percent, then demand is ____.

Inelastic

If Elasticity income is less than 0

Inferior Good

Rising income, the demand decreases, then the income elasticity of demand will be negative.

Inferior Good

If Elasticity income is more than 1

Luxury Good

If Elasticity income is Greater than 0

Normal Good

What determines the Elasticity of Demand?

Number of Substitutes Whether or not a Good is a Necessity Percentage of Income Spent on Good Length of Time for Adjustment

Inelastic: Total Revenue Decrease

P Decrease, Q Increase

Elastic: Total Revenue Decrease

P Increase, Q Decrease

Inelastic: Total Revenue Increase

P Increase, Q Decrease

Vertical Inelastic Demand meaning:

Perfect Inelastic Demand

The percentage change in quantity supplied of a good or service divided by the percentage change in price.

Price elasticity of supply

Price ceilings result in a ____.

Shortage

Price Floors result in a___.

Surplus

List some things that influence how sensitive you are to changes in the prices of goods and services you purchase.

The number of substitutes for the good. Your interpretation of how necessary the good is. The percentage of your income spent on a good. The length of time you have to adjust your purchases.

Elasticity of Demand: number is greater than one

The percentage change in quantity demanded is greater than the percentage change in price). Demand is elastic.

If the price elasticity of demand is less than one:

The percentage change in quantity demanded is less than the percentage change in price). Demand is inelastic

If demand were elastic, an increase of 10 percent in the price might cause a 20 percent decrease in quantity demanded. What would happen to the total revenue in this case?

Total Revenue Decrease

Elastic: P Decrease, Quanity Increase =

Total Revenue Increase

What would happen to the store's total revenue with this 10 percent price increase if quantity falls by 5 percent?

Total Revenue Increase

T/F: An exception is when demand is perfectly inelastic. In this case (an unusual one), price changes do not affect the quantity demanded at all.

True

T/F: An inelastic demand curve will be steeper than a demand curve that is elastic.

True

If the quantity demanded decreased by 10 percent due to a 10 percent change in price, that would indicate a ____.

Unitary elasticity.