Chapter 6 (Exam 2)

If the price if a good goes up by 20 percent and the quantity demanded falls by 40 percent, the price elasticity of demand is 2

True

When demand is perfectly inelastic, there is not change in quantity demanded after a change in price

True

Refer to the table shown to answer the question. Between $2 and $2.20, demand is:

Unit elastic

Price elasticity of demand is the percentage change in price divided by the percentage change in quantity demanded

false

Complements

goods that are used in conjunction with other goods - Ecross-price < 0

It is estimated that a 5 percent decline in income will reduce health care purchases by 2.5 percent and reduce dental service purchases by 8 percent. From this information, one can conclude that:

health care is a necessity and dental services are a luxury

Cross-price elasticity of demand

measures the responsiveness of demand to changes in prices of other goods - Ecross-price= % change in demand/ % change in P of related good

If supply is highly elastic and demand shifts to the right:

price will hardly change at all, quantity will rise significantly

If demand is highly inelastic and supply shifts to the right, price:

will fall significantly, quantity hardly changes at all

If the quantity of picture frames supplied increases 15 percent when the price goes up 20 percent, the elasticity of supply is

0.75

Refer to the graph shown. At which point is elasticity 1?

B (between 2 and 3 on graph)

Refer to the graph shown. Which point has an elasticity greater than 1?

B. ( between 4 and 6 on graph)

Which has greater elasticity: a supply curve that goes through the origin with slope of 1 or a supply curve that goes through the origin with slope of 4?

Both because they both go through the origin of 1

Inferior goods

Those whose consumption decreases with an increase in income - Eincome <0

A supply curve that intersects the horizontal (quantity) axis is:

inelastic

If quantity demanded falls by 25 percent when price rises by 50 percent, demand is said to be:

inelastic

In general, the greater the elasticity, the:

larger the responsiveness of quantity to changes in price

Price elasticity of demand is the:

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

Determine the price elasticity of demand if, in response to an increase in price of 10 percent, quantity demanded decrease by 20 percent. Is demand elastic or inelastic?

20/10=2 elastic

The short run elasticity of demand for gasoline sold at gasoline stations is .20. If terrorism causes the supply of gasoline to fall, resulting in a 5 percent drop in quantity, and other things remain the same, the price per gallon will increase by:

25 percent

When the price of ketchup rises by 15 percent, the demand for hot dogs falls by 1 percent. A) calculate the cross-price elasticity of demand B) Are the goods complements or substitutes? C) in the original scenario, what would have to happen to the demand for hot dots for us to conclude that got dogs and ketchup are substitutes?

A: -1/ 15= -.07 B: complements because the cross price elasticity of demand is negative C: the demand for hot dogs would have to rise

Calculate the income elastics for demand for the following: A) Income rises by 20 percent, demand rises by 10 percent B) income rises from $30,000 t0 $40,000, demand increases (at a constant price) from 16 to 19

A: 10/20=0.50 B: 40,000-30,000/0.5(30,000+40,000)= 10,000/35,000=0.286 19-16/0.5 (16+19)=3/17.5 =0.171 0.171/0.286=0.60 <- answer

Substitutes

Goods that can be used in place of another - Ecross-price > 0

Would you expect a shift in supply to have a greater effect on equilibrium quantity in the short run or in the long run? Explain your answer.

In the short run there tends to be fewer substitutes so demand is inelastic. In the long run there are more substitutes so demand is elastic

Refer to the following graph. Elasticity is greatest at point;

It is the same everywhere along the supply curve

Elasticity changes along straight line curves

On a straight line supply and demand curves, slope stays constant, but elasticity changes - Elasticity declines along this straight line curve as a we move towards the Q axis One a straight line supply curve, slope stays constant, but elasticity changes - If it intersects the vertical axis (So), elasticity starts at infinity and declines, and eventually approaches 1 - If it intersects the horizontal axis (S1), it starts at zero and increases, and eventually approaches 1

What makes supply or demand more or less elastic?

Substitution - A general rule is: the more substitutes a good has, the more elastic its supply or demand - If a good has substitutes, a rise in the price of that good will cause the consumer to shift consumption to those substitute goods

Application: Unit Elastic demand (Elasticity and Total Revenue)

TRe=PxQ= areas A+B=$4x6=$24 TRe=PxQ=areas A + C=$6x4=$24 - If Ed=1, and increase in price leaves total revenue unchanged

Application: inelastic demand (Elasticity and Total Revenue)

TRg=PxQ=areas A+B=$1x9=$9 TRh=PxQ=areas A+C=$2x8=$16 - If Ed<1, an increase in price increases total revenue. (price and total revenue move in the same direction

Application: elastic demand (Elasticity and Total Revenue)

TRj=PxQ=areas A+B=$8x2=$16 TRk=PxQ=areas A+C=$9x1=$9 - If Ed>1, an increase in price decreases total revenue. (price and total revenue move in opposite directions)

Elasticity and shifting supply and demand

The more elastic the demand (supply), the greater the effect of a supply (demand) shift on quantity and the smaller the effect on price. - demand is relatively elastic: supply sifts out and caused a greater effect on quantity than on price - demand is relatively inelastic: supply shifts out and caused a greater effect on price than on quantity

How is elasticity related to the revenue from a sales tax?

The more elastic the supply or demand the less revenue will come from tax. Increasing tax rates can decreases quantity supplied and quantity demanded enough to cause a decrease in tax revenue. Supply and demand that's inelastic changes a little meaning revenue from tax is greater than elastic supply or demand

Price elasticity of demand

The percentage change in quantity demanded divided by the percentage change in price. (Ed= % change in quantity demanded/ % change in price) - This tells us exactly how quantity demanded responds to a change in price - Elasticity is independent of units - Always expressed as a positive number - Demand is elastic is the percentage change in quantity is GREATER than the percentage change in price ( Ed>1) - Demand is inelastic is the percentage change in quantity is LESS than the percentage change in price (Ed <1) What is the price elasticity of demand between A and b? .33/.26=1.27

Price elasticity of supply

The percentage change in quantity supplied divided by the percentage change in price (Es= % change in quantity supplied/ % change in price) - This tells us exactly how quantity supplied responds to a change in price - Elasticity is independent of units - Supply is elastic is the percentage change in quantity is GREATER than the percentage change in price (Es>1) - Supply is inelastic if the percentage change in quantity is LESS than the percentage change in price (Es<1) What is the price elasticity of supply between A and B? - 0.0187/0.105= 0.18

If milk and cookies are complements and the price of cookies rises, we would expect to see:

a decrease in the demand for milk

If milk and cookies are complements and the price of cookies falls, we would expect to see:

an increase in the demand for milk

College students tend to eat more ramen noodles than do recent college graduates. A primary reason for this is that:

ramen noodles are a inferior good

If the amount of land supplied remains the same even when the price of land increases, the:

supply of land must be perfectly inelastic

Demand is said to be elastic when the:

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

Supply is said to be inelastic when the:

the percentage change in the quantity supplied is less than the percentage change in price

Refer to the graph shown. When price rises from $30 to $40:

Lost revenue is represented by areas C and E and gained revenue is represented by area A

Elasticity, Total revenue, and demand

- The elasticity if demand tells suppliers how their total revenue will change if their price changes - Total revenue is price multiplied by quantity, TR= (P)(Q) - If Ed>1, an increase in price decreases total revenue. (price and total revenue move in opposite directions) - If Ed=1, and increase in price leaves total revenue unchanged - If Ed<1, an increase in price increases total revenue. (price and total revenue move in the same direction

Substitution and demand

- The number of substitutes a good has is affected by several factors. Four of the most important factors: 1. The time period being considered 2. The degree to which a good is a luxury 3. The market definition 4. The importance of the good in one's budget

Summery

-Elasticity is percentage change in quantity divided by percentage change in some variable that affects demand (supply). The most common elasticity is price - Five elasticity terms are elastic (E>1), inelastic(E<1), unit elastic (E=1), perfectly inelastic (E=0), and perfectly elastic( E= infinity) - Demand becomes less elastic as we move down along a demand curve - The most important factor affecting the number of substitutes in supply is time. The longer the time interval, the more elastic is supply. - Factors affecting the number of substitutes in demand are: time period, degree to which the good is a luxury, market definition, importance of the good in one's budget - The more substitutes a good has, the greater its elasticity - When a supplier raises price, if demand is inelastic, total revenue increases, if demand is elastic, total revenue decreases, if demand is unit elastic, total revenue remains constant - other important elasticity concepts are income elasticity and cross-price elasticity of demand

Relationship between Elasticity, Total revenue, and demand

-Price rise and Elastic (Ed>1): TR decreases - Price rise and Unit elastic (Ed=1): TR constant - Price rise and Inelastic (Ed<1): TR increases - Price decline and Elastic (Ed>1): TR increases - Price decline and Unit elastic (Ed=1): TR constant - Price decline and Inelastic (Ed<1): TR decreases

Measuring the price of gasoline in dollars, an economist calculates the price elasticity of demand to be .5. What would the price elasticity of demand be if the economist had chosen to measure the price of gasoline in pennies rather than dollars?

.5

If average movie ticket prices rise by about 5 percent and attendance falls by about 2 percent, other things being equal, the elasticity of demand for movie tickets is about:

0.4

If the quantity of Big Macs demanded falls from 2 million to 1.6 million as the price of Whoppers falls from $1.40 to $.80, the cross- price elasticity of demand for Big Macs is:

0.4

When tolls on the Dulles Airport Greenway were reduced from $1.75 to $1.00, traffic increases from 10,000 to 26,000 trips a day. Assuming all changes in quantity were due to the change in price, what is the price elasticity of demand for the Dulles Airport Greenway?

16,000/18,000=0.889 0.75/1.375=0.545 0.889/0.545=1.63 <-answer

Refer to the graph shown. The approximate elasticity of segment AD is:

3/4

One football season Domino's Pizza, a corporate sponsor of the Washington Redskins (a football team), offered to reduce the price of its medium- size pizza by $1 for every touchdown scored by the Redskins during the previous week. Until that year, the Redskins weren't scoring many touchdowns. Much to the surprise of Domino's, in one week in 1999, the Redskins scored 6 touchdowns. (Maybe they like pizza). Domino's pizzas were selling for $2 a pie! The quantity of pizzas demanded soared the following week from 1 pie an hour to 100 pies an hour. What was price elasticity of demand for Domino's pizza?

8-2/ 0.5(8+2)=6/5 1-100/0.5(1+100)=99/50.5 99/50.5/6/5=1.96/1.02=$1.63 <-answer

A firm has just increases its price by 5 percent over last year's price, and it found that quantity sold remained the same A) What is its price elasticity of demand? B) How would you calculate it? C) What additional information would you search for before you did your calculations?

A) 0 B) 0/5=0 C) see what other variables impacted each other

Kean University Professor Henry Saffer and Bentley University Professor Dave Dhaval estimated that if the alcohol industry increases the prices of alcoholic beverages by 100 percent underage drinking would fall by 28 percent and underage binge drinking would fall by 51 percent A) What is the elasticity of demand of underage drinking and binge drinking? B) What might explain the difference in elasticities?

A) 28/100=0.28 51/100=0.51 B) Binge drinking is more elastic because its a larger percentage of one's income and has a substitute to drink less. It's easier for students to decrease the amount they drink rather than to quit drinking altogether

A newspaper recently lowered its price from 50 cents to 30 cents. As it did, the number of newspapers sold increased from 240,000 to 280,000. A) What was the newspaper's elasticity of demand? B) Given that elasticity, did it make sense for the newspaper to lower its price? C) What would your answer be if much of the firm's revenue came from advertising and the higher circulation, the more it could charge for advertising?

A) 40,000/ 260,000=0.15/ 20/40=0.5/= 0.31 <- answer B) no because the demand is inelastic so it doesn't make sense to lower the price because it will reduce the total revenue C) lowering the price as long as the demand for advertising is elastic and there's more revenue for the loss revenue due to circulation

Which of the pairs of goods would you expect to have a greater price elasticity pf demand? A) Cars, transportation B) Housing, leisure travel C) Rubber during WW2, rubber during the entire 20th century

A) Cars B) leisure travel C) rubber during the entire 20th century

Economists have estimated the following transportation elasticities. For each pair, explain possible reasons why elasticities differ. A) Elasticity of demand for buses is 0.23 during peak hours and 0.42 during off peak hours B) Elasticity of demand for buses is 0.7 in the short run and 1.5 in the long run C) Elasticity of demand for toll roads is 4.7 for low income commuters and 0.63 for high income commuters

A) During peak hours travelers because they're commuters who have little choice but to go to work so the demand elasticity is lower than people who rise buses during off peak hours to just run errands B) Short run because their are fewer substitutions and if fares rose in the long run people could find and alternative mode of transportation C) high income commuters because it's a small portion of their income

For each of the following pairs of goods, state whether the cross price elastics is likely positive, negative, or zero. Explain your answers. A) Lettuce, carrots B) housing, furniture C) Nice sneakers, puma sneakers D) jeans, formal suits

A) complements because people put carrots in salads but are also substitutes because if a person wants a vegetable and has to choose between the 2 B) Negative because they'e complements C) positive because they're substitutes D) zero because they're unrelated

Which of the following producers would you expect to support a tax on beer? Which would not? explain you answer. A) Producers of hard liquor. Cross-price elasticity with beer: -0.11 B) producers of wine. Cross-price elasticity with beer: 0.23

A) liquor producers wouldn't support a tax on beer because the cross-price elasticity is negative. The beer tax will also reduce liquor consumption B) Wine producers would support a tax on beer because the cross price elasticity between beer and wine is positive. The beer tax would also increase wine consumption

For each of the following goods, state whether it is a normal good, a luxury, a necessity, or an inferior good. Explain your answers A) Vodka B) Table salt C) Furniture D) Perfume E) Beer F) sugar

A) normal and luxury because people tend to drink more hard liquor as their income rises B) normal and necessity because it's a small portion of peoples income and its consumption doesn't increase much with income C) normal and luxury because everyone needs furniture but as income goes up people by more and nicer furniture D) Normal and luxury, rich tend to buy more perfume while others want to smell nice E) Normal because income elasticity is positive but less than 1 F) normal and necessity because its not used significantly more by rich than poor

Calculate the elasticity of the detonates ranges of supply and demand curves on the following graph

A-B: 20/30= 0.667/ 5/22.50=0.222 /= 33 <- answer C-D: 20/70=0.286/ 10/30=0.333/= 0.86 <- answer E-F: 20/20=1/ 10/5=2/= 0.50 <- answer G-H: 20/90=0.222/ 5/7.5=0.667/= 0.33 <- answer

Suppose average movie ticket prices are $8.50 and attendance is 1.2 billion. The price of tickets rises to $9.50 and attendance rises to 1.4 billion. A) What happened to total revenue? B) if you were to estimate elasticity from these figures, what would your estimate be? C) What provisos would you offer about your estimate of elasticity?

A: 8.50 x 1.2 billion= $10.2 billion 9.50 x 1.4 billion= $13.3 billion - total revenue rises B: 0.2/1.3= 0.154/ 1/9=0.111/= 1.39 C: This assumes that income, price, level, etc will stay constant which is very unlikely

University of Richmond Professor Erik Craft analyses the states' pricing of vanity plates. He found that in California, where vanity plates cost $28.75, the elasticity of demand was 0.52. In Massachusetts, where vanity plates cost $50, the elasticity of demand was 3.52. A) Assuming vanity plates gave zero production cost and his estimates are correct, was each state collecting the maximum revenue it could from vanity plates? Explain your reasoning B) What recommendation would you have for each state to maximize revenue? C) If these estimates are correct, which states was most likely to be following a politically unsupportable policy? D) Assuming the demand curves were linear, graphically demonstrate your reasoning in a and b

A: No because both are getting less than the maximum value. California's elasticity is less than 1 and Massachusetts elasticity is greater than 1 B: Massachusetts should lower its price and California should raise its price C: Massachusetts because it's charging a higher price than is best. It could lower prices to increase revenues which would please both who buy vanity plates and treasury. D: look in notes

Refer to the graph shown. When price rises by 20 percent, quantity supplied rises by 25 percent. Which curve best demonstrates elasticity in this example?

C (line above B, highest one)

Refer to the graph shown. Which of the following curves demonstrates a perfectly inelastic demand curve?

C. (straight up and down)

For which of the following goods is the demand curve likely to be most inelastic?

Candy

If demand is highly inelastic and supply shifts to the right, the equilibrium price will rise significantly while quantity will increase only slightly

False

If the price of corn goes up by $1 a bushel and the quantity supplied rises by 100 bushels, the price elasticity of supply has to be 100

False

Most likely, the elasticity of demand for transportation is greater than the elasticity of demand for cars

False

Price elasticity of demand is the percentage change price divided by the percentage change in quantity demanded

False

Refer to the following graph. If price is currently at B and rises, total revenue will rise

False

Revenue remains unchanged along a straight line demand curve

False

Normal goods

Those whose consumption increases with an increase in income - Necessity: 0 < Eincome>1 - Luxury: Eincome>1

Elasticity is not the same as slope

The steeper a curve is at a given point, the less elastic demand or supply - (Straight up and down) This curve is perfectly inelastic, meaning that Q does not respond at all to changes in price, Ed=0 - (horizontal) This curve is perfectly elastic, meaning that Q responds enormously to changes in price, Ed=infinity

The demand for a good is elastic. Which of the following would be the most likely explanation for this?

The time interval considered is long

Once a book has been written, would an author facing an inelastic demand curve for the book prefer to raise or lower the book's price?

They would prefer to raise the book price because raising prices when demand is inelastic increases revenue but because the authors cost is a sunk cost profit also rises

Refer to the following graph. Since the supply curve intersects the horizontal axis, all the points along the supply curve shown are inelastic

True

The cross price elasticity of demand is the percentage change in price divided by the percentage change in the price of another good

True

When the demand curve is highly inelastic, there is a strong incentive for suppliers to find a way to collectively reduce the quantity sold in the market and raise the price of the product

True

Richard Voith estimated the price elasticity of demand for round-trip rail fare to be 0.62. If fares rose by 30 percent, one would expect the quantity of round-trip tickets purchased to

fall by 18.6 percent

income elasticity of demand

measures the responsiveness of demand to changes in income - Eincome= % change in demand/ % change in income

The price elasticity of supply is the:

percentage change in the quantity supplied divided by the percentage change in price

If macaroni and cheese is an inferior good, falling incomes will ten to:

put upward pressure on its price and quantity