Econ Chapter 4 - Elasticity
T/F: An inferior good has an income elasticity that is negative; a normal good has an income elasticity that is positive.
True; An increase in income decreases the demand for inferior goods and increases it for normal goods.
T/F: People spend more on rent than on soap, so the price elasticity of de,and for housing is likely to be larger than the price elasticity of demand for soap.
True; Generally, the larger the total budget share spent on a good, the larger is the price elasticity of demand
T/F: The cross elasticity of demand between hot dogs and hot dog buns is negative.
True; Hot dogs and hot dog buns are complements, so the cross elasticity of demand is negative.
T/F: Exxon brand gasoline is likely to have an elastic demand.
True; Other brands of gasoline, such as Shell or BP, are close substitutes for Exxon, so the demand for Exxon gasoline is likely to be elastic.
T/F: The price elasticity of demand for food is largest in poor nations.
True; The price elasticity of demand for food in poor nations is lager than in rich nations because in poor nations, food takes a larger portion of consumer's incomes
T/F: The price elasticity of demand ranges from 0 to infinity.
True; The smallest value for the price elasticity of demand, 0, means demand is perfectly inelastic; the largest, infinity, indicates perfectly elastic demand
T/F: The more demanders respond to a price change, the larger the price elasticity of demand.
True; The stronger the response to a price change, the larger is the elasticity
T/F: If a good has a vertical supply curve, its elasticity of supply equals 0.
True; When the elasticity of supply equals zero, the supply is perfectly inelastic.
Business people often speak about price elasticity without actually using the term. Which statement describes a good with an elastic demand?
"My customers are real shoppers. After I cut my prices just a few cents below those my competitors charge, customers have been flocking to my store and my sales are booming!" When a small cut in price increases the quantity demanded substantially, the demand is elastic.
P: 19 > 21 Q: 55 > 45 What is the price elasticity of demand between these two points?
(1/5 x 100) / (1/10 x 100) = 2
A 10% hike in the price of a textbook decreases the quantity demanded by 2%. The price elasticity of demand for textbooks is...
(2%/10%) = 0.2
Which of the following is likely to have the largest price elasticity of demand? A. An automobile B. A new automobile C. A new Ford automobile D. A new Ford Mustang
D. A new Ford Mustang There are many more substitutes for a new Ford Mustang than for the other goods. The more narrowly defined a good, the larger is its price elasticity of demand.
By reviewing its sales records, Dell's economists discover that when it lowers the price of its personal computers, the total revenue Dell obtains from the sale of its personal computers rises. Hence Dell's economists know that the...
Demand for Dell personal computers is elastic When the demand is elastic, the percentage increase in the quantity demanded, so total revenue from sales of the good increase.
Moving up along a linear demand curve past the midpoint, the demand becomes....
Elastic About the midpoint of a linear demand curve, the price elasticity of demand is elastic
If a 4% rise in the price of peanut butter causes total revenue from sales of peanut butter to fall by 8%, then the demand for peanut butter is...
Elastic When demand is elastic, a rise in the price of the good decreases the quantity demanded by proportional more, so that total revenue falls when the price is boosted.
For a perfectly vertical demand curve, the price elasticity of demand...
Equals 0 When a good has a perfectly inelastic demand, the price elasticity of demand equals zero and the demand curve is vertical
The quantity of new cars will increase by 5%. If the price elasticity of demand for new cars is 1.25, the price of the new car will...
Fall by 4%
T/F: As time passes after a price change, the price elasticity of demand becomes smaller.
False; As more time passes, more changes occur, so demand becomes more elastic
T/F: If the price elasticity of demand is positive, the demand is elastic.
False; Demand is elastic when the price elasticity of demand exceeds 1.0
T/F: Moving along a linear demand curve to lower prices and increased quantities, the price elasticity of demand does not change.
False; Moving downward along a linear demand curve, the price elasticity of demand falls
T/F: Your local Domino's Pizza outlet estimates that the price elasticity of demand for its pizzas is 4.00, so if it raises the price it charges for its pizza, its total revenue will increase.
False; The demand for Domino's Pizza is elastic. Raising the price decreases the quantity by so much that total revenue declines
T/F: The elasticity of supply equals the change in the quantity supplied divided by the change in price.
False; The price elasticity of supply equals the percentage change in the quantity supplied divided by the percentage change in price.
T/F: The price elasticity of demand is the same as the slope of the demand curve.
False; The slope of the demand curve equals AP/AQ, whereas the price elasticity of demand equals (AQ/Qave)(AP/Pave)
T/F: A good has elastic demand if its income elasticity of demand exceeds 1.0.
False; To be elastic, the price elasticity of demand must exceed 1.0.
A rise in the price of a good increases the total revenue from the good if the...
Good has an inelastic demand If the deans us inelastic, the percentage rise in price exceeds the percentage decrease in the quantity demanded, so total revenue from sales of the good increases.
If the demand for a good is perfectly elastic, then its demand curve...
Is horizontal When demand is perfectly elastic, a very small rise in the price decreases the quantity demanded to 0, which means that the demand is inelastic
The demand for a good is more price inelastic if...
It has no close substitutes If there are no close substitutes, demanders continue to buy the good even if its price is boosted substantially, which means that the demand is inelastic.
If the price elasticity of demand equals 1.0, then as the price falls the...
Total revenue does not change If demand is unit price elastic, a change in the price of the good creates an offsetting change in the quantity demanded so that total revenue does not change.
When the price of a hot dog rises 10%, your expenditure on hot dogs increases. Hence, it is certain that...
Your demand for hot dogs is inelastic When an increase in the price of a good increases your expenditure on the good, your demand for the good is inelastic