econ

A horizontal supply curve indicates an elasticity of supply that equals A)1. B)infinity. C)0. D)-1.

B. Definition of perfectly elastic supply. The minimum sell price (height of supply curve) is the same for all units.

If a 1 percent decrease in the price of a pound of squash results in a larger percentage decrease in the quantity supplied, A)supply is elastic. B)demand is elastic. C)supply is inelastic. D)demand is inelastic.

A. Definition of price elasticity of supply: PES = %∆QS/%∆P. Here, a case where %∆QS/%∆P>1is being described. Supply is price elastic.

Assume that the supply for a good is perfectly inelastic and assume that the demand for that good is neither perfectly elastic nor perfectly inelastic. If the demand for that good decreases, which of the following will happen? A) the equilibrium price will decrease and the equilibrium quantity will increase. B) the equilibrium price will decrease and the equilibrium quantity will not change. C) the equilibrium price will not change and the equilibrium quantity will increase. D) the equilibrium price will decrease and the equilibrium quantity will decrease.

B sketch the graph

Suppose that there are many essentially equivalent substitutes in consumption for good X. Then the demand for good X must be A) perfectly inelastic. B) unit elastic. C) perfectly elastic. D) inelastic.

C. One of the determinants of the price elasticity of demand is the availability of substitutes in consumption for a good. The more substitutes, the greater the responsiveness to a price change and therefore the greater the price elasticity of demand.

Producing the gasoline we use in our cars requires a very specialized resource or input, namely crude oil. As a result, A) the demand for gasoline is unit elastic. B) the supply of gasoline is elastic. C) the supply of gasoline is inelastic. D) the demand for gasoline is elastic.

C. One of the determinants of the price elasticity of supply is the substitutability of the inputs used to produce the good. The less substitutability across the inputs, the lower the elasticity, or responsiveness to a price change. In this question, crude oil is necessary to produce gasoline and other inputs cannot be used as substitutes for crude oil.

If a rise in the price of good 1 decreases the quantity of good 2 demanded, A)good 1 is an inferior good. B)the cross elasticity of demand is positive. C)the cross elasticity of demand is negative. D)good 2 is an inferior good.

C. This is the definition of complements in consumption: the price of one good rises and a consumer responds by buying less of not only that good, but also of another good (e.g. peanut butter and jelly, printers and ink cartridges, tennis balls and tennis rackets). In this case, the cross price elasticity of demand (CED) is negative. CED = %∆Q2/ %∆P1 has the algebraic sign (-)/(+) which is negative.

The price elasticity of demand measures A) how often the price of a good changes. B) the slope of a budget curve. C) how sensitive the quantity demanded is to changes in demand. D) the responsiveness of the quantity demanded to changes in price.

D. Definition.

When the quantity of coal is measured in kilograms instead of pounds, the demand for coal becomes A)less elastic. B)neither more nor less elastic. C)more elastic. D)undefined.

neither more nor less elastic

If the price elasticity of demand is 5, a 10 percent increase in the price results in a A) 50 percent decrease in quantity demanded. B) 5 percent decrease in quantity demanded. C) 10 percent decrease in quantity demanded. D) 2 percent decrease in quantity demanded.

A. PED = %∆QD/%∆P 5 = %∆QD/10%. Solve for %∆QD.

Suppose the price elasticity of demand for oil is 0.1. In order to lower the price of oil by 20 percent, the quantity of oil supplied must be increased by A)20 percent. B)2 percent. C)200 percent. D)0.2 percent.

B. PED = %∆QD/%∆P 0.1 = %∆QD/20%. Solve for %∆QD. This is an interesting question. The price elasticity of demand measures the responsiveness of the quantity demanded to a change in price, but it can also be used to assess how the price responds to a change in quantity. Again, note that, when the supply curve shifts, it traces out a movement along the demand curve.

If total revenue rises when the price of a goodfalls, demand must be A) perfectly inelastic. B) unit elastic. C) elastic. D) inelastic.

C. If demand is elastic, PED = %∆QD/%∆P >1 %∆QD > %∆P. If demand is elastic, total revenue is increased by a decrease in price: Total Revenue = P Q. Buyers are responsive to price changes, so a decrease in price stimulates an increase in quantity demanded large enough to more than make up for the lower price and cause the total revenue to increase.

Suppose the price elasticity of teenagers' demand for cigarettes is 2.0. If the government imposes a tax on cigarettes that raises the price by 10 percent, by how much will it reduce teenage smoking? A)by 15 percent B)by 10 percent C)by 5 percent D)by 20 percent

D. PED = %∆QD/%∆P 2.0 = %∆QD/10%. Solve for %∆QD. This is similar, but not the same as the previous question.

If the supply curve for a good is represented by a straight-line supply curve that is not vertical and that that intersects the horizontal axis (or x axis), then the price elasticity of supply is A) less than 1. B) equal to 1. C) greater than 1. D) equal to 0.

A. A straight line supply curve that passes through the origin (S2 in the figure below) is unit elastic. S1 is elastic. This question is describing a supply curve such as S3. S3 is inelastic.

Demand is inelastic if A) a leftward shift of the supply curve raises the total revenue. B) a leftward shift of the supply curve reduces the total revenue. C) the good in question has close substitutes. D) large shifts of the supply curve lead to only small changes in price.

A. Demand is inelastic when %∆QD < %∆P. If this is the case, an increase in price raises total revenue. Total Revenue = P Q (the arrows using different font sizes are a visual way to keep track of the relative magnitudes of the percentage changes). Buyers are not very responsive to price changes, so an increase in price does cause a decrease in quantity demanded, but this decrease in quantity demanded is small and more than made up for by the increase in price, This results in the total revenue increasing. In this question, the shift of the supply curve is used as a way to motivate the price change: a leftward shift of the supply curve will cause a movement to the northwest along the demand curve and thus cause the equilibrium price to rise.

If a good is produced using inputs for which there are no substitutes, the good's A)elasticity of supply is likely to be small. B)elasticity of demand will be large. C)elasticity of demand will be small. D)elasticity of supply is likely to be large.

A. One of the determinants of the price elasticity of supply is the substitutability of the inputs used to produce the good. The more substitutability across the inputs, the greater the elasticity, or responsiveness to a price change. An example of a high degree of substitutability across the inputs would be a situation where a product can be produced with a little labor and a lot of capital or with a lot of labor and a little capital. An example of a low degree of substitutability across the inputs would be a situation where a product can be produced only one way, with labor, and no amount of capital can compensate if that labor is not available.

Deb's income has just risen from $950 per week to $1,050 per week. As a result, she decides to increase the number of movies she attends each month by 5 percent. Her demand for movies is A)income inelastic. B)income elastic. C)represented by a vertical line. D)represented by a horizontal line.

A. The income elasticity of demand (IED) = %∆QD/%∆I. Here, the percent change in the quantity demanded of movies is given as 5%, but we have to calculate the percent change in income using the average value method. %∆I = ($1050-950)/($1000) = $100/$1000 = 0.1 or 10%. Putting this together, IED = 5%/10% =0.5. Income inelastic.

Demand is perfectly inelastic when A)the good in question has perfect substitutes. B)shifts of the supply curve results in no change in quantity demanded. C)shifts of the supply curve results in no change in the total revenue from sales. D)shifts in the supply curve results in no change in price.

B If demand is perfectly inelastic, the demand curve is vertical. The quantity demanded is the same regardless of whether the price is high or low. Draw this. Shifts of the supply curve will affect the equilibrium price but not the equilibrium quantity.

The demand for Honda Accords is probably A)inelastic but more elastic than the demand for automobiles. B)elastic and more elastic than the demand for automobiles. C)elastic but less elastic than the demand for automobiles. D)inelastic and less elastic than the demand for automobiles.

B. One of the determinants of the price elasticity of demand is the availability of substitutes in consumption for a good. The availability of substitutes is affected by how narrowly or broadly the good is defined. The more substitutes, the greater the elasticity, or responsiveness to a price change. The notes use orangescitrus fruitsfruits food to show the progression from narrowest definition to broadest. There are more substitutes for an orange (a very specific food item) than there are for food (a broad category that includes all food items). Here, that progression might be Honda AccordsHonda autosmid-size economy coupesautomobiles.

The price elasticity of demand depends on A)the units used to measure price but not the units used to measure quantity. B)neither the units used to measure price nor the units used to measure quantity. C)the units used to measure quantity but not the units used to measure price. D)the units used to measure price and the units used to measure quantity.

B. Percentage changes are units-free and so is a ratio of two percentage changes. 20% more wheat does not depend on whether the wheat is measured in pounds, ounces, or kilograms.

Assume that the demand for a good is perfectly elastic and assume that the supply for that good is neither perfectly elastic nor perfectly inelastic. If the supply for that good increases, which of the following will happen? A) the equilibrium price will decrease and the equilibrium quantity will increase. B) the equilibrium price will decrease and the equilibrium quantity will not change. C) the equilibrium price will not change and the equilibrium quantity will increase. D) the equilibrium price will decrease and the equilibrium quantity will decrease.

C sketch graph

One way to characterize a perfectly elastic supply curve is to say that A) the "maximum buy price" is the same for every unit. B) the "minimum sell price" is infinite for every unit. C) the "minimum sell price" is the same for every unit. D) the "maximum buy price" is infinite for every unit.

C. A perfectly elastic supply curve is horizontal, so the height of the supply curve (minimum sell price) is constant and the same for each unit.

Demand is unit elastic when A)a shift of the supply curve leads to no change in price. B)a shift of the supply curve leads to an equal shift of the demand curve. C)a change in the price of the product leads to no change in the total revenue. D)the slope of the demand curve is -1.

C. Demand is unit elastic when %∆QD = %∆P. If this is the case, an increase in price leads to no change in total revenue. Total Revenue = P Q (the arrows using the same font sizes are a visual way to keep track of the idea that the magnitudes of the percentage changes are the same and the effects cancel each other). In this question, the shift of the supply curve is used as a way to motivate the price change. If you thought about choosing answer D, remember that the price elasticity of demand is not the same as the slope and that, along any straight line demand curve, the elasticity varies and is 1 only at the midpoint!

A local transit authority charges $1 for a bus ride. An economics study suggests that in the price range from $0.50 to $1.50, the elasticity of demand for bus trips is 1.1. To increase its revenue, the transit authority should A) increase the fare. B)leave the fare as it is. C)decrease the fare. D)randomly increase or decrease the fare daily.

C. Here, demand is price elastic (barely). If demand is elastic, PED = %∆QD/%∆P >1 %∆QD > %∆P. If demand is elastic, total revenue is increased by a decrease in price: Total Revenue = P Q. Buyers are responsive to price changes, so a decrease in price stimulates an increase in quantity demanded large enough to more than make up for the lower price and cause the total revenue to increase.

If demand is price elastic, A)a 1 percent decrease in the price leads to a decrease in the quantity demanded that is less than 1 percent. B)the price is very sensitive to any shift of the supply curve. C)a 1 percent decrease in the price leads to an increase in the quantity demanded that exceeds 1 percent. D)a 1 percent increase in the price leads to an increase in the quantity demanded that exceeds 1 percent.

C. If demand is price elastic, PED > 1. This implies PED = %∆QD/%∆P > 1 or %∆QD > %∆P.

The demand for a good is less price elastic A)in the long run than in the short run. B)if the good is a luxury rather than a necessity. C)if the share of the good in the average consumer's budget is smaller. D)if closer substitutes are available.

C. One of the determinants of the price elasticity of demand is the percentage of a consumer's budget that expenditures on the good account for. An item making up 2% of a consumer's expenditures will have a lower price elasticity of demand than an item making up 50% of a consumer's expenditures, all else constant. Remember that elasticity is a measure of responsiveness or sensitivity to a change. You would be more sensitive to and respond more to a doubling in the price of gasoline that you would be to a doubling in the price of mechanical pencil lead refills.

The price elasticity of supply is largest A) immediately after a price change. B) in the short run. C) in the long run. D) None of the above answers are correct.

C. One of the determinants of the price elasticity of supply is the time elapsed since the price change. More time to respond leads to a greater response, and less time to respond leads to limited response options and less of a response. This is also true for the price elasticity of demand.

Suppose that the price elasticity of supply for oil is 0.5. Then, if the price of oil rises by 30 percent, the quantity of oil supplied will increase A)by 3 percent. B)by 5 percent. C)by 15 percent. D)by 20 percent.

C. PES = %∆QS/%∆P 0.5 = %∆QS/30%. Solve for %∆QS.

To say that turnips are an inferior good means that the income elasticity of demand for turnips A) is zero. B) is positive and greater than 1. C) is negative. D) is positive but between 0 and 1.

C. The income elasticity of demand (IED) = %∆QD/%∆I. With an inferior good, an increase in income is associated with a decrease in the quantity demanded. In this case, the income elasticity of demand (IED) is negative. IED = %∆QD/ %∆I has the algebraic sign (-)/(+) which is negative.

If a rightward shift of the supply curve leads to a 6 percent decrease in the price and a 5 percent increase in the quantity demanded, the price elasticity of demand is A)0.83. B)0.30. C)1.20. D)0.60.

Draw a diagram indicating a rightward supply curve shift and make sure you see that this traces out a movement along the demand curve. Along the relevant section of the demand curve, PED = %∆QD/%∆P = 5%/6% = 0.83.