Economics -- Chp. 6 (Pg.79-82)
The degree to which consumers respond to a change in their incomes by buying more or less of a particular product is measured by the income elasticity of demand.
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The demand for most agricultural products is price inelastic. Consequently, an increase in supply will reduce the total income of producers of agricultural products.
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The flatness or steepness of a demand curve is based on absolute changes in price and quantity, while elasticity is based on relative or percentage changes in price and quantity.
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The immediate market period is a time so short that producers cannot respond to a change in demand and price.
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The price of elasticity of supply will tend to be more elastic in the long run.
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Total revenue will not change when price changes if the price elasticity of demand is unitary.
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Two products are considered to be independent or unrelated when the cross elasticity of demand is zero.
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When the absolute value of the price elasticity coefficient is greater than 1 and the price of the product decreases, then the total revenue will increase.
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Other things equal, the higher the price of a good relative to consumers' incomes, the greater the price elasticity of demand.
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Other things equal, the higher the price of a good relative to the longer te time period the purchase is considered, the greater the price elasticity of demand.
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Price elasticity of demand and the slope of the demand curve are two different things.
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The degree of price elastically of supply depends on how easily and quickly producers can shift resources between alternative uses.
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Assume Amanda Herman finds that her total spending on compact discs remains the same after the price of compact discs falls, other things equal. Which of the following is true about Amanda's demand for compact discs with this price change?
(a) It is unit price elastic.
If a 5% increase in the price of one good results in a decrease of 2% in the quantity demanded of another good then it can be concluded that the two goods are
(a) complements
Which is characteristic of a good whose demand is inelastic?
(b) The buyer spends a small percentage of total income on the good.
For which product is the income elasticity of demand most likely to be negative?
(b) bus tickets
A study shows that the coefficient of the cross elasticity of Coke and Sprite is negative. This information indicates that Coke and Sprite are
(b) complementary goods
If supply is inelastic and demand decreases, the total revenue of sellers will
(b) decrease
You are the sales manager for a pizza company and have been informed that the price elasticity of demand for your most popular pizza is greater than 1. To increase total revenues, you should
(b) decrease the price of the pizza
If a 1% fall in the price of a product causes the quantity demanded of the product to increase by 2%, demand is
(b) elastic
Compared to the lower-right portion, the upper-left portion of most demand curves tends to be
(b) more elastic
The chief determinant of the price elasticity of supply of a product is
(b) the length of time sellers have to adjust to a change in price
If a business increased the price of its product from $7 to $8 when the price elasticity of demand was inelastic, then
(b) total revenues increased
If, when the price of a product rises from $1.50 to $2, the quantity demanded of the product decreases from 1000 to 900, the price elasticity of demand coefficient, using the midpoint formula, is
(c) 0.37
Most goods can be classified as normal goods rather than inferior goods. The definition of a normal good means that
(c) as consumer income increases, consumer purchases of a normal good increase
If a 5% fall in the price of a commodity causes quantity supplied to decrease by 8%, supply is
(c) elastic
Which is characteristic of a product whose demand is elastic?
(d) The percentage change in quantity is greater than the percentage change in price.
During a recession, the quantity demanded for which product is likely to be most affected by the decline in consumer incomes?
(d) meals bought at restaurants
From a time perspective, the demand for most products is
(d) more elastic in the long run than in the short run
The demand for Nike basketball shows is more price elastic than the demand for basketball shoes as a whole. This is best explained by the fact that
(d) there are more substitutes for Nike basketball shoes than for basketball shoes as a whole
A PRODUCT WITH A PRICE ELASTICITY OF DEMAND EQUAL TO 1.5 is described as price inelastic. (You have to scream the first part of this when you read it because it's in all caps)
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A state government seeking to increases its excise-tax revenues is more likely to increase the tax rate on restaurant meals than on gasoline.
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Cross elasticity of demand is measured by the percentage change in quantity demanded over the percentage change in income.
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Demand tends to be inelastic at higher prices and elastic at lower prices along a downsloping linear demand.
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If an increase in product price results in no change in the quantity supplied, supply is perfectly elastic.
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If the percentage change in price is greater than the percentage change in quantity demanded, the price elasticity coefficient is greater than 1.
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If the price of a product increases from $5 to $6 and the quantity demanded decreases from 45 to 25, then according to the total-revenue test, the product is price inelastic in this price range.
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In general, the larger the number of substitute goods that are available, the less the price of elasticity of demand.
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Inferior goods have a positive income elasticity of demand.
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The more that a good is considered to be a "luxury" rather than a "necessity," the less is the price elasticity of demand.
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There is a total-revenue test for the elasticity of supply.
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For a substitute product, the coefficient of the cross elasticity of demand is positive.
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If the quantity demanded for a product increases from 100 to 150 units when the price decreases from $14 to $10, using the midpoint formula, the price elasticity of demand for this product in this price range is 1.2.
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"If such individuals (low income earners receiving government benefits) were to accept a job (or a higher paying job if they are already employed), two thing will normally occur." What are these two things?
• First, they will lose some or all of their government benefits. • Second, they may have to start paying federal (and perhaps state) personal income taxes.
"In 1980, the top marginal income tax rate was 70 percent. The highest 1 percent of income-earning Americans paid 17 percent of all federal personal income taxes. In 2009, when the top tax rate was 35 percent, the richest 1 percent paid more than double that share." How can this be explained?
• Lower marginal income tax rates create an incentive for people to work more and harder because the rewards of doing so are greater. Also, in their role as risk-taking entrepreneurs, individuals are almost always going to be willing to take bigger risks if they know that success will yield greater after-tax increases in their incomes.
Distinguish between static analysis and dynamic analysis in the context of analyzing the impact of taxes.
• Static analysis assumes that people's behavior is static (unchanged), no matter how the constraints they face. • Dynamic analysis assumes they would have correctly anticipated that consumers (even rich ones) were going to change their buying decisions when faced with new taxes.
State the "underlying theory" behind the belief that the income tax rates paid by America's richest individuals do not matter to them. Incorporate into your answer the concept of elasticity of supply.
• The underlying theory behind such a belief is that the supply of labor is completely unresponsive to the after-tax price received by the providers of labor. Stated another way, if you were to draw the supply curve of labor, it would be nearly vertical line for each individual at some fixed number of work hours per year. Supposedly, then, the elasticity of supply of labor is low.
Use the concept of elasticity of demand to explain why the luxury tax on new, high-end boats produced negligible tax revenues.
• When elasticity of demand for new, high-end boats was relatively high: when the tax per boat went up, the quantity demanded fell so far that tax collections were negligible.