Elasticity HW

Consider the market for a new​ CD, where the price is initially ​$10.00 and 20 thousand copies are​ sold, as indicated in the figure at point A. The music company is considering lowering the price to ​$9.00​, at which price 24 thousand copies would be sold. What is total revenue at the initial price​ (at point​ A)? Revenue is initially ​______ thousand.

200 thousand total revenue is ​$200 ​thousand, from a price of ​$10.00 multiplied by 20 thousand units sold.

Determinants of the price elasticity of demand

>Availability of close substitutes ≻Passage of time ≻Luxuries versus necessities ≻Narrowness of definition of the market ≻Share of the good in the​ consumer's budget

Normal good

If the quantity demanded of a good increases as income​ increases, then the good is a normal good.

perfect inelastic demand

The case where the quantity demanded is completely unresponsive to​ price, and the price elasticity of demand equals zero. in this case, the demand curve is vertical

Perfect elastic demand

The case where the quantity demanded is infinitely responsive to​ price, and the price elasticity of demand equals infinity. In this​ case, the demand curve is horizontal.

How to determine when a product is elastic vs inelastic

The demand for a good will be more elastic the larger the share of the good in the average​ consumer's budget. People tend to buy pencils infrequently and in small​ quantities, compared to​ "big-ticket" items such as clothes. ​Therefore, the demand for pencils is likely more inelastic.

In​ particular, the supply curve for a particular product will be increasingly more elastic over a ______ period of time.

longer The supply curve for a product will be inelastic if we measure it over a short period of​ time, but increasingly more elastic the longer the period of time over which we measure it.

Consider the market for a new DVD​ movie, where the price is initially ​$20 and 20 copies are sold per day at a​ superstore, as indicated in the figure to the right. The superstore is considering lowering the price to ​$16. What is the price elasticity of demand between these two prices ​(use the Midpoint Formula​)? The price elasticity of demand is ____. ​(Enter your response as a real number rounded to two decimal​ places.)

-1/50 Price elasticity of demand is the responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in quantity demanded of a product by the percentage change in the product's price. using the midpoint formula price elasticity of demand= percentage change in quantity demanded/percentage change in price price elasticity of demand= (20-28)/((20+28)/2) divided by (20-16)/((20+16)/2) = 0.3333/-0.2222= -1.5

Suppose income increases by 10 percent​ and, as a​ result, the quantity of a particular brand of automobile demanded​ (holding the price for this particular automobile​ constant) increases by 9 percent. The income elasticity of demand for this brand of car is ________. ​(Enter your response rounded to two decimal places and include a minus sign if​ appropriate.) this particular brand of automobile is a _____ good

0.90 The income elasticity of demand A measure of the responsiveness of quantity demanded to changes in​ income, measured by the percentage change in quantity demanded divided by the percentage change in​ income: Income elasticity of demand= Percentage change in quantity demanded/ Percentage change in income. ​Therefore, the income elasticity of demand for this brand of car​ is: Income elasticity of demand=910=0.90. normal Normal good If the quantity demanded of a good increases as income​ increases, then the good is a normal good. Inferior good A good is inferior if the quantity demanded falls when income increases. In this​ example, an increase in income increases the quantity of the automobile​ demanded, so this brand of car is a normal good.

What would total revenue be at the lower price​ (at point​ B)? Revenue would be ______ thousand.

216 In​ particular, total revenue would be ​$216 ​thousand, from a price of ​$9.00 multiplied by 24 thousand units sold.

inferior good

A good is inferior if the quantity demanded falls when income increases.

income elasticity of demand

A measure of the responsiveness of quantity demanded to changes in​ income, measured by the percentage change in quantity demanded divided by the percentage change in​ income: Income elasticity of demand= Percentage change in quantity demanded/ Percentage change in income.

What is the impact of an increase in worker productivity when demand is relatively more​ elastic? A. An increase in sales revenue received by the firm. B. A large increase in the price received by the firm. C. A small increase in the price received by the firm. D. A decline in sales revenue received by the firm.

A. An increase in sales revenue received by the firm.

Compare the demand for pencils with demand for clothes. The demand for pencils is likely A. more inelastic because pencils tend to represent a smaller fraction of a​ consumer's budget. B. more elastic because pencils tend to be purchased in larger quantities. C. more inelastic because pencils tend to be purchased more frequently. D. more elastic because pencils tend to represent a larger fraction of a​ consumer's budget. E. more elastic because pencils tend to represent a smaller fraction of a​ consumer's budget.

A. more inelastic because pencils tend to represent a smaller fraction of a​ consumer's budget.

How is the price elasticity of demand measured? The price elasticity of demand is measured as A. the percentage change in the quantity demanded divided by the percentage change in price. B. price divided by the quantity demanded. C. the slope of the demand curve. D. the percentage change in the quantity demanded divided by the percentage change in the quantity supplied. E. the change in price divided by the change in the quantity demanded.

A. The price elasticity of demand is measured as the percentage change in the quantity demanded divided by the percentage change in price.

3. Would you expect​ PA-12 to be price elastic or​ inelastic? A. It is very elastic in the short​ run; however, as substitutes become​ available, it will become relatively more inelastic. B. It is very inelastic in the short​ run; however, as substitutes become​ available, it will become relatively more elastic. C. It would be expected to be very​ elastic, but according to the​ graph, it is almost perfectly inelastic. D. It would be expected to be very​ inelastic, but according to the​ graph, it is almost perfectly elastic.

B. It is very inelastic in the short​ run; however, as substitutes become​ available, it will become relatively more elastic.

Suppose Wendy's hamburgers have many close substitutes available. If​ so, then an increase in the price of Wendy's hamburgers will likely A. decrease the quantity of Wendy's hamburgers demanded by a relatively small amount. B. decrease the quantity of Wendy's hamburgers demanded by a relatively large amount. C. increase the quantity of Wendy's hamburgers demanded by a relatively small amount. D. increase the quantity of Wendy's hamburgers demanded by a relatively large amount. E. not change the quantity of Wendy's hamburgers demanded.

B. decrease the quantity of Wendy's hamburgers demanded by a relatively large amount. If a product has more substitutes​ available, it will have more elastic demand. If a product has fewer substitutes​ available, it will have less elastic demand. Since Wendy's hamburgers have many close​ substitutes, their demand will be relatively elastic​, and a price increase will decrease the quantity demanded by a relatively large amount.

Consider firms that introduce new​ products, such as DVDs in 2001. When firms introduce new​ products, how do they typically determine the price elasticity of demand for those​ products? Firms with new products often A. identify price elasticity of demand by asking for government assistance. B. estimate price elasticity of demand by experimenting with different prices. C. approximate price elasticity of demand with market signals such as surpluses. D. guess price elasticity of demand based on market competition. E. identify price elasticity of demand by using price controls to set price ceilings.

B. estimate price elasticity of demand by experimenting with different prices.

Compare the demand for water with the demand for wine. The demand for water is likely A. relatively more elastic because water is a luxury. B. relatively more inelastic because water is a necessity. C. relatively more inelastic because water is a luxury. D. equally elastic as the demand for wine. E. relatively more elastic because water is a necessity.

B. relatively more inelastic because water is a necessity. Determinants of the price elasticity of​ demand: ≻Availability of close substitutes ≻Passage of time ≻Luxuries versus necessities ≻Narrowness of definition of the market ≻Share of the good in the​ consumer's budget The demand curve for a luxury is more elastic than the demand curve for a necessity. Water is more of a necessity than wine​, so the demand for water is likely relatively more inelastic.

In​ addition, assume that between 1950 and 2017 the income of the average American increased substantially and that wheat is a normal good. With this increase in​ income, A. the price of wheat will be unaffected. B. the amount by which the price of wheat rises will be smaller the lower the income elasticity of wheat. C. the amount by which the price of wheat rises will be smaller the higher the income elasticity of wheat. D. the amount by which the price of wheat falls will be smaller the higher the income elasticity of wheat. E. the amount by which the price of wheat falls will be larger the higher the income elasticity of wheat.

B. the amount by which the price of wheat rises will be smaller the lower the income elasticity of wheat. Income elasticity of demand A measure of the responsiveness of quantity demanded to changes in​ income, measured by the percentage change in quantity demanded divided by the percentage change in income. If wheat is a normal​ good, then an increase in income will increase the demand for​ wheat, raising the market price of wheat. If the income elasticity of wheat is low​, then this increase in demand will be​ smaller, and the price of wheat will increase by a smaller amount than if the income elasticity of demand for wheat were high.

Over the past 30​ years, the price of oil has been relatively​ unstable, fluctuating between​ $11.00 and well over​ $100 per barrel. Which of the following potentially contributes to​ oil-price instability? Oil prices are relatively unstable because A. the demand for oil is elastic. B. the supply of oil is inelastic. C. the income elasticity of demand for oil is negative. D. the market for oil is relatively competitive. E. OPEC has been successful in controlling the quantity of oil its members supply.

B. the supply of oil is inelastic. When a price elasticity is low​ (small in absolute​ value), small percentage changes in quantity correspond to large percentage changes in price. The combination of inelastic supply and inelastic demand in the market for oil has resulted in shifts in supply causing relatively large changes in price.

Consider the demand curve illustrated in the figure to the right. Is demand elastic or​ inelastic? A. Demand is elastic at all prices above ​$12.00 and inelastic at all prices below ​$12.00. B. Demand is inelastic​ (at all​ prices). C. Demand is elastic at all prices above ​$10.00 and inelastic at all prices below ​$10.00. D. Demand is inelastic at all prices above ​$10.00 and elastic at all prices below ​$10.00. E. Demand is elastic​ (at all​ prices)

C. Demand is elastic at all prices above ​$10.00 and inelastic at all prices below ​$10.00. midpoint= ((X1+X2)/2 + (Y1+Y2)/2) (0+10)/2= 5 + (20+0)/2=10)= 5,10 Along most demand​ curves, elasticity is not constant. For​ example, elasticity is not constant along a linear demand curve. At prices above the midpoint of a linear demand​ curve, demand is​ elastic, and at prices below the midpoint of a linear demand​ curve, demand is inelastic. ​Therefore, demand is elastic at all prices above ​$10.00 and inelastic at all prices below ​$10.00.

Suppose a professional basketball game is to be played at a suburban ​arena, which increases demand for parking on the night of the game. If the suburban area has the ability to create additional parking during periods of peak​ demand, then A. the supply of parking will be more elastic and the price of parking will increase by a relatively large amount the night of the game. B. the supply of parking will be more inelastic and the price of parking will increase by a relatively small amount the night of the game. C. the supply of parking will be more elastic and the price of parking will increase by a relatively small amount the night of the game. D. the supply of parking will be more inelastic and the price of parking will not change the night of the game. E. the supply of parking will be perfectly elastic and the price of parking will increase by a relatively large amount the night of the game.

C. the supply of parking will be more elastic and the price of parking will increase by a relatively small amount the night of the game. When demand​ increases, the amount that price increases depends on the price elasticity of supply. Price increases more when supply is inelastic. Price increases by less when supply is elastic. The ability to create additional parking makes the supply of parking relatively elastic​, resulting in the price of parking increasing by a relatively small amount the night of the game.

In another​ example, suppose market research shows that a particular brand of truck is a normal good and a necessity. If​ so, then the income elasticity of demand for this truck is A. negative. B. positive. C. less than 1 but greater than 0. D. greater than 1. E. zero.

C. less than 1 but greater than 0 Normal good If the quantity demanded of a good increases as income​ increases, then the good is a normal good. Normal goods are often further subdivided into luxury goods and necessity​ goods: ​Luxury: A good is a luxury if the quantity demanded is very responsive to changes in​ income, so that a 10 percent increase in income results in more than a 10 percent increase in quantity demanded. ​Necessity: A good is a necessity if the quantity demanded is not very responsive to changes in​ income, so that a 10 percent increase in income results in less than a 10 percent increase in quantity demanded. If the brand of truck is a normal good and a necessity​, then the income elasticity of demand is less than 1 but greater than 0.

2. What factors impact price​ elasticity? A. availability of close substitutes B. time C. proportion of income spent on the product D. All of the above.

D. All of the above. also if the good is a luxury or a necessity

. What is​ own-price elasticity of​ demand? A. Price elasticity is a measure of how sensitive the quantity demanded of a product is to a change in price. B. Price elasticity is the ratio of the percentage change in the quantity demanded to the percentage change in price. C. Price elasticity is equal to the slope of the demand curve. D. Both A and B are correct. E. All of the above are correct.

D. Both A and B are correct.

Why might the demand for Post Raisin Bran cereal be more elastic than the demand for all types of breakfast​ cereals? Post Raisin Bran cereal A. is consumed over a shorter period of time. B. is a smaller share of a​ consumer's budget. C. is more of a necessity. D. has more substitutes available. E. is defined more broadly.

D. has more substitutes available. If a product has more substitutes​ available, it will have a more elastic demand. In a narrowly defined​ market, consumers have more substitutes available. The demand for Post Raisin Bran cereal is likely more elastic than the demand for all cereal because Post Raisin Bran cereal has more substitutes.​ Alternatively, Post Raisin Bran cereal is a market defined more narrowly.

​Instead, suppose pepper and salt were substitutes. If​ so, then the​ cross-price elasticity of demand between pepper and salt would be A. negative. B. less than 1. C. zero. D. positive. E. greater than −1.

D. Positive The​ cross-price elasticity of demand is positive or negative depending on whether the two products are substitutes or complements. An increase in the price of a substitute will lead to an increase in quantity​ demanded, so the​ cross-price elasticity of demand will positive. An increase in the price of a complement will lead to a decrease in the quantity​ demanded, so the​ cross-price elasticity of demand will be negative. If pepper and salt were substitutes​, then the​ cross-price elasticity of demand would be positive.

Consider the two demand curves illustrated in the figure. Which of the two is relatively more elastic

D2 While elasticity is not the same as​ slope, it is true that if two demand curves​ intersect, the one with the smaller slope​ (in absolute ​value)—the flatter demand curve—is more elastic.​ Therefore, D2 is more elastic than D1 because it is flatter.

Consider the demand for cigarettes. Suppose the government decreases the price of cigarettes by lowering cigarette taxes. How will this affect the demand for cigarettes over​ time? If the price of cigarettes decreases​, then the quantity of cigarettes demanded will A. likely never change either initially or over time. B. increase​, and this effect will likely remain constant over time. C. decrease​, and this effect will likely become larger​ (in absolute​ value) over time. D. increase​, but this effect will likely become smaller​ (in absolute​ value) over time. E. increase​, and this effect will likely become larger​ (in absolute​ value) over time.

E. increase​, and this effect will likely become larger​ (in absolute​ value) over time. The more time that​ passes, the more elastic the demand for a product becomes. This is because it usually takes consumers some time to adjust their buying habits when prices change.​ Therefore, if the price of cigarettes decreases​, then the quantity of cigarettes demanded will increase​, and this effect will become larger​ (in absolute​ value) over time.

What information must economists have to estimate the price elasticity of​ demand? To estimate the price elasticity of​ demand, economists need to know A. the market price and quantity sold. B. the supply curve for a product. C. total revenue. D. the change in price. E. the demand curve for a product.

E. the demand curve for a product. The price elasticity of demand is measured by dividing the percentage change in quantity demanded of a product by the percentage change in the​ product's price: Price elasticity of demand=Percentage change in quantity demandedPercentage change in price Price elasticity of demand=(Q2−Q1)/Q1 DIVIDED BY (P2−P1)/P1​, where the initial price and quantity demanded are P1 and Q1 and the final price and quantity demanded are P2 and Q2. To calculate this​ (to identify these prices and​ quantities), economists need to know the demand curve for a product.

market experiments

Firms try different prices and observe the change in quantity demanded that results. That​ is, when firms are unsure of the price elasticity of the demand curves they face​ (such as when firms introduce new​ products), they often experiment with different prices to help determine the price elasticity of demand.

Given this change in total​ revenue, is demand between these prices elastic or​ inelastic? Demand​ (in this range of​ prices) is elasticelastic.

In this​ example, a decrease in price increases total​ revenue, so demand is elastic.

cross price elasticity of demand

The percentage change in quantity demanded of one good divided by the percentage change in the price of another​ good: ​Cross-price elasticity of demand= Percentage change in quantity demanded of one good/ Percentage change in price of another good.

price elasticity of supply

The responsiveness of quantity supplied to a change in​ price, measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the​ product's price.

total revenue

The total amount of funds received by a seller of a good or​ service, calculated by multiplying the price per unit by the number of units sold.

cross price elasticity of demand when considering substitutes and compliments

The ​cross-price elasticity of demand is positive or negative depending on whether the two products are substitutes or complements. ​Substitute: An increase in the price of a substitute will lead to an increase in quantity​ demanded, so the​ cross-price elasticity of demand will positive. ​Complement: An increase in the price of a complement will lead to a decrease in the quantity​ demanded, so the​ cross-price elasticity of demand will be negative. If the​ cross-price elasticity of demand between beer and wine is 0.31​, then beer and wine are substitutes.

At what price is total revenue​ maximized? Total revenue is maximized when price equals ​$1010. ​(Enter your response as a real number rounded to two decimal​ places.)

Total revenue is maximized when the demand curve is unit elastic. That​ is, total revenue is maximized at the price at the midpoint of a linear demand curve. ​Therefore, total revenue is maximized at a price of ​$10.00.

In​ addition, Gao and colleagues have estimated the income elasticity of demand for beer to be −0.09. If​ so, then beer is A. a normal good that is a necessity. B. an inferior good. C. a normal good that is a luxury. D. a luxury that may be a normal good or an inferior good. E. a normal good that may be a luxury or a necessity.

b. an inferior good Normal good If the quantity demanded of a good increases as income​ increases, then the good is a normal good. Normal goods are often further subdivided into luxury goods and necessity​ goods: ​Luxury: A good is a luxury if the quantity demanded is very responsive to changes in​ income, so that a 10 percent increase in income results in more than a 10 percent increase in quantity demanded. ​Necessity: A good is a necessity if the quantity demanded is not very responsive to changes in​ income, so that a 10 percent increase in income results in less than a 10 percent increase in quantity demanded. Inferior good A good is inferior if the quantity demanded falls when income increases. If the income elasticity of demand for beer is −​0.09, then beer is an inferior good.

In this​ example, pepper and salt are ____

compliments The​ cross-price elasticity of demand is positive or negative depending on whether the two products are substitutes or complements. An increase in the price of a substitute will lead to an increase in quantity​ demanded, so the​ cross-price elasticity of demand will positive. An increase in the price of a complement will lead to a decrease in the quantity​ demanded, so the​ cross-price elasticity of demand will be negative. In this​ example, an increase in the price of pepper decreases the quantity of salt ​demanded, so pepper and salt are complements.

Which of the following is a primary determinant of the price elasticity of supply? The price elasticity of supply is affected by A. whether the good produced is a luxury or a necessity. B. the share of the good in consumer budgets. C. the definition of the market. D. the passage of time. E. whether the good produced has close substitutes available.

d. passage of time Whether supply is elastic or inelastic depends on the ability and willingness of firms to alter the quantity they produce as price changes. ​Often, firms' ability to alter the quantity of the product they supply is affected by the passage of time.

MIT economist Jerry Hausman has estimated the price elasticity of demand for Post Raisin Bran cereal to be −2.5 and the price elasticity of demand for all types of breakfast cereals to be −0.9. The demand for Post Raisin Bran cereal is _______​, and the demand for all types of breakfast cereals is _______

elastic, inelastic Demand is elastic when the percentage change in quantity demanded is greater than the percentage change in​ price, so the price elasticity of demand is greater than 1 in absolute value. Demand is inelastic when the percentage change in quantity demanded is less than the percentage change in​ price, so the price elasticity is less than 1 in absolute value. ​ Therefore, the −2.5 price elasticity of demand for Post Raisin Bran cereal is elastic and the −0.9 price elasticity of demand for all types of breakfast cereals is inelastic.

Gao and colleagues have estimated that the​ cross-price elasticity of demand between beer and spirits is 0.15. If the price of spirits increases by 10​ percent, then the quantity of beer demanded will _____ by ______ percent. ​(Enter your response rounded to one decimal​ place.)

increase, 1.5 ​Cross-price elasticity of demand The percentage change in quantity demanded of one good divided by the percentage change in the price of another good. If the​ cross-price elasticity of demand between beer and spirits is 0.15 and the price of spirits increases by 10​ percent, then the quantity of beer demanded will increase by 1.5 percent.

Between 1950 and​ 2017, the price of wheat fell dramatically from​ $19.23 per bushel to​ $3.85 per bushel. Suppose between 1950 and​ 2017, the supply of wheat increased substantially due to increases in​ productivity, shifting the wheat supply curve to the right. With this supply​ shift, the amount by which the price of wheat falls will be larger the more ___________ the demand for wheat.

inelastic Elastic demand Demand is elastic when the percentage change in quantity demanded is greater than the percentage change in price. Inelastic demand Demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price. If the supply of wheat​ increases, then this will decrease the market price of wheat. If the price elasticity of demand for wheat is​ inelastic, then this decrease in price will be larger than if the price elasticity of demand for wheat were more elastic.

when demand is elastic what happens to price and total revenue

price and total revenue move inversely​: An increase in price reduces total​ revenue, and a decrease in price raises total revenue.

when demand is inelastic what happens to price and total revenue

price and total revenue move in the same​ direction: An increase in price raises total​ revenue, and a decrease in price reduces total revenue.

Economist X. M. Gao and two colleagues have estimated that the​ cross-price elasticity of demand between beer and wine is 0.31. If​ so, then beer and wine are ________.

substitues The ​cross-price elasticity of demand is positive or negative depending on whether the two products are substitutes or complements. ​Substitute: An increase in the price of a substitute will lead to an increase in quantity​ demanded, so the​ cross-price elasticity of demand will positive. ​Complement: An increase in the price of a complement will lead to a decrease in the quantity​ demanded, so the​ cross-price elasticity of demand will be negative. If the​ cross-price elasticity of demand between beer and wine is 0.31​, then beer and wine are substitutes.

Suppose the price of pepper increases by 25 percent​ and, as a​ result, the quantity of salt demanded​ (holding the price of salt ​constant) decreases by 6 percent. The​ cross-price elasticity of demand between pepper and salt is ________. ​(Enter your response rounded to two decimal places and include a minus sign if​ appropriate.)

​-0.24 Cross-price elasticity of demand The percentage change in quantity demanded of one good divided by the percentage change in the price of another​ good: ​Cross-price elasticity of demand= Percentage change in quantity demanded of one goodPercentage change in price of another good. ​Therefore, the​ cross-price elasticity of demand between pepper and salt ​is: ​Cross-price elasticity of demand=−625=−0.24.