microeconomics chapter 5

between producers and consumers

How is the burden of the tax divided?

less bc product has less substitutes where as Honey Bunches of Oats has other cereal options that are easily obtainable

demand for product is ____ elastic than demand for specific brand of same product

consumer; producer

inelastic demand = more of tax on ________ elastic demand = more of tax on _______

midpoint method

use average % change in both Q and P; % change in Q = Q2-Q1/((Q2+Q1)/2) x100 (for P and Q)

elastic demand

very responsive to price change; change in price causes large change in Qd; price elasticity >1; % change Qd > % change price; not as steep of a demand curve

A. Increase fares

A major city was thinking about increasing its bus fares and commissioned a study to estimate the price elasticity of demand. The study estimated that elasticity was 0.4. What action should the city have taken to increase revenue from bus fares? A. Increase fares B. Decrease fares C. Do not change fares

elastic supply

change in price causes large change in Qs; producers respond to changes by greatly changing quantity produced and sold; easier to make more of product (ice cream rather than diamonds)

inelastic supply

change in price causes small change in Qs; producers won't change quantity provided to market by much when price changes; harder to make more of product ( diamonds rather than ice cream)

cross-price elasticity of demand

change in price of one good can shift Qd for another good -substitutes: positive cross price (decrease price of one good = decrease demand of other good) -complements: negative cross price (decrease price of one good = increase Qd of other good)

inelastic demand

change in price only cause small change in Qd; price elasticity <1; % change Qd < % change price; steeper demand curve

price elasticity of demand

% change in Qd / % change in price

exceptions; violate

perfectly elastic and inelastic demand are _________ and ______ the law of demand

price elasticity of supply

% change in Qs / % change in price

D. cross-price elasticity of demand for iced tea is 2.

A 10 percent increase in the price of soda leads to a 20 percent increase in the quantity of iced tea demanded. It appears that: A. elasticity of demand for soda 0.5 and is inelastic. B. elasticity of demand for iced tea is 2 and is elastic. C. cross-price elasticity of demand for soda is -0.5. D. cross-price elasticity of demand for iced tea is 2.

A. total revenue will decrease.

A 25 percent decrease in the price of breakfast cereal leads to a 20 percent increase in the quantity of cereal demanded. As a result: A. total revenue will decrease. B. total revenue will increase. C. total revenue will remain constant. D. the elasticity of demand will increase.

B. Decrease

A business should ___________ (increase/decrease) the price of a good with an elastic demand if it wants to increase revenues. A. Increase B. Decrease

A. Increase

A business should ___________ (increase/decrease) the price of a good with an inelastic demand if it wants to increase revenues. A. Increase B. Decrease

C. Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold.

A firm has a choice of raising or lowering its price. If the firm wishes to increase its revenues (the price times the quantity sold), what should it do? A. Raise price when demand is elastic, because the quantity demanded will increase. B. Lower price when demand is elastic, because the quantity demanded will decrease. C. Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold. D. Lower price when demand is inelastic, because the revenues lost from the lower price will be smaller than the revenues gained from the increase in quantity sold.

C. horizontal.

A perfectly elastic supply curve is: A. upward sloping to the right. B. downward sloping to the left. C. horizontal. D. vertical.

Since the income elasticity is positive, it is a normal good. This means that when income decreases (as it does in a recession) demand will decrease also.

If a good has an income elasticity of 0.8, what do you expect to happen to the quantity demanded of this good if the country enters a recession?

D. Negative

Assume that as your income increases, your consumption of burgers decreases. We can assume that your income elasticity of demand for burgers is what? A. Between 0 and 1 B. Greater than 1 C. Equal to 1 D. Negative

elastic

Assume that the elasticity of demand is 1.6. Is demand elastic or inelastic?

B. 3.0

Billy Bob's Barber Shop knows that a 5 percent increase in the price of their haircuts results in a 15 percent decrease in the number of haircuts purchased. What is the elasticity of demand facing Billy Bob's Barber Shop? A. 0.15 B. 3.0 C. 0.10 D. 0.05

C. A greater

Ceteris paribus, an increase in an inelastic demand will cause _______ change in the equilibrium price than the same increase in an elastic demand. A. A smaller B. The same C. A greater D. One cannot tell

A. A greater

Ceteris paribus, an increase in an inelastic demand will cause _______change in the equilibrium quantity than the same increase in an elastic demand. A. A greater B. A smaller C. The same

Demand for a college education is less elastic and a demand for a degree at college is more elastic because there are more substitutes for what degree you get.

Compare the likely elasticity of demand for a college education with the likely elasticity of demand for a degree at one specific institution.

B. More

If a man spends approximately 45% of his income on air travel and his sister only spends about 2% of her income on air travel (and that is the only difference), would the man's demand for air travel be less or more elastic than his sister's? A. Less B. More C. Cannot tell

A. elastic

Demand is said to be _______ when the quantity demanded is very responsive to changes in price. A. elastic B. unit elastic C. inelastic D. independent

B. unit elastic

Demand is said to be _______when the quantity demanded changes at the same proportion as the price. A. elastic B. unit elastic C. inelastic D. independent

increase price of good = increase revenue decrease price of good = decrease revenue

How do price changes affect total revenue if a firm has inelastic demand?

increase price of good = decrease revenue decrease price of good = increase revenue

How do price changes affect total revenue if firm has elastic demand?

A. their cross price elasticities are greater than zero.

If cola and iced tea are good substitutes for consumers, then it is likely that: A. their cross price elasticities are greater than zero. B. their price elasticities of demand are less than one. C. their income elasticities are less than zero. D. their price elasticities of supply are less than one .

Total revenues for the store decrease because the quantity demanded decrease is more impactful than the price increase

If demand were elastic, an increase of 10 percent in the price might cause a 20 percent decrease in quantity demanded. What would happen to the total revenue in this case?

B. Demand will increase by 3.2%

If the country enters a period of prosperity, resulting in consumer incomes increasing by 4% and the income elasticity of a good is 0.8, what will happen to the demand for that good as a result? A. Demand will increase by 1.2% B. Demand will increase by 3.2% C. Demand will increase by 4.8%

B. rise and the equilibrium quantity to stay the same.

If the demand curve for a life-saving medicine is perfectly inelastic, then a reduction in supply will cause the equilibrium price to: A. rise and the equilibrium quantity to fall. B. rise and the equilibrium quantity to stay the same. C. rise and the equilibrium quantity to rise. D. stay the same and the equilibrium quantity to fall.

B. increase the quantity exchanged but result in no change in the price.

If the demand curve is perfectly elastic, then an increase in supply will: A. decrease the price but result in no change in the quantity exchanged. B. increase the quantity exchanged but result in no change in the price. C. increase the price but result in no change in the quantity exchanged. D. increase both the price and the quantity exchanged.

A. The supply curve will shift to the left.

If the government taxes car producers, that will happen in the market for cars? A. The supply curve will shift to the left. B. The demand curve will shift to the right. C. There will be a movement along the supply curve to the left. D. There will be a movement along the demand curve to the right.

A. It is a normal good.

If the income elasticity of a good is 0.8, what do we know about the good? A. It is a normal good. B. It is an inelastic good. C. It is an inferior good. D. It is an elastic good.

A. stay the same and the equilibrium quantity to fall.

If the supply curve for aspirin is perfectly elastic, then a reduction in demand will cause the equilibrium price to: A. stay the same and the equilibrium quantity to fall. B. fall and the equilibrium quantity to fall. C. rise and the equilibrium quantity to stay the same. D. rise and the equilibrium quantity to fall.

D. fall and the equilibrium quantity to stay the same.

If the supply curve for housing is perfectly inelastic, then a reduction in demand will cause the equilibrium price to: A. rise and the equilibrium quantity to fall. B. rise and the equilibrium quantity to stay the same. C. fall and the equilibrium quantity to fall. D. fall and the equilibrium quantity to stay the same.

A. Lower price

If you were selling a product with an elasticity of 1.6 and you wanted to increase your revenue, what should you do to the price? A. Lower price B. Increase price C. Do not change price

A. Inelastic because salt is a necessary dietary component C. Inelastic because for most people salt is a very small part of their budget

Is the demand for a container of salt likely to be inelastic or elastic? Why? Multiple answers A. Inelastic because salt is a necessary dietary component B. Elastic because there are lots of substitutes for salt C. Inelastic because for most people salt is a very small part of their budget D. Elastic because people only buy salt in the long-run

A. Elasticity is now greater than 1

People found substitutes for the bus. In the question above, if the city examined the elasticity of bus fares again, what would they likely find? A. Elasticity is now greater than 1 B. Elasticity is now less than 1 C. Elasticity is 0

D. the percentage change in quantity demanded divided by the percentage change in price.

Price elasticity of demand is defined as: A. the slope of the demand curve. B. the slope of the demand curve divided by the price. C. the percentage change in price divided by the percentage change in quantity demanded. D. the percentage change in quantity demanded divided by the percentage change in price.

C. Increased; decreased

Prices should be ___________ (increased/decreased/not changed) in the winter and ___________ (increased/decreased/not changed) in the summer. Winter: $8 = 22,000 tickets, $9 = 21,000 tickets Summer: $8 = 10,000 tickets, $9 = 8,000 tickets A. Increased; increased B. Decreased; decreased C. Increased; decreased D. Not changed; decreased

food -> dessert -> cookies -> oreos

Rank the following from the least elastic (inelastic) to most elastic. (Hint: think about the substitutes for each of these goods when ranking them). -demand for food -demand for cookies -demand for oreos -demand for dessert

prescribed -> over the counter -> sudafed

Rank the following in order from the least elastic demand to most elastic: -sudafed cold and allergy medicine -allergy medicine prescribed by doctor -any over the counter allergy drug

B. More; less

Situation A: When a $10 per unit tax is imposed on the producer of Bippies (a candy), the equilibrium price increases by $4.Situation B: When a $10 per unit tax is imposed on the producer of Bippies, the equilibrium price increases by $2.Based on the two situations above, Bippies in Situation A has a _________ elastic supply OR has a _________ elastic demand than exists in Situation B. A. More; more B. More; less C. Less; less D. Less; more

C. responsiveness of quantity demanded to a change in price.

The price elasticity of demand measures the: A. responsiveness of quantity demanded to a change in quantity supplied. B. responsiveness of price to a change in quantity demanded. C. responsiveness of quantity demanded to a change in price. D. responsiveness of quantity demanded to a change in income.

A. These are luxury goods, so income elasticity would be greater than 1.

Sometimes consumers purchase goods because of "conspicuous consumption"; i.e., they want others to know that they can afford to buy the goods. There are many examples of these goods, such as Rolex watches, Coach purses, and flying first class. What would you expect the income elasticity of demand to be for these goods? A. These are luxury goods, so income elasticity would be greater than 1. B. These are normal goods, so income elasticity would be greater than 1. C. These are inferior goods, so income elasticity would be greater than 1.

D. elastic

Supply is said to be _______ when the quantity supplied is very responsive to changes in price. A. independent B. inelastic C. unit elastic D. elastic

D. There is no change in either consumers' or producers' well-being.

Suppose that there is currently a $2.00 per bottle tax on vodka that is levied on consumers. Legislators have decided to give consumers some relief by eliminating the tax. In order to keep tax revenues at their previous level, they decide to impose a $2.00 tax on producers. What is the net impact of these two actions? A. Consumers of vodka are made better off. B. Producers of vodka are made better off. C. The government is made better off. D. There is no change in either consumers' or producers' well-being.

C. 4%

Suppose you know that the price elasticity of demand for your product is 0.5, and you are thinking about raising your price by 8%. How much can you expect quantity to decrease? A. 8% B. 5% C. 4% D. We can't tell how much quantity will decrease.

C. increase

The longer the time period considered, the more the elasticity of supply tends to: A. decrease B. remain constant C. increase D. converge to zero

C. More than one

The price elasticity of demand (in absolute value) will be _________________ if demand is elastic. A. Equal to one B. Less than one C. More than one

A. increasing the price of game tickets because demand is inelastic.

The price elasticity of demand for tickets to local baseball games is estimated to be equal to 0.89. In order to boost ticket revenues, an economist would advise: A. increasing the price of game tickets because demand is inelastic. B. not changing the price of game tickets because demand is unit elastic. C. increasing the price of game tickets because demand is elastic. D. decreasing the price of game tickets because demand is elastic.

B. Gasoline

The suppliers of ____________are more likely to have a tax imposed on their production. A. Jewelry B. Gasoline

1. number of substitutes: increase number of substitutes = easier to switch and greater elasticity 2. whether or not good is necessity: less sensitive to $ change of prescript medicine bc a necessity 3. % of income spent on good: spend more = more sensitive to change = more elastic 4. length of time for adjustment: more time to adjust to $ change = more elastic demand

What are the four determinants of the price elasticity of demand?

1. ability of producer to increase production: market price increase and producers can increase Qs = elastic (clothes); market price increase and producers can't increase Qs = inelastic (oil) 2. amount of time: short period of time = inelastic; long period of time = elastic

What are the two determinants of the price elasticity of supply?

slope = rate of change and does not change on demand curve but price elasticity changes along curve bc it's % change

What is the difference between elasticity of demand and the slope of the demand curve?

need to look at total revenue and how elasticity of firm may shift and cause total revenue to shift

What is the relationship between the price elasticity of demand for a good and the total revenue obtained from its sales?

The store's total revenue would increase because the price increase is greater than what would be lost by the quantity decrease.

What would happen to the store's total revenue with this 10 percent price increase if quantity falls by 5 percent?

C. An increase in the demand for higher education

When the federal government subsidizes higher education in the form of Pell grants to students, it results in A. An increase in the supply of higher education B. A decrease in the supply of higher education C. An increase in the demand for higher education D. A decrease in the demand for higher education

A. An increase in the supply of higher education

When the federal government subsidizes higher education in the form of direct subsidies to universities, it results in: A. An increase in the supply of higher education B. A decrease in the supply of higher education C. An increase in the demand for higher education D. A decrease in the demand for higher education

B. Bottles of alcohol, such as whiskey and gin

Which of the following goods would be the most likely to be subject to a government-imposed tax? A. Cereal B. Bottles of alcohol, such as whiskey and gin C. Shoes

A. The producer of vanilla ice cream

Which of the following is likely to have the largest elasticity of supply? A. The producer of vanilla ice cream B. The producer of yachts C. A dentist

Both consumers and producers pay the tax. The elasticity of demand is relevant. teenagers probably have a more elastic demand than adults since they may not be as addicted.

Who really pays the tax? Is the elasticity of demand relevant here? What do you expect to be the difference between the elasticity of demand for cigarettes between teenagers and adults?

C. elastic

Youth smoking seems to be more _______than adult smoking—that is, the quantity of youth smoking will fall by a greater percentage than the quantity of adult smoking in response to a given percentage increase in price. A. unitary elastic B. inelastic C. elastic D. cross-price elastic

use midpoint formula then % change in Qs / % change in price

how do we calculate price elasticity of supply?

% change in Qd / % change in income

how is income elasticity of demand calculated?

% change in quantity / % change in price

how to calculate price elasticity?

perfectly elastic demand

price change affects Qd by as much as possible; horizontal line on graph -ex: increase in price not only decreases Qd but decreases Qd to 0

perfectly inelastic demand

price changes don't affect Qd at all; vertical line on graph -ex: insulin - diabetics have to buy no matter the price

unitary elastic demand

price elasticity = 1; Qd change at same proportion as price; % change Qd = % change price

positive; negative

price elasticity of supply is always ______ while price elasticity of demand is always ________

costs

quantity and ______ increase and decrease together

price elasticity

ratio between percentage change in quantity demanded or quantity supplied and corresponding percentage change in price

income elasticity of demand

sign (+ or -) of elasticity varies -positive: normal good (computers, movies); increase income = increase demand -negative: inferior good (rice, used car); increase income = decrease demand