Microeconomics Chapter 5 Elasticity and Its Applications
Suppose good X has a positive income elasticity of demand. This implies that good X could be (i)a normal good. (ii)a necessity. (iii)an inferior good. (iv)a luxury.
(i), (ii), and (iv) only
Refer to Table 5-7. Using the midpoint method, when income equals $5,000, what is the price elasticity of demand between $8 and $12?
0.56
Refer to Table 5-7. Using the midpoint method, at a price of $16, what is the income elasticity of demand when income rises from $5,000 to $10,000?
1.00
If the price elasticity of demand for a good is 2.0, then a 10 percent increase in price results in a
20 percent decrease in the quantity demanded.
If the price elasticity of demand for a good is 0.3, then a 20 percent decrease in price results in a
6 percent increase in the quantity demanded.
A good will have a more inelastic demand, the
broader the definition of the market.
If demand is price inelastic, then
buyers do not respond much to a change in price.
For a good that is a necessity,
demand tends to be inelastic.
Economists compute the price elasticity of demand as the
percentage change in quantity demanded divided by the percentage change in price.
If two goods are substitutes, their cross-price elasticity will be
positive
Assume that a 4 percent increase in income results in a 2 percent increase in the quantity demanded of a good. The income elasticity of demand for the good is
positive, and the good is a normal good.
Refer to Figure 5-4. Assume the section of the demand curve from A to B corresponds to prices between $8 and $16. Then, when the price changes between $9 and $10,
quantity demanded changes proportionately more than the price.
The price elasticity of demand measures how much
quantity demanded responds to a change in price.
The midpoint method for calculating elasticities is convenient in that it allows us to
calculate the same value for the elasticity, regardless of whether the price increases or decreases.
The price elasticity of demand for a good measures the willingness of
consumers to buy less of the good as price rises.
Refer to Figure 5-4. If the price increases in the region of the demand curve between points A and B, we can expect total revenue to
decrease
Refer to Figure 5-11. A decrease in price from $20 to $10 leads to a
decrease in total revenue of $120, so the price elasticity of demand is less than 1 in this price range.
Refer to Figure 5-13. Between point A and point B on the graph, demand is
elastic, but not perfectly elastic.
Refer to Figure 5-4. Suppose the point labeled B is the "halfway point" on the demand curve and it corresponds to a price of $5.00. Then, between prices of $4.99 and $5.01, the price elasticity of demand is
equal to 1.
Demand is elastic if the price elasticity of demand is
greater than 1.
For which of the following goods is the income elasticity of demand likely lowest?
housing
If an increase in income results in a decrease in the quantity demanded of a good, then for that good, the
income elasticity of demand is negative.
Refer to Figure 5-11. If price increases from $10 to $20, total revenue will
increase by $120, so demand must be inelastic in this price range.
Refer to Figure 5-4. The section of the demand curve from B to C represents the
inelastic section of the demand curve.
If the price of gasoline rises, when is the price elasticity of demand likely to be the highest?
one year after the price increase
If the cross-price elasticity of two goods is positive, then the two goods are
substitutes.
For a good that is a luxury, demand
tends to be elastic.
Refer to Figure 5-4. Assume the section of the demand curve from A to B corresponds to prices between $6 and $12. Then, when the price increases from $8 to $10,
the percent decrease in the quantity demanded exceeds the percent increase in the price.
Which of the following is likely to have the most price inelastic demand?
toothpaste
