Chapter 5

Question 1

Price floor

Answer 1

government sets minimum price

Question 2

What may a black market rise from?

Answer 2

Ineffective price ceilings/floors

Question 3

What does price elasticity of demand measure?

Answer 3

the responsiveness of quantity demanded to a change in the price

Question 4

price of elasticity of demand equation

Answer 4

percent change in quantity demanded / percent change in price

Question 5

The size of elasticity of demand is influenced by:

Answer 5

1. Number of substitutes
2. Time
3. Whether a good is a necessity of a luxury
4. Share of income spend on the good

Question 6

Number of substitutes

Answer 6

the more substitutes good A has,, the more consumers can respond to a change in the price of good A. Thus the more elastic is the demand for good A

Question 7

Time

Answer 7

The more time consumers have, the more they can respond to a change in the price and again the more elastic demand is

Question 8

Whether a good is a necessity or a luxury

Answer 8

demand for a luxury is more elastic than a demand for a necessity

Question 9

Share of income spent on the good

Answer 9

The elasticity of demand tends to be low (inelastic) when spending on a good accounts for a small share of consumers income.

Question 10

The total Revenue Rule

Answer 10

1. If demand is elastic, total revenue moves in the opposite direction
2. If demand is inelastic, total revenue moves in the same direction as price
3. If demand is unit elastic, total revenue does not change as price changes

Question 11

Income inelastic of demand

Answer 11

measures the responsiveness of quantity to changes in income (measure size of shift of demand curve)

Question 12

Cross Price Elasticity

Answer 12

measures the responsiveness of demand of good A to a change in the price of good B

Question 13

Elasticity of Supply

Answer 13

measures responsiveness of quantity supplied to a change in price