Chapter 7-Elasticities

Question 1

The price elasticity of demand is defined as the:

Answer 1

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

Question 2

A price elasticity of demand of .5 means that:

Answer 2

Price is elastic

Question 3

Estimated price elasticity of demand for new cars is .87. If the price of cars goes up by 20%, what would happen to the quantity if new cars demanded?

Answer 3

Fall 17.4%

PEoD = %chng Q/ %chng P, x/20=.87, solve for x.

Question 4

Mark estimated that for every 1% increase in wages for child care workers, they increased their supply of labor by 1.9%. This indicated that the elasticity if supply of labor to child care is:

Answer 4

Elastic. ( elasticity= 1.9. Elastic points are greater than 1)

Question 5

When a supply curve is vertical, it is:

Answer 5

Perfectly inelastic (for a vertical curve, quantity doesn’t change when price changes)

Question 6

Elasticity of supply is greater the longer the time period considered because the longer the time period…

Answer 6

The more options are available for producers to change production.
(The longer time period considered the more possible are substitutes in production and this elasticity of supply is greater.)

Question 7

Richard has estimated EoD for commuter rail transportation to be .6 in the short run and 1.6 in the long run. An increase in fair rates would:

Answer 7

Raise revenue in short run, but lower revenue in the long run

Question 8

The fact that airlines charge business travelers more for the same airplane seat than leisure travelers is an example of:

Answer 8

Price discrimination where the carrier charges those with greater elasticity a lower fare. (The ability of suppliers to charge higher prices to those with inelastic demand is price discrimination )

Question 9

For inferior goods, income elasticity is:

Answer 9

Less than 0

Question 10

Suppose EoD is 2, EoS is 1, and demand increased by 10%. What will happen to price?

Answer 10

Price will rise by 3.33%

10/(2+1)

Question 11

If supply is elastic, which is true:

a) supply changes more than demand
b) quantity supplied changes more than price
c) the percentage change in quantity supplied is greater than the percentage change in price.
d) price changes more than quantity supplied.

Answer 11

c) the percentage change in quantity supplied is greater than the percentage change in price

Question 12

If reducing the price f a movie ticket from $9 to $7 causes sales to go from 1,900 tickets to 2,100, according to midpoint formula, the PEoD is:

Answer 12

.4

([2100-1900]/2000)/([9-7]/8)= .4

Question 13

A perfectly elastic demand curve would be

Answer 13

Horizontal

Question 14

A business can reduce prices and increase its total revenue if demand for its good is

Answer 14

Elastic

Question 15

Generally speaking the demand for a good will be less elastic:

Answer 15

If the good makes up a small part of an individuals budget.

Question 16

At State U, a 10% increase in tuition is expected to decrease enrollment a by 2%. President Miser claims this means higher tuition will decrease the University’s total revenue. President miser is:

Answer 16

Incorrect, demand is inelastic and total revenue would rise

Question 17

Which of the following scenarios is consistent with a large increase in quantity and only a small change in price?

Answer 17

A shift in supply along a highly elastic demand curve.

Question 18

Which of the following income EoD for DVD players would be most consistent with the hypothesis that DVD players are a luxury?

a) 1.9
b) 0.8
c) 0.6
d) 2.1

Answer 18

a) 1.9

Question 19

If beer and pretzels have a cross-price elasticity of -1, then beer and pretzels are:

a) both inferior goods
b) both normal goods
c) complements
d) substitutes

Answer 19

c) complements