chapter 4 Flashcards
(19 cards)
The price elasticity of supply normally has a ________.
a) Value lower than one
b) Value greater than one
c) Positive value
d) Negative value
c) positive value
- with positively sloped supply curves, suppliers will always be willing and able to supply more units as price increases. so, when prices increased
- ex. when prices increase, quantity supplied will increase
- ex. when prices decrease, the quantity supplied will decrease.
- therefore, positive relation/value
Tax incidence refers to __________.
a) Tax revenues received by the government
b) Deadweight loss from the tax
c) Excess burden of the tax
d) The division of the tax between buyers and sellers
d) the division of the tax between buyers and sellers
- ex. if $1 in new taxes is imposed, tax incidence refers to how much of that $1 is paid by the buyer and how much by the seller.
- helps figure out how much the burden of tax is split between buyer and seller, and the elasticity for that product
The income elasticity for Kraft Dinner (macaroni and cheese) is -3. This defines Kraft Dinner (macaroni and cheese) as what type of good?
a) a neccessity
b) an inferior good
c) a normal good
d) a luxury
b) an inferior good
- any good with a negative income elasticity is an inferior good as income levels increase as you consume less of that good.
what is a necessity good?
a) inelastic good but is positively related to income
b) an elastic good that is positively related to income
c) a good that is inelastic but positively related to income
c) a good that is inelastic but is positively related to income
what are luxury goods?
a) elastic but positively related to income
b) inelastic but positively related to income
a) elastic but positively related to income
Tax incidence is affected by the ________.
a) Price elasticity of supply only
b)The size of the shift in demand and supply caused by the tax.
c) Price elasticity of demand and supply for a product
d) Price elasticity of demand only
c) price elasticity of demand and supply for a product
- since taxes cause prices to change, the tax incidence will be affected by the relative elasticities
T/F:
The steeper the demand curve, the more elastic the good.
True, although you shouldn’t base your graphing purely based on this fact
T/F:
The flatter the demand curve, the more inelastic the good.
True, although you shouldn’t base your graphing purely based on this fact
If the price elasticity of supply is 0.4, then a 20 percent increase in price will __________ the quantity supplied by __________ percent.
a) Increase; 50
b) Increase; 8
c) Decrease; 50
d) Decrease; 8
b) Increase; 8
- The percentage change in quantity supplied is equal to the elasticity of supply multiplied by the percentage change in price.
- b/c quantity supplied will move in the same direction as price since suppliers will be willing to supply more units at higher prices
If prices rise the quantity supplied will be greater ________.
a)The higher the consumer income
b) The shorder the time that elapses
c) The lower the consumer income
d) The longer the time that elapses
d) The longer the time that elapses
- If producers have more time they will be able to adjust production in response to the price change. Consumer income is unrelated to the supplier response to higher prices.
An increase in the price of a substitute for iPads will lead to __________ in the quantity demanded of iPads so the cross-price elasticity of demand will be __________.
a) An increase; negative
b) A decrease; positive
c) An increase; positive
d) A decrease; negative
c) an increase; positive
- When the substitute good increases in price it will result in people switching and buying iPads instead of the substitute good. This will also be an increase so the overall cross-price elasticity will be positive.
- Complementary goods would result in negative cross-price elasticity and a decrease in quantity demanded as a result of a price increase.
If the cross-price elasticity of demand between two products is -3.0, then the two products are ________.
a) Complements
b) Either complements or substitutes
You Were Unsure and incorrect
c) Substitutes
d) Unrelated
a) complements
- When two products are complements, or goods that are consumed together, an increase in the price of one good causes the demand for the other good to fall. Therefore any negative relationship indicates the goods are complements.
The current price of wheat is $1 per bushel, and the price elasticity of demand for wheat is known to be 0.50. A bad harvest causes the supply of wheat to decrease and as a result the price of wheat rises by 20 percent.
In this scenario, the percentage change in quantity demanded for wheat is ________, and farm revenues will ________.
a) 20 percent; rise
b) 20 percent; fall
c) 10 percent; fail
d) 10 percent; rise
d) 10 percent; rise
The elasticity of demand is the** percentage change in quantity divided by the percentage change in price**. An elasticity of demand coefficient of 0.50 indicates that the quantity demanded will fall by 0.50 * 20 = 10 percent.
Since wheat demand is inelastic we know that farm revenues will rise as a result.
Suppose that the Canadian government is attempting to reduce the rate of teenage smoking in the country. Further suppose that a package of cigarettes costs $12.48 and the elasticity of cigarette demand for teenagers is about 1.3. What price would achieve a target reduction of 60 percent in the rate of teenage smoking?
a) $19.97
b) $5.76
c) $18.24
d) $9.60
c) 18.24
- manipulate the mid-point forumla
- 1. define variables ( 60% is the desired reduction target - so its the quantity demanded, elasticity is the 1.3, leaving the unknown variable, the change in price
- 2. figure out the change in price by swapping elasticity with price in your formula
- after finding the change in price, multiply that number by the original cost of 12.48 and you get 18.24
The __________ is a measure of responsiveness of the change in quantity demanded of a good to the change in its price.
a ) Income elasticity
b) Price elasticity of demand
c) Price elasticity of supply
d) Cross elasticity of demand
b) Price elasticity of demand
- If the percentage change in quantity demanded is greater than the percentage change in price the product is said to have elastic demand. If the percentage change in quantity demanded is less than the percentage change in price the product is said to have inelastic demand. If the percentage changes are equal the product’s demand is said to be unit elastic.
If the supply of product B is perfectly elastic and price falls the quantity supplied will fall to zero.
a)Remain unchanged
b) Rise by the same amount
c) Rise to infinity
d) Fall to zero
d) fall to zero
-Perfectly elastic supply means that any decline in price results in zero units being supplied. If the supply did not change it would be perfectly inelastic. Quantity supplied will not increase when prices fall.
When you compute a price elasticity of demand of a normal product, the answer is always ________.
a) Less than one
b) Negative
c) Positive
d) Greater than one
b) Negative
ex. price goes up, demand falls - quantity/price = negative
- According to the law of demand, when we increase the price of a product the quantity demanded will fall, or vice versa. As with any fraction when the numerator and denominator have opposite signs the fraction will be negative. Since we know it will always be negative we commonly refer to elasticity coefficients by their absolute value.
What is the cross-price elasticity of demand for two goods that are unrelated?
a) Negative
b) Positive
c) One
d) Zero
d) Zero
- If the two products are unrelated then a change in the price of one product will have no impact on the quantity demanded of the other good. When the numerator is equal to zero the elasticity coefficient will always be zero.
