Chapter 5

Question 1

what does the price elasticity of demand measure?

Answer 1

how much the quantity demanded responds to change in the price

Question 2

when is demand MORE elastic?

Answer 2

if close substitutes are available, if the good is a luxury rather than a necessisty, if the market is narrowly defined, or if buyers have substantial time to react to a price change

Question 3

how is the price elasticity of demand calculated?

Answer 3

as the percentage change in quantity demanded divided by the percentage change in price

Question 4

what happens if quantity demanded moves proportionally less than the price?

Answer 4

then the elasticity is less than 1 and demand is said to be inelastic

Question 5

what happens if quantity demanded moves proportionally more than the price?

Answer 5

then the elasticity is greater than 1 and demand is said to be elastic

Question 6

what is total revenue?

Answer 6

the total amount paid for a good, equals the price of the good, times the quantity sold.

Question 7

for elastic demand curves, how does total revenue move?

Answer 7

in the opposite direction as the price

Question 8

what does the price elasticity of supply measure?

Answer 8

how much the quantity supplied responds to changes in price.

Question 9

is supply more elastic in the long run or short run?

Answer 9

the long run

Question 10

how is price elasticity of supple calculated?

Answer 10

as the percentage change in quantity supplied divided by the percentage change in price

Question 11

what happens if quantity supplied moves less than the price?

Answer 11

then the elasticity is less than 1 and supply is said to be inelastic

Question 12

what happens if quantity supplied moves more than the price?

Answer 12

then the elasticity is greater than one and supply is said to be elastic.

Question 13

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

Answer 13

1. availabiltiy of close substitutes
2. necessities vs luxuries
3. definition of the market
4. time horizon

Question 14

If the elasticity equals zero, is demand perfectly elastic or perfectly inelastic?

Answer 14

it is perfectly inelastic

Question 15

if demand is elastic, what happens to total revenue?

Answer 15

an increase in price will cause total revenue to decrease.

Question 16

what do we call a good whose income elasticity is less than zero?

Answer 16

it is called an inferior good

Question 17

If a fixed quantity of a good is available, and no more can be made, what is the price elasticity of supply?

Answer 17

the price elasticity of supply is zero meaning perfectly inelastic supply.

Question 18

if demand is elastic should you lower the price to increase revenue?

Answer 18

yes