Chapter 6 (6.3-6.6)

Question 1

Substitutability and price elasticy of demand with example

Answer 1

larger number the substitute goods available, greater the price elasticity of demand. Ex Candy Bars, glasses or contacts inelastic

Question 2

proportion of income and price elastic of demand with example

Answer 2

greater the proportion of income spent on goods, greater the price elasticity of demand. Ex price increase in gum is a small change on consumer income= inelastic
ex price increase on automobile insurance is big change on consumer income therefore is elastic

Question 3

Luxury Goods

Answer 3

Elastic ex car, vacation,

Question 4

Necessity Goods

Answer 4

Inelastic ex gas, electricity, internet

Question 5

Time

Answer 5

longer period under construction= more elastic. Consumers need time to adjust to prices

Question 6

Large Crop Yields

Answer 6

Most farm products inelastic. Increase in supply affects price and TR negatively. Elastic if production restricted

Question 7

Sales Tax and government

Answer 7

Governments put taxes on necessities and inelastic goods and services gain highest Total Revenue. Tax on elastic goods=less revenue

Question 8

Decriminalization of Illegal Drugs

Answer 8

demand of addicts are inelastic, demand for drugs are elastic

Question 9

Price Elasticity of supply

Answer 9

measures responsiveness of quantity supplied to a change in price

Question 10

elastic supply

Answer 10

producers responsive to price change

Question 11

inelastic supply

Answer 11

producers unresponsive to price change

Question 12

Es percent formula

Answer 12

percent change in quantity supplied of product x / percentage change in price of product x

Question 13

Can Elasticity of Supply be negative

Answer 13

no

Question 14

Es > 1

Answer 14

supply elastic %change in QS > %change in price

Question 15

Es = 1

Answer 15

supply is unit elastic %change in QS = %change in price

Question 16

Es < 1

Answer 16

supply is inelastic %change in QS < %change in price

Question 17

Elasticity of supply depends on how easily……

quick=
slow=

Answer 17

suppliers can shift resources to alternative uses
quick=elastic
slow=inelastic

Question 18

Immediate Market Period

Answer 18

length of time over which produces are unable to respond to change in price with a change in quantity supplied (perfectly inelastic)

Question 19

Short Run and elasticity of supply

Answer 19

period too short to change plant capacity but long enough to current plant capacity more or less intensively. More elastic than immediate market period

Question 20

Long run and elasticity of supply

Answer 20

period long enough for firms to adjust their plant sizes and for firms to enter or exit industry

Question 21

is there a total revenue test for elasticity of supply

Answer 21

no

Question 22

supply relationship with price

Answer 22

supply shows direct relationship between price and amount supplied.

Question 23

Antiques and elasticity of supply

Answer 23

higher price in antique is from strong demand, limited supply therefore is inelastic.

Question 24

Reproductions (designed to look antique)

Answer 24

elastic supply, increase in demand raises price slightly and so companies supply more

Question 25

Volatile Gold prices

Answer 25

supply of gold inelastic because increase or decrease in price does not yield more or less gold supplied

Question 26

cross elasticity of demand Exy

Answer 26

measures how responsive consumer purchases of one product x are to a change in price of some product y

Question 27

Exy > 0 (positve)

Answer 27

substitute goods: sales of product x move in same direction as y price

Question 28

Exy < 0 (negative)

Answer 28

complementary goods: quantity demanded of product x is opposite to change in price of y

Question 29

Exy is near equalling 0

Answer 29

independent good: goods are unrelated

Question 30

Income Elasticity of Demand

Answer 30

measures degree to which consumers demands change with respect to change in their income

Question 31

income elasticity positive

Answer 31

normal good: more demanded as income rises

Question 32

income elasticity negative

Answer 32

inferior goods: less demanded as income rises

Question 33

Income Elastic Insights

Answer 33

High income elasticities (luxury) affected by recession Low income inelasticities (necessities) least affected by recession ( Income falls, we cannot stop buying necessities but we can stop buying luxuries)

Question 34

Incident of a tax with demand

Answer 34

inelastic demand results in tax burden on consumer | elastic demand results in tax burden on producer

Question 35

incident of a tax with supply

Answer 35

inelastic supply results in tax burden on producer | elastic supply results in tax burden on consumer

Question 36

Efficiency Loss of a Tax

Answer 36

deadweight, tax reduces production and consumption below their economic efficiency