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Flashcards in HBX- Economics 1 Deck (54):
1

Willingness to Pay (WTP)

The highest price a consumer is willing to pay for a product or service. One can think of it as the price at which the consumer is just indifferent between purchasing the product and not purchasing it.

2

You walk into a small grocery store with a list of 4 items to purchase. Having found every item on your list, you decide to purchase only 3 items: milk, cereal, and a pound of bananas. We can conclude that your willingness to pay for the other item was less than its price. True or False

TRUE If your WTP for the item were higher than its price, you would have purchased it. You may have decided not to purchase the item because it wasn't the brand you like, or you remembered you already had the item at home, or for some other reason—but any of those reasons would lower your WTP for the item.

3

Two companies, A and B, are bidding to acquire a target firm. Their initial bids are $300 million by firm A and $350 million by firm B. The internal analysis done by each company indicates that the value of the target firm is $500 million to company A and $450 million to company B. In this example, which of the following values is likely to approximate company A’s willingness to pay?

$500 million Company A would be willing to pay up to $500 million, which is the approximate value it will derive from the target firm.

4

Under its original offering, customers of media company Netflix were charged $9.99 for a service that included a one-DVD-at-a-time plan and unlimited streaming of movies. In July 2011, Netflix announced a change to its pricing policy. The $9.99 plan would be eliminated. Instead, consumers could choose one of three plans—$7.99 per month for one-DVD-at-a-time, $7.99 per month for unlimited streaming, or $15.98 for both DVD and streaming. In October 2011, Netflix announced that it had lost 800,000 subscribers in the U.S. during the third quarter of 2011. Which of the following MUST be true for all subscribers that Netflix lost in the third quarter?

*Their WTP for streaming only is less than $7.99. *Their WTP for DVDs only is less than $7.99. *Their WTP for the two services together is less than $15.98.

5

Under its original offering, customers of media company Netflix were charged $9.99 for a service that included a one-DVD-at-a-time plan and unlimited streaming of movies. In July 2011, Netflix announced a change to its pricing policy. The $9.99 plan would be eliminated. Instead, consumers could choose one of three plans—$7.99 per month for one-DVD-at-a-time, $7.99 per month for unlimited streaming, or $15.98 for both DVD and streaming. Although Netflix had expected to continue to lose subscribers in the fourth quarter of 2011, in January 2012 the company announced that it had instead added 610,000 subscribers by the end of that quarter. Which of the following MUST be true for the subscribers that Netflix added in the fourth quarter of 2011? A- Their WTP for streaming only is more than $7.99. B- Their WTP for DVDs only is more than $7.99. C- Their WTP for a bundle is more than $15.98. D- A & B E- A, B, & C F- At least one of A, B, & C.

E. A, B, or C must be true of each customer, or that customer would not subscribe to any of Netflix's services.

6

Differences in WTP for a Hockey Game

  • Venue- 17%
  • Teams Competing- 15%
  • Date & Time- 15%
  • Income- 12%
  • Family & Friends attending- 10%
  • Interest in Sport- 9%
  • Weather- 8%
  • Seat Location- 8%
  • Importance of Game- 5%
  • Demographics- 3%

7

According to research by HBS professor Max Bazerman and others, people’s perceptions of fairness can impact their purchasing decisions. Suppose that a hardware store in Harvard Square has been selling flashlights for $10, but on the day of a hurricane they raise the price to $20. Meanwhile Target, located in nearby Watertown, has kept the price of the same flashlight unchanged at $10. Based on what you know about factors that determine WTP which of the following is most plausible?

  • A- People's WTP for a flashlight at the hardware store will decrease after customers learn of this price increase.
  • B- People's WTP for a flashlight at the hardware store will be higher than at Target since they urgently need flashlights and will pay the higher price if necessary.
  • C- People's WTP for a flashlight at the two stores will be the same given that the flashlight they sell is exactly the same

A!

People's WTP for the flashlight at the hardware store will likely decrease because of the perceived unfairness of the price increase. Note that even the decreased WTP might still be high enough for customers to make the purchase, if they really need flashlights.

8

The share price of a company is $20 at the beginning of the month, and $10 at the end of the month. Assuming that the company did not issue new stock during the month, which of the following statements is true? (Select all that apply) A-The WTP for the company’s stock fell by an average of 50% amongst all interested buyers. B-The WTP for the stock fell by an average of 100% amongst all interested buyers. C-Just because the price of the stock changed does not mean investor WTP for the stock has changed. D-The overall valuation of the company fell over the course of the month. E-Some investors may be willing to pay more than $10 for the stock.

A, D, & E A- True. The company is now valued at 50% of what it was originally, meaning that the average investor’s WTP for the company is 50% lower as well. B-The average investor is willing to pay $10 for a share, so average WTP fell by 50%, not 100%. C-Assuming that no new shares were issued, the price of a stock represents a market’s overall valuation of a company. Valuation and average WTP are then synonymous. D-True, since in this situation valuation and average WTP are synonymous. E-True. The $10 valuation represents the average investor valuation of the company's stock. However, some investors may still be willing to pay more than $10 for the stock.

9

What does a demand curve look like? (what's the on the x and y access)

  • X access- # of Consumers/Demand
  • Y access- Price These normally have a downward slope

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10

What is the equation for Revenue?

Revenue = Price x Quantity!

11

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Revenue increased by about 14%.

Eyeballing the graphs, we can see that revenue increases from about 3*175 (or $525 billion) to 4*150 (or $600 billion), a 14% revenue increase.

12

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Choice 4

The table gives the billions of gallons that will be purchased at a given price. To obtain a demand curve, simply plot the price (on the y-axis) against the quantity (on the x-axis).

13

What happens to demand—and revenues—if people's WTP changes?

As people’s WTP changes, the demand curve will also change. The demand curve will shift (left or right) in response. Why? Because now, at any given price the number of people with a WTP equal to that price will be different (higher or lower, depending on the event).

14

Can price shift the demand curve?

NO

 

price is not a factor that shifts the demand curve. By convention, price is on the y-axis of any demand curve. So a change in price will move us up or down along the existing demand curve but it will not shift the curve. (This is a very common mistake that is made about the demand curve.) In other words, price affects quantity demanded, but doesn't change the underlying WTP or demand.

15

Most common factors that impact people’s WTP:

  • Income
  • Gender
  • Geography
  • Weather
  • Age
  • Service levels
  • Brand
  • Advertising
  • Competing products
  • Expectations

16

How would the factors below affect the demand curve for gasoline in the US? (Shift left, Shift Right, No Change)

  • AN ECONOMIC BOOM RAISES NATIONAL INCOME
  • LARGE INVESTMENTS IMPROVE THE AVAILABILITY OF PUBLIC TRANSPORTATION
  • MORE COMPANIES ALLOW PEOPLE TO WORK FROM HOME, REDUCING THE NUMBER OF COMMUTERS
  • THE PRICE OF GASOLINE FALLS DUE TO NEW SOURCES OF SUPPLY
  • CAR COMPANIES DEVELOP MORE FUEL-EFFICIE-NT MODELS
  • POPULATION GROWTH INCREASES THE NUMBER OF LICENSED DRIVERS
  • THE GOVERNMENT PROVIDES A SUBSIDY FOR HYBRID CARS
  • THE PRICE OF GASOLINE INCREASES

SHIFT LEFT (Decrease Demand) 

  • LARGE INVESTMENTS IMPROVE THE AVAILABILITY OF PUBLIC TRANSPORTATION
  • MORE COMPANIES ALLOW PEOPLE TO WORK FROM HOME, REDUCING THE NUMBER OF COMMUTERS
  • CAR COMPANIES DEVELOP MORE FUEL-EFFICIE-NT MODELS
  • THE GOVERNMENT PROVIDES A SUBSIDY FOR HYBRID CARS​

SHIFT RIGHT (Increase Demand)

  • AN ECONOMIC BOOM RAISES NATIONAL INCOME
  • POPULATION GROWTH INCREASES THE NUMBER OF LICENSED DRIVERS

NO CHANGE

  • THE PRICE OF GASOLINE FALLS DUE TO NEW SOURCES OF SUPPLY
  • THE PRICE OF GASOLINE INCREASES

17

See the graph below and then see below. 

  • Pampered Pets Resort has run an advertising campaign promoting its service, and consumer willingness to pay has increased as a result.
  • Pampered Pets Resort has increased its price, and fewer customers have sent their dogs to the resort as a result.
  • The city Pampered Pets Resort is based in has become more polluted, and pet owners are taking their dogs along on their vacations more frequently in order to protect them from the smog.
  • Salaries in the city Pampered Pets Resort is based in have increased, giving pet owners more disposable income and increasing their willingness to pay.

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Pampered Pets Resort has increased its price, and fewer customers have sent their dogs to the resort as a result.

  • This graph represents a movement along the demand curve, rather than a shift in the demand curve. Prices have increased, and quantity has decreased as a result.

18

  • Pampered Pets Resort has placed a television in each dog’s suite, and as a result, customer willingness to pay has increased.
  • Minimum wage has increased in Pampered Pets Resort’s state, and as a result, the company’s costs have increased.
  • Pampered Pets Resort has signed a long-term deal with a supplier of dog food and is now paying less for the food, decreasing its total costs.
  • A recession has decreased salaries in the region, and as a result, fewer pet owners can afford to go on vacation.

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A recession has decreased salaries in the region, and as a result, fewer pet owners can afford to go on vacation.

  • This would decrease WTP, shifting the demand curve to the left.

19

Diminishing Marginal Returns

An economic relationship stating that a consumer's willingness to pay for a product should decrease for additional units of a product (i.e. the tenth milkshake will not taste as good as the first).

20

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Sarah

Sarah seems to get more of a high on the 2nd cup than the first.

21

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16

Quantity demanded is calculated by summing up the quantity demanded by each consumer. Notice that even though Aaron's demand curve doesn't indicate strictly diminishing marginal returns, the market demand curve is downward sloping.

22

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Between $1 and $2

If the price of scones is $2, Dan will purchase only five scones. If the price drops to $1, Dan will purchase the sixth scone. His WTP for the sixth scone must be between $1 and $2.

23

What factors determine whether the demand curve for a product is steep or flat?

  1. It depends on whether the product has close substitutes or not.
    Chocolate ice cream has a lot of close substitutes (cookie dough ice cream, chocolate cake, other desserts). If the price of chocolate ice cream suddenly rises, consumers will simply switch to the other products. Baby formulaon the other hand has few close substitutes.
  2. It depends on whether the product is a necessity or a luxury.
    Chocolate ice cream is a luxury good. (That is, despite what some of us may think, we can live without it.) On the other hand, baby formula is considered a necessity.
  3. The time horizon also matters.
    Consider the demand for gasoline. In the short run, the demand curve for gasoline is quite steep—there are few substitutes and, for many people, driving is a necessity. But over time, people can move closer to work, we can discover alternate fuels, etc. This can cause the demand curve for gasoline to flatten out in the longer run.
     

Ex below: (a price increase for ice cream drives more customers away than baby formula)

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24

We sometimes refer to steep demand curves as ____ curves, and to flat demand curves as _____ones

We sometimes refer to steep demand curves as “inelastic” curves, and to flat demand curves as “elastic” ones

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25

​​Which of the following scenarios illustrates the concept of diminishing marginal returns?

  • Nate is willing to pay $3 for a bottle of soda pop, but Max is only willing to pay $2.50.
  • Alexis would pay $3 for a cup of coffee, but would only pay $4 total for two cups.
  • Abe is only willing to pay $30 for a ticket to his alma mater’s hockey game because he lives out of state and travel costs are high.
  • Even though Miranda would gladly pay $25 to stream music via Spotify each month, her subscription costs only $8.

Alexis would pay $3 for a cup of coffee, but would only pay $4 total for two cups.
This scenario illustrates the concept of diminishing marginal returns. The first cup is worth more to Alexis than the second cup, so she is not willing to pay as much for the second cup.

26

Name 4 Important things about demand curves

  1. They are summaries of the willingness to pay among consumers
    (It will help a lot in thinking about the shape or shift of the curve & help your intuition)
  2. The curves can be flat or steep
    1. Flat Curves- Elastic
    2. Steap- Inelastic
  3. Demand Curves Can Move around over time (Because WTP Can move over time)
    Ex: A Key Player in a game is injured or Weather Changes (Warm to Freezing)!
    These above are called DEMAND SHIFTERS (Weather, Injury of a player, big players last game)
    *****Be careful whether you’re referring to shifts in the demand curve over time or how steep or flat the demand curve is at a point in time.
  4. Demand Curves can be for a single individual as well.

                                        

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27

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C

This demand curve shows how many people would purchase a laptop at each of the prices displayed in the histogram.

28

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$1500

If the producer charged $1500 per laptop, he would make ($1500)*(875) = $1,312,500.00 in revenue. Based on the demand curve, the producer should charge at some price close to $1500 to maximize revenue. Remember that revenue can be calculated as price charged* quantity sold and is equivalent to the rectangular area under the demand curve.

29

 

Which of the following events would, all else equal, cause a rightward shift of the demand curve for yachts? Select all that apply.

  • A decrease in the price of yachts
  • An increase in household income
  • The elimination of a regulation, which had prevented boats from sailing on a particular series of lakes
  • The introduction of a wealth tax
  • A decrease in the popularity of nautical activities
 

  • An increase in household income
    • An increase in income would allow more households to be able to afford yachts, shifting the overall demand for yachts at any given price to the right.
  • The elimination of a regulation, which had prevented boats from sailing on a particular series of lakes
    • The elimination of a regulation on boats would increase the demand for yachts to sail in previously forbidden waters.

30

  • Peter cannot eat more than 1 pizza (8 slices)
  • Peter is willing to pay at most $12 for 1 pizza
  • Peter will not pay more than $4 for a slice of pizza
  • Peter’s willingness to pay for a 5th slice is between $2.00 and $2.50

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Peter’s willingness to pay for a 5th slice is between $2.00 and $2.50

This is definitely true. Since Peter demands 4 slices when the price is $2.50 and 6 slices when the price is $2.00, his demand for 5 slices must be at a price somewhere in between.

31

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At $1, quantity demanded is 6000, and at $2 it is only 2000. So quantity demanded has changed by 4000.

32

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Quantity demanded would decrease by 62.5 cups.

33

Elasticity. What is it? Why do we need it? What's the formula? 

What it is: A measure of the responsiveness in one variable to a change in another variable. Mathematically, it is the percentage change in one variable, divided by the percentage change in another variable; for more details, see price elasticity of demand. Elasticity does not depend on the units in which variables are measured (unlike the concept of slope).

Why we need it: Because units matter when comparing, we need a method. (see photo below - 2 different units = confusing)​

The slope of a market demand curve measures how responsive buyers are to changes in price.

  • When the curve is steep or vertical, changes in price have little impact on the quantity demanded. Steep curves are often called “inelastic,” 
  • When the curve is flat or near-flat, a small dip in price sparks a large surge in the quantity demanded. flat curves are often called “elastic.” Demand is typically more elastic if a product is a luxury rather than a necessity, or if the product has many substitutes.

An important advantage of the elasticity measure over a slope measure is that elasticity is a unit-less measure: it doesn’t change as the units used to measure quantity demanded change. As a result, one can also more easily compare the elasticities of demand for different products; slopes do not enjoy this property.

Elasticity is different at each point on a demand curve with constant slope (i.e., a straight-line demand curve). However, that demand curve as a whole could be colloquially called “elastic” or “inelastic” depending on how flat or steep its slope is.


Formula: The percentage change in quantity demanded divided by the percentage change in price. Q (T) PIE! 
(Percentage change formula is also below)

 

To calculate the elasticity of a curve:

  1. Calculate the percentage change in quantity demanded and the percentage change in price separately
  2. Divide the former by the latter
    (Notice also the one minor caveat: because increases in price are almost always associated with decreases in quantity demanded, the number you’d obtain is almost always negative. The elasticity formula takes the absolute value of this ratio just for convenience, so that we can speak in terms of positive numbers.)

     

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34

A store owner is selling shirts at a price of $25 each. At this price, 300 shirts are sold. The owner then puts the shirts on sale, offering them for $20 each. At this price, 400 shirts are sold. What is the price elasticity of demand in this example?

5/3

Elasticity is the percent change in quantity demanded divided by the percent change in price. Quantity increased by 33%, or 1/3, and price decreased by 20%, or 1/5.

35

Sunk Cost

A fixed cost that has already been incurred at the time that a firm is making a production or pricing decision (e.g. money spent on exploratory research for a new product shouldn't be considered when pricing the product).

36

Cost-Plus Pricing

A method of setting prices in which a company bases its prices on its costs of production (e.g. the price is set equal to cost plus a mark-up) rather than willingness to pay.

37

Value-Based Pricing

A method of setting prices that's based on consumers' willingness to pay, and not just cost.

38

What is the intuition for why elasticity is 1 at the revenue-maximizing price?

A couple of answers from peers....

  • Elasticity is fundamentally a ratio between rates of change. If the elasticity is greater than 1, we get a larger change in quantity for a smaller change in price, so lowering the price raises profits. In the opposite case, a given increase in price produces a lesser decrease in quantity, so raising the price raises profits. The point where elasticity is 1 is where these forces balance, such that the derivative of profit is 0 and profit is maximized.
  • Elasticity is 1 at the revenue maximizing price because that is the point where the business can sell at the highest possible price for the highest possible quantity demanded. At any other point either the price will be high and the quantity demanded low, or the quantity demanded high and the price low.

 

39

At point A, the price is $98 and the quantity demanded is two tickets. At point B, the price is $2 and the quantity demanded is 98 tickets. In other words, total revenue is exactly the same at both points.

Now, let’s say you were considering raising the price of a ticket by $1. Where would it be more profitable to do so—at point A or point B?

It's better to raise prices at B.

Raising prices at B will increase your revenues.


When demand is elastic (like in option A), you can’t afford to raise prices. When demand is inelastic (Like in Option B), you surely can!
 

*****Difference between elasticity and slope: the elasticity of demand varies along a linear (or, straight-line) demand curve, reflecting the idea that price sensitivity varies along the curve. On the other hand, the slope of the curve is exactly the same at points A and B, which wouldn’t really help inform pricing decisions.​

(Remember from our earlier discussion, we had referred to steep demand curves as inelastic and flat curves as elastic. Even though, as we now see, the elasticity varies along a linear demand curve, you can also see why we used those terms colloquially: for a steep demand curve, quantity demanded hardly changes as you raise prices; for a flat curve, quantity demanded decreases far more.)​

40

What is the THE VOLUME-PROFIT TRADE OFF?
 

Even though you might have more customers selling your product for a smaller fee, you’d make less money all together . In other words, you need to ensure that the revenue loss from existing customers will be more than offset by the revenues you gain from new customers. Simply put, it’s a tradeoff between volume and profit.

41

What do you learn about the relation between revenue-maximizing prices and elasticity?

(My answer)

Revenues are maximized at an elasticity of 1. When the demand is elastic (above 1), you shouldn't raise prices- you would lose money because the quantity would be reduced. When the demand is inelastic (below 1), you can raise the price of your product and receive more revenue in return.

Revenues are maximized at the price where elasticity equals 1 for any demand curve!

(Remember from our earlier discussion, we had referred to steep demand curves as inelastic and flat curves as elastic. Even though, as we now see, the elasticity varies along a linear demand curve, you can also see why we used those terms colloquially: for a steep demand curve, quantity demanded hardly changes as you raise prices; for a flat curve, quantity demanded decreases far more.)
So when demand is elastic (above 1) flat - you shouldn't raise prices
And when demand is inelastic (below 1) steep- you should raise prices
????

 

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42

A coffee company lowers the price of its one-pound bags of coffee from $10 to $9 and as a result, quantity demanded increases from 4 million to 5 million units. Assuming the company's demand curve is linear, what is the slope of the demand curve? Please treat the quantity increase as an increase from 4 to 5, ignoring the millions. [Recall, one formula for slope is Rise / Run]

Price decreases by $1 and quantity increases by 1, so slope is -1/1 = -1.

43

A coffee company lowers the price of its one-pound bags of coffee from $10 to $9 and as a result, quantity demanded increases from 4 million to 5 million units. What is the elasticity at that point of the demand curve? [Recall, one formula for calculating percentage changes is (New-Old)/Old.]

Quantity has increased by 25% and price has decreased by 10%. Elasticity is 25%/10% = 2.5.

44

If the price of natural gas rises, when is the price elasticity of demand likely to be the highest?​

  • Before the price change
  • Immediately after the price change
  • Six months after the price change
  • One year after the price change

  • Before the price change
    • Remember that as price increases, the price elasticity of demand increases (that is, demand becomes more elastic).
  • Immediately after the price change
    • In the short-term, customers may be unable to find substitutes and will exhibit a relatively inelastic demand for natural gas.
  • Six months after the price change
    • In the short-term, customers may be unable to find substitutes and will exhibit a relatively inelastic demand for natural gas.
  • One year after the price change
    • In the short-term, customers may be unable to find substitutes and will exhibit a relatively inelastic demand for natural gas. However, over a longer time period, consumers can adjust their behavior and use substitutes, so the price elasticity of demand is higher a year after the price change.

45

For a company facing a linear demand curve, revenue is maximized:

  • where the number of customers is highest.
  • midway down the demand curve.
  • where demand is very elastic.
  • where demand is very inelastic.

midway down the demand curve.

  • Revenue is maximized midway down the demand curve, where elasticity equals 1.

46

Pampered Pets Resort has had an average of 25 dog guests per night at its price of $30. In order to attract more customers, the company lowers its price to $26 (per dog per night), and the average number of dog guests per night increases to 27. What is the impact of the price change on Pampered Pets Resort’s revenue?

  • Revenue decreases
  • Revenue increases
  • Revenue does not change

Revenue decreases

The additional $52 in revenue from new customers is not enough to make up for the $100 lost as Pampered Pets charges its original 25 customers less.

47

What is the price elasticity of demand as the price drops from $30 to $26? Remember that quantity demanded increased from 25 to 27.

0.6

Quantity has increased by 8% (2/25), and price has decreased by 13.3% (4/30). Elasticity is 8%/13.3%, 0.6.

48

Along with the price elasticity of demand, there are two other "elasticities" that are particularly useful. What are they?

 

  1. The income elasticity of demand: Do your habits change if you make more $? With medicine (like insulin- no) With jewelry- maybe yes! Ramen Noodles- Yes (you buy fewer!)
  2. Cross-price elasticity of demand: What about when OTHER products change prices. Does this affect you?

49

Elasticity is just a shorthand way to describe ______
 

how sensitive your revenues are to price changes.


HOW TO USE: What would have if other competition enters the market? Or if YOU raise prices. It gives you an idea of what would happen to your revenues.
 

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50

 

A certain product has a negative income elasticity of demand. What might this product be?

Speedboat
Rice
Clothing
Books

Rice
A negative income elasticity of demand implies that a consumer will buy less of a good as his or her income increases. This could be the case for cheaper foods such as rice. A consumer with a higher income might be able to afford more expensive foods and switch to, say, quinoa, fish or steak instead.

51

 

Which of the following statements regarding price elasticity of demand is true? Select all that apply.

Price elasticity of demand is a better measure of price sensitivity than slope.
Price elasticity of demand tends to increase as price increases.
Price elasticity of demand for a particular product will tend to increase as more substitute goods become available.
Price elasticity of demand tends to decrease over time.
Price elasticity of demand is necessarily equal to one halfway down a demand curve.

 
Price elasticity of demand is a better measure of price sensitivity than slope.
This is true because slope measures absolute changes in quantity and is sensitive to the units of measurement; in contrast, elasticity is not.
Price elasticity of demand tends to increase as price increases.
This is generally true. The higher the price, the less willing consumers will be to put up with increases in price for a particular product. For example, consumers might be willing to put up with a 100% price increase for a $1 candy bar, but not for a $20,000 car.
Price elasticity of demand for a particular product will tend to increase as more substitute goods become available.
The more available are substitute goods, the less willing consumers will be to put up with increases in price for a particular product.
Price elasticity of demand tends to decrease over time.
This is generally false. The longer the time horizon, the greater the chance of competition in a market and/or the greater chance consumers have to switch away to a substitute good. All else equal (for example, accounting for brand loyalty, consumer habits and other factors), this would make consumers more sensitive to changes in price over time.
Price elasticity of demand is necessarily equal to one halfway down a demand curve.
False. This is only true for linear demand curves.

52

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3/4

We can determine the total market demand at $3 by adding together the total number of cones at which Alex, Maria, and Raj's WTP is $3 or higher. We can see that Alex will buy 3 cones at $3 or higher, Maria will also buy 3, and Raj will buy 2, which adds up to a total of 8 cones demanded at $3. Repeating the same process for $4 (or higher), we get 2 cones for Alex, 2 cones for Maria, and 2 cones for Raj, which adds up to a total of 6 cones demanded at $4. Once we have these quantities for demand at the new and old prices, we can plug them into the equation for price elasticity of demand = absolute value of [(6-8)/8]/[(4-3)/3] = 3/4.

53

Changes in ___________ result in shifts of the demand curve.

For example:

  • an increase in a consumer’s _________ will shift her demand curve _______;
  • a decrease in _________ will shift her demand curve ______.

Changes in consumer willingness to pay result in shifts of the demand curve.


For example:

  • an increase in a consumer’s WTP for a product will shift her demand curve outward;
  • a decrease in WTP will shift her demand curve inward.

54

Explain slopes versus shifts in the demand curve

Changes in price correspond to movements along the demand curve.

Non-price factors that affect WTP correspond to shifts in the demand curve (inward or outward).

Factors that shift individual demand curves up or down also shift the market demand curve.