Microecon chapter 4

Question 1

Elastic demand

Answer 1

• Quantity demanded responsive to change in price

Question 2

Inelastic demand

Answer 2

Quantity demanded unresponsive to change in price

Question 3

Elasticity relative to the equilibrium

Answer 3

Less change in equilibrium price and greater change in equilibrium quantity for any shift on supply curve

Question 4

Total revenue of inelastic demand

Answer 4

TR↑ as P↓
TR↑ as Q↑

Question 5

Total revenue of elastic demand

Answer 5

TR↓ as P↑
TR↓ as Q↓

Question 6

Price of elasticity demand formula

Answer 6

(ΔQd / ΔP) x (Pavg/Qdavg)

Question 7

Price of elasticity demand (η)

Answer 7

The responsiveness of Qd to a change in price all things equal

Question 8

Do we ignore the negative sign when measuring the price elasticity?

Answer 8

Yes

Question 9

Does a negatively sloped linear demand curve have a constant elasticity?

Answer 9

No

Question 10

%ΔQ > %ΔP

Answer 10

Elastic (η > 1)

Question 11

%ΔQ < %ΔP

Answer 11

Inelastic (η < 1)

Question 12

%ΔQ = %ΔP

Answer 12

Unit elastic (η = 1)

Question 13

Are P and η positively related?

Answer 13

Yes

Question 14

Demand is elastic if

Answer 14

Price↓ -> TR↑

Question 15

Demand is inelastic if

Answer 15

Price↓ -> TR↓

Question 16

Demand is unit elastic if

Answer 16

ΔP -> no ΔTR

Question 17

Determinant of η (3)

Answer 17

• Availability of substitute (greater sub. -> more elastic)
• Importance in consumer budget (more important -> more elastic)
• Time period (more time -> more elastic)

Question 18

Elasticity of supply

Answer 18

Mesure the responsiveness of Qs and ΔP

Question 19

Elastic supply

Answer 19

Responsive to change in price

Question 20

Inelastic supply

Answer 20

Unresponsive to change in price

Question 21

Elasticity of supply formula

Answer 21

(ΔQs / ΔP) x (Pavg/Qsavg)

Question 22

ηs depends on… (2)

Answer 22

• Ease of factor substitution (better sub => more elastic)
• Short run and Long run (SR: immediate response to a ΔP. LR: response of Qs given ΔP, and producers can adjust capacity)

Question 23

Excise tax (2)

Answer 23

• Rise price paid by consumers and reduce price received by producers
• Difference between price paid by consumer and price received by seller

Question 24

Tax incidence

Answer 24

Question of who bears the burden of a tax

Question 25

Who bears the burden of a tax?

Answer 25

Depends on the relative elasticities of supply and demand

Question 26

Cross price elasticity

Answer 26

The responsiveness of the demand for a good to the change in price of a substitute or complement

Question 27

Cross price elasticity formula (ηxy)

Answer 27

(ΔQx / ΔPy) x (Py avg/Qx avg)

Question 28

If ηxy > 0 …

Answer 28

Substitute

Question 29

If ηxy < 0 …

Answer 29

Complement

Question 30

Income elasticity

Answer 30

Mesures the responsiveness of demand to change in income

Question 31

Income elasticity formula (ηy)

Answer 31

(ΔQ / ΔI) x (I avg/Q avg)

Question 32

If ηy > 0 …

Answer 32

Normal good

Question 33

If ηy < 0 …

Answer 33

Inferior good

Question 34

If ηy > 1…

Answer 34

Luxury

Question 35

If 0 ≤ ηy ≤ 1…

Answer 35

Necessity

Question 36

True or false? The more necessary an item is in the consumption pattern of consumers, the greater is its income elasticity

Answer 36

False

Question 37

General rule of incidence of tax

Answer 37

The more elastic (inelastic) is supply/demand, the lesser (more) is the burden of a tax