Question 1

Suppose that at a price of $55, 100 units were sold while at a price of $33, 153 units were sold.Without calculating the price elasticity value, can you determine whether demand is elastic, unit elastic, or inelastic? Explain your answer.

Accepted Answer

The answer of Suppose that at a price of $55,...

Question 2

Ali's Gyros operates near a college campus.Ali has been selling 120 gyros a day at $4.50 each and is considering a price cut.He estimates that he would be able to sell 200 gyros per day at $3.50 each.
a.Calculate the price elasticity of demand using the midpoint formula.
b.Calculate the change in revenue as a result of the price cut.

Accepted Answer

The answer of Ali's Gyros operates near a college campus.Ali...

Question 3

The Mass Rapid Transit (MRT)System in Hong Kong has been running significant losses.Transport Ministry officials have argued over whether to raise fares to combat the losses.One argument against a fare increase is that it will aggravate traffic congestion on the streets during peak commuter hours.Suppose that the current fare is $4 and the government is considering raising it to $6.Officials estimate that this reduces the number of rides purchased from 10,000 to 8,000 per day.
a.Using the midpoint formula, what is the estimated elasticity of demand for MRT rides?
b.What does this elasticity of demand suggest to you about what will happen to total revenue earned by the transit system if the fare increase happens?
c.Last year, the MRT system incurred a loss of $50,000 per day.Do you think the fare increase will resolve the deficit problem as well as Ministry officials anticipate? Explain.

Accepted Answer

The answer of The Mass Rapid Transit (MRT)System in Hong...

Question 4

Using cross-sectional data from the two Housing Assistance Supply Experiment (HASE)sites-Brown County, Wisconsin, and St.Joseph County, Indiana-John Mulford of Rand Research estimates the long-run "permanent" income elasticity of housing expenditures to be 0.45 for owners.Using this information, what is likely to happen to housing expenditures if the government increases income transfers to recipients in HASE sites?

Accepted Answer

According to the given information, the long-run "permanent" income elasticity of housing expenditures for owners is 0.45, which means that a 1% increase in permanent income of households will lead to a 0.45% increase in their housing expenditures. Therefore, if the government increases income transfers to recipients in HASE sites, it will increase their permanent income, which will ultimately lead to an increase in their housing expenditures as well. Hence, the correct choice is C.

Question 5

Economists estimated that the price elasticity of beer is -0.30 and the income elasticity of beer is 0.09.This means that

Accepted Answer

The price elasticity of -0.30 indicates that beer is inelastic, so an increase in price will increase revenue. The income elasticity of 0.09 indicates beer is a normal good, not a luxury or inferior good.

Question 6

Calculate the income elasticity if an 8 percent increase in income leads to a 4 percent increase in quantity demanded for organic produce.

Accepted Answer

The formula for income elasticity of demand is: 
Income elasticity = percentage change in quantity demanded / percentage change in income

Substituting the values gives us: 
Income elasticity = 4% / 8% = 0.5

Therefore, the answer is B. The income elasticity is positive (so the good is a normal good), and the value is less than 1, indicating that the good is relatively income inelastic.

Question 7

Last year, Sefton purchased 60 pounds of potatoes to feed his family of five when his household income was $30,000.This year, his household income fell to $20,000 and Sefton purchased 80 pounds of potatoes.All else constant, Sefton's income elasticity of demand for potatoes is

Accepted Answer

When Sefton's income decreased, he purchased more potatoes, indicating that potatoes are an inferior good for him, which results in a negative income elasticity of demand.

Question 8

Income elasticity measures how a good's quantity demanded responds to

Accepted Answer

Income elasticity measures the responsiveness of demand for a product or service to a change in consumer income.

Question 9

Suppose the governor of California has proposed increasing toll rates on California's toll roads, and has presented two possible scenarios to implement these increases.Following are projected data for the two scenarios for the California toll roads:
Scenario 1: Toll rate in 2015: $10.00.Toll rate in 2019: $22.50
For every 100 cars using the toll roads in 2015, only 81.6 cars will use the toll roads in 2019.
Scenario 2: Toll rate in 2015: $10.00.Toll rate in 2019: $17.50
For every 100 cars using the toll roads in 2015, only 96.2 cars will use the toll roads in 2019.
a.Using the midpoint formula, calculate the price elasticity of demand for Scenario 1 and Scenario 2.
b.Assume 10,000 cars use California toll roads every day in 2015.What would be the daily total revenue received for each scenario in 2015 and in 2019?
c.Is demand under Scenario 1 and under Scenario 2 price elastic, inelastic, or unit elastic.Briefly explain.
(For above questions, assume that nothing other than the toll change occurs during the time frame listed that would affect consumer demand.)

Accepted Answer

The answer of Suppose the governor of California has proposed...

Question 10

If the cross-price elasticity of demand for computers and software is negative, this means the two goods are

Accepted Answer

The answer of If the cross-price elasticity of demand for...

Question 11

If you expect the economy is going to experience a boom and average income in the economy will rise in the foreseeable future, the type of firm that would be able to increase its sales if your expectations are met is

Accepted Answer

A luxury good is a type of product that people purchase more frequently when their income rises. Therefore, if the economy experiences a boom and average income increases, the demand for luxury goods will increase, leading to an increase in sales for firms that sell luxury goods.

Question 12

Consider the following pairs of items:
A.shampoo and conditioner
B.iPhones and earbuds
C.a laptop computer and a desktop computer
D.beef and pork
E.air-travel and weed killer
Which of the pairs listed will have a negative cross-price elasticity?

Accepted Answer

The answer of Consider the following pairs of items:
A.shampoo and...

Question 13

Studies show that the income elasticity of demand for wine is approximately five.What does this mean?

Accepted Answer

The income elasticity of demand for wine being approximately five means that a 1 percent increase in income leads to a 5 percent increase in wine consumption.

Question 14

Linesha, a college student working part-time received a wage increase.An avid movie buff, she increased her purchases of Blu-ray discs and reduced her purchases of DVDs.Based on this information

Accepted Answer

Linesha's behavior suggests that as her income increased, she bought more Blu-ray discs and fewer DVDs, indicating Blu-ray discs are normal goods and DVDs are inferior goods.

Question 15

Consider the following pairs of items:
A.shampoo and conditioner
B.iPhones and earbuds
C.a laptop computer and a desktop computer
D.beef and pork
E.air-travel and weed killer
Which of the pairs listed will have cross-price elasticity of zero?

Accepted Answer

Air-travel and weed killer are unrelated goods, so a change in the price of one does not affect the demand for the other, resulting in a cross-price elasticity of zero.

Question 16

Suppose Pump-U-Up lowers the price of its gym membership by 10 percent and as a result, Sweat-It-Out experienced a 16 percent decline in its gym membership.What is the value of the cross-price elasticity between the two gym memberships?

Accepted Answer

The answer of Suppose Pump-U-Up lowers the price of its...

Question 17

Cross-price elasticity of demand is calculated as the

Accepted Answer

Cross-price elasticity of demand measures the responsiveness of quantity demanded of one good to changes in the price of another good. Therefore, it is calculated as the percentage change in quantity demanded of one good divided by percentage change in price of a different good.

Question 18

Which of the following items is likely to have the highest income elasticity of demand?

Accepted Answer

Vacation homes in Swiss Alps are typically luxury goods, and as such, have a high income elasticity of demand. As people's income increases, they are more likely to spend money on expensive vacation homes.

Question 19

You are the manager of a theater.At present the theater charges the same admission price of $8 to all customers, regardless of age.You propose a two-tier pricing scheme: $5 for children under the age of 12 and $10 for adults.You tell your supervisor that your proposal is likely to increase revenue.What must be true about the price elasticity of demand if your proposal is to achieve its goal of raising revenue? Explain your answer.

Accepted Answer

The answer of You are the manager of a theater.At...

Question 20

According to a study of the U.S.demand for alcoholic beverages, the price elasticity of demand for beer is -0.30.Which of the following could explain why the price elasticity of demand for beer is low?

Accepted Answer

The low price elasticity of demand for beer could be explained by the fact that it is a habit forming product for many people and the price is relatively low compared to other alcoholic beverages. This means that consumers are less likely to change their consumption behavior in response to a price change.

Quiz 6: Elasticity: the Responsiveness of Demand and Supply