Question 1

A price elasticity of supply of 1.5 implies that
A)a 20 percent increase in the quantity supplied increases the price by 30 percent.
B)total revenue is 1.5 times total cost.
C)a 20 percent increase in the price increases the quantity supplied by 30 percent.
D)a 20-unit increase in supply reduces the price by $30.
E)a $20 increase in the price increases the quantity supplied by 30 units.

Accepted Answer

A price elasticity of supply of 1.5 means that a 1% change in price will result in a 1.5% change in quantity supplied. Therefore, a 20% increase in price will result in a 30% increase in quantity supplied (20% x 1.5 = 30%).

Question 2

Calculate the price elasticity of demand if a 8 percent change in the price of a product results in a 2.5 percent change in quantity demanded, and indicate whether demand is elastic, inelastic, or unit elastic.

Accepted Answer

The answer of Calculate the price elasticity of demand if...

Question 3

Define, in words, income elasticity of demand and tell why we care if it is positive or negative.

Accepted Answer

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Question 4

Normal goods have positive income elasticities of demand, and inferior goods have negative income elasticities of demand.

Accepted Answer

This statement is true according to the law of demand. As income increases, people tend to buy more normal goods because they can afford them while demand for inferior goods decreases as people have more income and can afford to buy better quality goods. Therefore, normal goods have positive income elasticities, while inferior goods have negative income elasticities.

Question 5

If the consumption of alcoholic beverages is higher for lower-income people than for higher-income people, then the income elasticity of demand for alcoholic beverages is positive.

Accepted Answer

Income elasticity of demand measures how the quantity demanded of a good responds to a change in income. If a good is a normal good, an increase in income leads to an increase in demand, making the income elasticity positive. However, if lower-income people consume more than higher-income people, it suggests that the good might be an inferior good (where demand decreases as income increases), implying a negative income elasticity of demand, not positive.

Question 6

If the cross-price elasticity between two goods is positive, then it is most likely that the two goods are
A)both inferior goods.
B)both luxury goods.
C)complements.
D)substitutes.
E)necessities.

Accepted Answer

If the cross-price elasticity between two goods is positive, it means that an increase in the price of one good leads to an increase in demand for the other good. This suggests that the two goods are substitutes, as consumers are willing to switch from one good to the other when the price of one increases.

Question 7

The price elasticity of supply is a measure of how
A)long it takes for producers to change technology.
B)sensitive producers are to a change in technology.
C)long it takes for producers to change their prices.
D)sensitive producers are to a change in input prices.
E)sensitive producers are to a change in output price.

Accepted Answer

The price elasticity of supply measures the responsiveness of producers to a change in the price of the output. Option E reflects this definition, as it indicates that the measure is related to a change in output price. Options A, B, C, and D are all incorrect as they do not measure the responsiveness of producers to a change in the price of the output.

Question 8

Suppose the price of a good falls from $4.95 to $3.85, and the quantity demanded changes from 77 units to 99 units. Calculate the price elasticity of demand using the midpoint formula, and indicate whether demand is elastic, inelastic, or unit-elastic.

Accepted Answer

The answer of Suppose the price of a good falls...

Question 9

Give four instances that cause price elasticity to vary. Explain.

Accepted Answer

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Question 10

Because tea and coffee are substitutes, their cross-price elasticity must be
A)less than 1.
B)less than 0.
C)equal to 0.
D)positive.
E)infinity.

Accepted Answer

Since tea and coffee are substitutes, their cross-price elasticity of demand is positive. This means if the price of one increases, the demand for the other also increases, indicating a positive relationship between their prices and demands.

Question 11

Elasticity of supply is
A)the responsiveness of supply to changes in costs.
B)the percentage change in quantity supplied due to a percentage change in price.
C)the responsiveness of the price to changes in supply.
D)1 minus the elasticity of demand.
E)the change in quantity supplied due to a change in quantity demanded.

Accepted Answer

Elasticity of supply refers to the percentage change in quantity supplied that results from a percentage change in price. It measures how responsive suppliers are to changes in the market price. Option A refers to the concept of marginal cost and its relationship with supply, while option C refers to the responsiveness of price to changes in supply which is the concept of elasticity of demand. Option D is the complement of elasticity of demand and not related to elasticity of supply. Option E refers to the concept of shifts in demand affecting the quantity supplied.

Question 12

Calculate the price elasticity of demand if a 2.6 percent change in the price of a product results in a 10.5 percent change in quantity demanded, and indicate whether demand is elastic, inelastic, or unit elastic.

Accepted Answer

The answer of Calculate the price elasticity of demand if...

Question 13

Suppose the price of a good rises from $2.25 to $3.15, and the quantity demanded changes from 2,360 units to 1,250 units. Calculate the price elasticity of demand using the midpoint formula, and indicate whether demand is elastic, inelastic, or unit elastic.

Accepted Answer

The answer of Suppose the price of a good rises...

Question 14

Indicate whether the percentage change in quantity demanded or percentage change in price is greater and whether demand is considered sensitive or insensitive for each of the following categories: elastic, inelastic, unit elastic.

Accepted Answer

The answer of Indicate whether the percentage change in quantity...

Question 15

Why isn't the slope of a demand curve used to measure the sensitivity of demand to a price change?

Accepted Answer

The answer of Why isn't the slope of a demand...

Question 16

The price elasticity of supply is a unit-free measure and uses percentage changes in quantity supplied and price to measure how sensitive supply is to a change in price.

Accepted Answer

This is correct. The price elasticity of supply is a unit-free measure that uses percentage changes in quantity supplied and price to measure how sensitive supply is to a change in price.

Question 17

Explain how price elasticity of demand indicates how total revenue changes when there is a change in price.

Accepted Answer

The answer of Explain how price elasticity of demand indicates...

Question 18

Suppose the price of a good falls from $200 to $150, and the quantity demanded changes from 45,000 units to 50,500 units. Calculate the price elasticity of demand using the midpoint formula, and indicate whether demand is elastic, inelastic, or unit elastic.

Accepted Answer

The answer of Suppose the price of a good falls...

Question 19

If a good has negative income elasticity, then it is an inferior good.

Accepted Answer

Negative income elasticity means that as income increases, demand for the good decreases. This is characteristic of inferior goods, which are cheaper alternatives that people tend to switch to when they have higher incomes and can afford better goods.

Question 20

The cross-price elasticity of demand between two goods measures the percentage change in the demand for one good for a given percentage change in the price of another good.

Accepted Answer

The cross-price elasticity of demand measures the responsiveness of the quantity demanded for one good to a change in the price of another good. It is calculated by dividing the percentage change in the quantity demanded of one good by the percentage change in price of another good.

Quiz 4: Subtleties of the Supply and Demand Model

A price elasticity of supply of 1.5 implies that