Question 1

There are two methods of calculating elasticities. One calculates the ratio of the percentage changes in quantity and price, and the other calculates the average percentage changes in quantity and price. We use the second method because it

Accepted Answer

The second method, which calculates the average percentage changes in quantity and price, is preferred because it is not sensitive to the direction of movement. This means it provides a consistent measure of elasticity regardless of whether the price is increasing or decreasing.

Question 2

Which answer ranks the elasticities of supply from highest to lowest?

Accepted Answer

The elasticity of supply typically increases over time. In the market-day supply, producers cannot adjust their production, making it the least elastic. In the short-run, some adjustments can be made, and in the long-run, producers can fully adjust their production methods and capacities, making it the most elastic.

Question 3

We know that increases in population increase the market demand for various goods. The prices of those goods will increase the most if the elasticity of supply is

Accepted Answer

When the elasticity of supply is very small, it means that suppliers cannot easily increase production in response to increased demand. This limited ability to ramp up supply in the face of rising demand leads to larger price increases.

Question 4

The numerical value of a price elasticity represents the percentage amount by which the quantity demanded changes when the price

Accepted Answer

Price elasticity of demand measures the percentage change in quantity demanded resulting from a 1 percent change in price.

Question 5

One response to increased oil prices, which reflects long-run elasticity and not short-run elasticity, is

Accepted Answer

Long-run elasticity refers to how consumers and producers adjust their behavior over time in response to changes in price. Choosing smaller cars is a long-run response to increased oil prices because it involves a significant change in behavior and potentially a substantial financial decision that people are more likely to make after they have had time to adjust to the new price levels. Other options like gasoline rationing, fewer joy rides, shorter family vacations, and less winter heat are more reflective of short-run elasticity, where individuals make quicker, less permanent adjustments to their behavior.

Question 6

The cross price elasticities among substitute goods will be extremely high when

Accepted Answer

Substitute goods with very high cross-price elasticities are those that are very similar to each other, as consumers can easily switch from one product to another if the price of one increases, indicating a strong substitution effect.

Question 7

The averaging equation of elasticity solves the problem of

Accepted Answer

The averaging equation of elasticity addresses the issue of which price or quantity to use as a base for calculating percentage changes, providing a consistent method for calculation.

Question 8

Demand for farm products, in general, is said to be relatively price inelastic. Therefore, U.S. farm policy, which is designed to keep farm prices above equilibrium, should

Accepted Answer

Since demand for farm products is relatively price inelastic, increasing prices through policy measures (keeping prices above equilibrium) generally leads to an increase in farm incomes. This is because the percentage decrease in quantity demanded is less than the percentage increase in price, leading to higher overall revenue for farmers.

Question 9

Suppose the value of income elasticity of demand for a private college education is equal to 1.5. This means that

Accepted Answer

The income elasticity of demand measures how the quantity demanded of a good responds to a change in income, with a value of 1.5 indicating that a 10 percent increase in income leads to a 15 percent increase in the quantity demanded of the good, in this case, private college education.

Question 10

The percentage change in the quantity demanded of film divided by the percentage change in the price of cameras indicates

Accepted Answer

The percentage change in the quantity demanded of one good (in this case, film) divided by the percentage change in the price of another good (in this case, cameras) measures the cross-price elasticity of demand. This concept reflects how the demand for one product responds to a change in the price of another product. However, since the options provided do not include cross-price elasticity of demand, the closest relevant concept is the price elasticity of demand for film. This is because the question essentially asks how the demand for film changes in response to price changes, albeit indirectly through the price of cameras.

Question 11

If an excise tax is placed on a product that has a price elasticity of demand equal to zero, then the

Accepted Answer

When the price elasticity of demand is equal to zero, it means that the quantity demanded does not change regardless of the price change. Therefore, consumers will bear the entire burden of the excise tax, as their purchasing behavior remains unchanged despite the price increase.

Question 12

In 1997 the price of a local telephone call from most pay phones rose from 15 cents to 25 cents. What effect do you think this will have on phone company revenues? Explain.

Accepted Answer

The answer of In 1997 the price of a local...

Question 13

When you buy a new car, the dealer presents you with a set of keys and you drive away into the sunset. What would you do if, after agreeing to a price for the car, the dealer told you that a set of keys would cost an additional $5? What does this tell you about the price elasticity of demand for car keys? Explain.

Accepted Answer

The answer of When you buy a new car, the...

Question 14

In terms of economic elasticities, why would farmers be upset to see a bumper crop?

Accepted Answer

The answer of In terms of economic elasticities, why would...

Question 15

Imagine winning a radio trivia contest and being given the choice of three packages. Each package has twoprizes. One package has a cellular phone and a beeper; one package has a cellular phone and a coupon forunlimited calls for a year; and one package has a cell phone and a compact disc player. Unfortunately, thelabels on the packages only give you the following information: the goods in Package A have a crosselasticity of 0.63, the goods in Package B have a cross elasticity of 0.00; and the goods in Package C have across elasticity of -0.84.
a. Which package will you choose if you want the cellular phone and the coupon for unlimited calls? Explain your answer
 b. Which package will you choose if you want the cellular phone and the beeper? Explain your answer.

Accepted Answer

The answer of Imagine winning a radio trivia contest and...

Question 16

Brandon Wallace tutors economics students. He finds that when he charges $5 per hour, students demand atotal of 30 hours of tutoring per week; however, when he raises his rate to $8 per hour, they demand only26 hours of tutoring.
a. Calculate the price elasticity of demand for Brandon's tutoring.
 b. Is demand for Brandon's tutoring price elastic, unit elastic, or price inelastic? Which rate should he charge to maximize his revenue?
 c. Brandon finds that he can raise his rate to $10 per hour during the week before final exams and students will continue to demand 26 hours of tutoring. Explain why this is so.

Accepted Answer

The answer of Brandon Wallace tutors economics students. He finds...

Question 17

a. What effect will a tax on cigarettes have on the consumption of cigarettes and on the wallets of smokers who are addicted to cigarettes?
 b. What effect will a tax on cigarettes have on the decision of teenagers to smoke?
 c. Describe the cross elasticity between cigarettes and the price of a Nicoderm patch, which is used to fight the craving for nicotine.

Accepted Answer

The answer of a. What effect will a tax on...

Question 18

The Grinch is now the mayor of your hometown, and he's still trying to steal Christmas. On the day after Thanksgiving, he announces a $25 tax on fresh Christmas trees. Tree farmers are angry to hear this because they have already delivered this season's freshly cut trees to the tree lots in your town. You hear your neighbors planning to buy an artificial tree, and your family decides to drive to the next town to buy a tree.
a. Who will bear the biggest share of the burden the first Christmas season this tax is in effect? Why?
 b. Will your answer change for subsequent Christmases? Why?

Accepted Answer

The answer of The Grinch is now the mayor of...

Question 19

Using the concept of elasticity, show that a drug enforcement policy aimed at getting rid of heroin suppliers may not be very effective in reducing heroin consumption.

Accepted Answer

The answer of Using the concept of elasticity, show that...

Question 20

Suppose that the price of gasoline doubles overnight. Why is the short-run price elasticity of demand for gasoline different from the long run?

Accepted Answer

The answer of Suppose that the price of gasoline doubles...

Quiz 4: Elasticity