Question 1

When the price of pens went from $1 to $1.50, the quantity demanded of pencils changed from 50 to 75 a day. The cross-price elasticity of demand for pens (using the initial value formula) is

Accepted Answer

The answer of When the price of pens went from...

Question 2

How do you interpret the value of cross-price elasticity?

Accepted Answer

The answer of How do you interpret the value of...

Question 3

If a decrease in the price of good X results in a decrease in the quantity of Y demanded

Accepted Answer

If a decrease in the price of good X leads to a decrease in the quantity of Y demanded, it implies that X and Y are substitutes. This phenomenon occurs because consumers tend to switch from Y to X when the price of X decreases, leading to a decrease in the demand for Y.

Question 4

Recall the Application about finding estimates of elasticities of demand to answer the following question(s).
-According to the Application, ________ has a Web site that provides estimates of demand elasticities for hundreds of food products for dozens of countries.

Accepted Answer

The Application states that the U.S. Department of Agriculture has a Web site that provides estimates of demand elasticities for hundreds of food products for dozens of countries.

Question 5

Inferior goods are substandard.

Accepted Answer

Inferior goods refer to products that people buy less of as their income increases, not necessarily products that are substandard or of poor quality.

Question 6

How do you interpret the value of income elasticity?

Accepted Answer

The answer of How do you interpret the value of...

Question 7

If the cross-price elasticity of salt and pepper is positive the goods must be complements.

Accepted Answer

If the cross-price elasticity of two goods is positive, it indicates that an increase in the price of one good leads to an increase in the quantity demanded of the other good. This is characteristic of substitute goods, not complementary goods. Therefore, if the cross-price elasticity of salt and pepper is positive, it means that they are substitutes, not complements.

Question 8

Put the following products in order from lowest to highest based on their cross-price elasticity of demand with peanut butter: bread, bologna, floppy disks. Justify your answer.

Accepted Answer

The answer of Put the following products in order from...

Question 9

The cross-price elasticity between good X and good Y is positive. Other things being equal, if the price of X rises

Accepted Answer

A positive cross-price elasticity indicates that goods X and Y are substitutes. Therefore, if the price of X rises, consumers will demand more of good Y as they switch from X to Y.

Question 10

When the price of hamburger went from $3 to $4 a pound, the quantity demanded of buns changed from 30 to 25 packages a day. The cross-price elasticity of demand for hamburger (using the initial value formula) is

Accepted Answer

The answer of When the price of hamburger went from...

Question 11

Suppose that income increases and the quantity demanded of guitars stays the same. This means that the income elasticity of guitars is unit elastic.

Accepted Answer

If the quantity demanded of guitars stays the same despite an increase in income, it means that guitars are an inferior good. In this case, the income elasticity of demand for guitars is negative, meaning that a change in income results in a proportionately larger change in quantity demanded. Therefore, the income elasticity of guitars is not unit elastic, but rather it is elastic.

Question 12

Recall the Application about finding estimates of elasticities of demand to answer the following question(s).
-According to the Application, the regular price elasticities of demand found at www.ers.usda.gov are reported as

Accepted Answer

The regular price elasticities of demand found at www.ers.usda.gov are reported as negative numbers.

Question 13

When the price of hamburger went from $3 to $4 a pound, the quantity demanded of buns changed from 30 to 25 packages a day. The cross-price elasticity of demand for buns (using the initial value formula) is

Accepted Answer

The cross-price elasticity of demand is calculated as the percentage change in quantity demanded of buns divided by the percentage change in price of hamburgers. The percentage change in quantity demanded of buns is ((25-30)/30) = -0.1667, and the percentage change in price of hamburgers is ((4-3)/3) = 0.3333. The cross-price elasticity is -0.1667 / 0.3333 = -0.5.

Question 14

If butter and margarine are substitutes, then an increase in the price of butter will reduce the demand for margarine.

Accepted Answer

An increase in the price of butter, if they are substitutes, will increase the demand for margarine as consumers switch to the cheaper alternative.

Question 15

For most goods and services, income elasticity of demand tends to be smaller in the short run than in the long run. However, a recent study shows that the demand for a durable good such as automobiles tends to be more income-elastic in the short run than in the long run. Explain why.

Accepted Answer

The answer of For most goods and services, income elasticity...

Question 16

When the price of pens went from $1 to $1.50, the quantity demanded of pencils changed from 50 to 75 a day. The cross-price elasticity of demand for pencils (using the initial value formula) is

Accepted Answer

The cross-price elasticity of demand formula using the initial value method is: (ΔQd of good B / Qd of good B initial) / (ΔP of good A / P of good A initial). Here, ΔQd of pencils = 75 - 50 = 25, Qd initial of pencils = 50, ΔP of pens = $1.50 - $1 = $0.50, and P initial of pens = $1. Thus, the calculation is (25 / 50) / (0.50 / 1) = 0.5 / 0.5 = 1. This indicates that pencils and pens are substitutes, as the price increase in pens leads to an increase in the quantity demanded of pencils.

Question 17

The Department of Justice could use the cross-price elasticity between products sold at Staples and Office Max to show that the firms are very similar.

Accepted Answer

Cross-price elasticity measures the responsiveness of demand for one product to changes in the price of another product. If Staples and Office Max have a high cross-price elasticity, it means that their products are close substitutes and consumers are likely to switch between the two brands. This would suggest that the firms are competing directly with each other and would support the Department of Justice's argument that the proposed merger of Staples and Office Max would reduce competition within the office supply market.

Question 18

When the price of tacos went from $2 to $3 dollars each, the quantity demanded of burritos changed from 100 to 120 a day. The cross-price elasticity of demand for burritos calculated using the initial value method is

Accepted Answer

According to the initial value method, the formula for cross-price elasticity of demand (Exy) is:
Exy = (%ΔQy / %ΔPx) = [(Q2y - Q1y) / Q1y] / [(P2x - P1x) / P1x]

Using the given values:
Q1y = 100
Q2y = 120
P1x = $2
P2x = $3

Exy = [(120-100)/100] / [(3-2)/2]
Exy = 0.4

Therefore, the answer is C.

Question 19

If an increase in the price of good X results in a decrease in the quantity of Y demanded

Accepted Answer

When the price of good X increases and this leads to a decrease in the quantity of good Y demanded, it indicates that goods X and Y are complements. This means that they are often used together, so an increase in the price of one reduces the demand for the other.

Question 20

If peanut butter and jelly are complements, then an increase in the price of peanut butter will reduce the demand for jelly.

Accepted Answer

Peanut butter and jelly are complements, which means they are often consumed together. An increase in the price of peanut butter will make it more expensive for consumers to buy both peanut butter and jelly, so they may decide to just buy one or the other, reducing the demand for jelly.

Quiz 4: Elasticity: A Measure of Responsiveness