Question 1

Suppose the price elasticity of demand for electricity is equal to 0.15 in the short run but is equal to 0.5 in the long run. What explains this difference, and what does this imply about the demand curve for electricity in the short run versus the long run?

Accepted Answer

The answer of Suppose the price elasticity of demand for...

Question 2

If the cross-price elasticity of demand between hamburgers and cheese is positive, these two goods must be complements.

Accepted Answer

The statement is incorrect. A positive cross-price elasticity of demand between two goods indicates that they are substitutes, not complements.

Question 3

All else equal, when the demand for oil increases, the price will increase. Some economists say that this is only a short-run worry because in the long run a more elastic supply curve will benefit consumers. Do you agree? Explain.

Accepted Answer

The answer of All else equal, when the demand for...

Question 4

The price elasticity of the supply of paintings by Rembrandt is greater than 1.

Accepted Answer

The price elasticity of the supply of paintings by Rembrandt is essentially zero or very close to it, as Rembrandt is no longer alive to produce more paintings, making the supply fixed and inelastic.

Question 5

If the price elasticity of demand between two points on a demand curve is 0.75, then the demand between those two points is:
A) price unit-elastic.
B) price-inelastic.
C) price-elastic.
D) unknown.

Accepted Answer

Price elasticity of demand measures how much the quantity demanded of a good responds to a change in its price. If the elasticity is less than 1, it is considered price-inelastic, meaning that the quantity demanded is relatively unresponsive to price changes. Since 0.75 is less than 1, the demand is price-inelastic.

Question 6

When the absolute value of the percentage change in quantity demanded is less than the absolute value of the percentage change in price, demand is:
A) inelastic.
B) elastic.
C) unit-elastic.
D) unknown.

Accepted Answer

When the absolute value of the percentage change in quantity demanded is less than the absolute value of the percentage change in price, demand is said to be inelastic. This means that changes in price have little effect on the quantity demanded.

Question 7

You are the manager of a supermarket, and you know that the cross-price elasticity of peanut butter to jelly is exactly -2.0.Because of a bad grape harvest, grape jelly prices are expected to rise by 10% next year. To account for the change in demand, you should stock 10% more peanut butter.

Accepted Answer

The cross-price elasticity of -2.0 indicates that peanut butter and jelly are complements. A 10% increase in the price of jelly would lead to a 20% decrease in the demand for peanut butter, not an increase.

Question 8

Suppose the cross-price elasticity of demand for pork with respect to the price of chicken is equal to +0.4. What does this tell you about the relation between pork and chicken? What will happen to consumption of pork if the price of chicken falls by 20%?

Accepted Answer

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

Question 9

Since for most people, eating in restaurants is a luxury and eating at home is a necessity, the price elasticity of demand for food eaten at home is less than the price elasticity of demand for eating in restaurants.

Accepted Answer

The price elasticity of demand is the extent to which quantity demanded changes in response to a change in price. Since eating at home is necessary for most people, they are less likely to change their consumption habits in response to a price change. On the other hand, eating in restaurants is typically considered a luxury, so consumers may be more likely to reduce their consumption if prices increase. Therefore, the price elasticity of demand for food eaten at home is generally lower than the price elasticity of demand for eating in restaurants.

Question 10

If the cross-price elasticity of demand between rice and beans is -0.25, rice and beans are complements.

Accepted Answer

A negative cross-price elasticity of demand indicates that as the price of one good increases, the demand for the other good decreases, which is characteristic of complementary goods.

Question 11

Demand for Wendy's hamburgers is more inelastic than the demand for all fast food.

Accepted Answer

The answer of Demand for Wendy's hamburgers is more inelastic...

Question 12

Suppose the price of e-books is initially $20 but decreases to $15. The absolute value of the percentage change in price (by the midpoint method) is approximately:
A) 28%.
B) 10%.
C) 5%.
D) 15%.

Accepted Answer

The midpoint method for calculating percentage change uses the formula: [(New Value - Old Value) / ((New Value + Old Value) / 2)] * 100. Here, it's [(15 - 20) / ((15 + 20) / 2)] * 100 = (-5 / 17.5) * 100 ≈ -28.57%. The absolute value is approximately 28%.

Question 13

Suppose the income elasticity for cross-country bus trips is -2 and the income elasticity for cross-country plane trips is +2. Does this make sense? Explain your answer.

Accepted Answer

The answer of Suppose the income elasticity for cross-country bus...

Question 14

If the absolute value of the price elasticity of demand is greater than 1:
A) small percentage changes in the price will lead to much larger percentage changes in the quantity demanded.
B) small percentage changes in the price will lead to even smaller changes in the percentage change in the quantity demanded.
C) percentage changes in the price will lead to equal percentage changes in the quantity demanded.
D) changes in the price will have no impact on changes in the quantity demanded.

Accepted Answer

When the absolute value of the price elasticity of demand is greater than 1, it is considered to be elastic demand. This means that small percentage changes in the price will lead to much larger percentage changes in the quantity demanded. In other words, if the price of a product increases by 10%, the quantity demanded will decrease by more than 10%. Similarly, if the price decreases by 10%, the quantity demanded will increase by more than 10%.

Question 15

The income elasticity of demand for an inferior good, such as a macaroni and cheese dinner, is negative.

Accepted Answer

The income elasticity of demand for an inferior good is always negative. As income increases, demand for inferior goods tends to decrease as households can afford higher quality substitutes.

Question 16

If the quantity demanded is 5,000 gallons at $3.00 per gallon, the price elasticity of demand for gasoline is 0.5, and the price rises to $3.15 per gallon, how many gallons of gas will be sold at this higher price? (Use the conventional method, not the midpoint method, of calculating price elasticity of demand.)

Accepted Answer

The answer of If the quantity demanded is 5,000 gallons...

Question 17

A university bookstore decreased the price of a sweatshirt from $20 to $18 and discovered that sweatshirt sales increased from 100 per week to 120 per week. Use the midpoint formula to compute the price elasticity of demand for sweatshirts.

Accepted Answer

The answer of A university bookstore decreased the price of...

Question 18

Suppose you are told that the short-run price elasticity of supply for a movie theater is zero. Does this make sense?

Accepted Answer

The answer of Suppose you are told that the short-run...

Question 19

The city government is losing millions of dollars on its buses and subways. The government proposes to increase the fare by 20% to raise revenue and has asked your advice. You know that the price elasticity of demand for mass transit in the city is approximately equal to 0.75. What do you think of the proposal to increase the fare to raise revenue for the city? Be as specific as possible.

Accepted Answer

The answer of The city government is losing millions of...

Question 20

Suppose the cross-price elasticity between two goods is zero. What does this tell you about these two goods?

Accepted Answer

The answer of Suppose the cross-price elasticity between two goods...

Quiz 6: Elasticity