# ECO Chapter 6

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Price elasticity of demand measures
how responsive quantity demanded is to a change in price.
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Suppose the value of the price elasticity of demand is -3. What does this mean?
A 1 percent increase in the price of the good causes quantity demanded to decrease by 3 percent.
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If demand is inelastic, the absolute value of the price elasticity of demand is
Less than one.
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If demand is perfectly inelastic, the absolute value of the price elasticity of demand is
Zero
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Jenna runs a small boutique in Capitola. She tells one of her suppliers that she is willing to pay \$6 for a pair of wool hand warmers and not a dime more. On the basis of this information, what can you conclude about her price elasticity of demand for wool hand warmers?
It is perfectly elastic
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Seth is a competitive body builder. He says he has to have his 12-oz package of protein powder to "feed his muscles" every day. On the basis of this information, what can you conclude about his price elasticity of demand for protein powder?
It is perfectly inelastic
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Which of the following statements is true about the price elasticity of demand along a downward sloping linear demand curve?
It is elastic at high prices and inelastic at low prices.
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If, for a given percentage increase in price, quantity demanded falls by a proportionately smaller percentage, then demand is
Relatively inelastic.
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If a 35 percent increase in price of golf balls led to an 42 percent decrease in quantity demanded, then the demand for golf balls is
Relatively elastic.
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If the demand for a life-saving drug was perfectly inelastic and the price doubled, the quantity demanded would
Remain constant.
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Which of the following products comes closest to having a perfectly inelastic demand?
Cholesterol medication in general
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Which of the following statements about the price elasticity of demand is correct?
Demand is more elastic in the long run than it is in the short run.
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When there few close substitutes available for a good, demand tends to be
Relatively inelastic.
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Jonah lives in a small town where there is only one Mexican restaurant. Which of the following is likely to be true about the price elasticity of demand for meals at the Mexican restaurant?
Demand is likely to be relatively inelastic.
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A demand curve that is horizontal indicates that the commodity
Has a large number of substitutes.
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Which of the following goods would have the most inelastic demand?
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The demand for gasoline in the short run is
Inelastic because there are no good substitutes for gasoline.
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With the increased usage of cell phone services, what has happened to the price elasticity of demand for land-line telephone services?
It has become more price elastic.
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Which of the following would result in a higher absolute value of the price elasticity of demand for a product?
A wide variety of substitutes are available for the good.
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As high gasoline prices persisted into the first part of 2011, consumers began driving less and using public transportation more. Over time, this caused the demand curve for gasoline to become ________ and the quantity of gasoline demanded to ________.
more elastic; fall
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Necessities tend to have more inelastic demands than luxuries.
TRUE
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When there are few substitutes available for a good, demand tends to be relatively inelastic.
TRUE
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If the market for a product is narrowly defined, then there are likely to be many substitutes for the product and the demand for the product is relatively elastic
TRUE
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List the five key determinants of price elasticity of demand and explain how each determinant indicates if demand tends to be elastic or inelastic.
1. Availability of close substitutes: If a product has more substitutes available, it will have more elastic demand. If a product has fewer substitutes available, it will have less elastic demand. 2. Passage of time: The more time that passes, the more elastic the demand for a product becomes. 3. Luxuries versus necessities: The demand curve for a luxury is more elastic than the demand curve for a necessity. 4. Definition of the market: The more narrowly a market is defined, the more elastic demand will be. 5. Share of a good in a consumer's budget: The demand for a good will tend to be more elastic the larger the share of the good in the average consumer's budget.
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Total revenue equals
price per unit times quantity sold.
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When demand is elastic, a fall in price causes total revenue to rise because
The increase in quantity sold is large enough to offset the lower price.
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When demand is unit-elastic, a change in price causes total revenue to stay the same because
The percentage change in quantity demanded exactly offsets the percentage change in price.
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If a firm lowered the price of the product it sells and found that total revenue did not change, then the demand for its product is
Unit-elastic.
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A service station owner in Staten Island, New York, was worried that raising the price of gasoline would cause the quantity demanded to fall by so much that he would be in a worse situation than if he did not raise the price. If raising the price of gasoline would cause the owner to receive less total revenue from the sale of gasoline, the demand for gasoline is
Elastic
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Income elasticity measures
How a good's quantity demanded responds to change in buyers' incomes.
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Calculate the income elasticity if an 8 percent increase in income leads to a 4 percent increase in quantity demanded for organic produce.
0.5
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Studies show that the income elasticity of demand for wine is approximately five. What does this mean?
A one percent increase in income leads to a five percent increase in wine consumption.
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Which of the following items is likely to have the highest income elasticity of demand?
A vacation home in the Swiss Alps
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Cross-price elasticity of demand is calculated as the
Percentage change in quantity demanded of one good divided by percentage change in price of a different good.
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If the cross-price elasticity of demand for computers and software is negative, this means the two goods are
Complements.
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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?
a and b only
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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 cross-price elasticity of zero?
e only
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For people who live near a bus route, a subway station, or a commuter rail line, public transportation provides a substitute to driving their own cars. So, for these people, the cross-price elasticity of demand between gasoline and public transportation is
Positive
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If the cross-price elasticity of demand between Breeze Detergent and Faber Detergent is a relatively large positive number, then it indicates that
The two brands of detergent are close substitutes.
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The cross-price elasticity of demand between an unlimited texting option and an unlimited call minutes option offered from a cell phone provider would be
Positive if subscribers consider the services substitutes for each other.
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The price elasticity of an upward-sloping supply curve is always
Positive
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Price elasticity of supply is used to gauge
How responsive suppliers are to price changes.
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The price elasticity of supply is equal to
the percentage change in quantity supplied divided by the percentage change in price
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Suppose the value of the price elasticity of supply is 4. What does this mean?
A 1 percent increase in the price of the good causes quantity supplied to increase by 4 percent.
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Suppose a 4 percent increase in price results in a 2 percent increase in the quantity supplied of a good. Calculate the price elasticity of supply and characterize the product.
0.5; The product is inelastic.
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If, for a given percentage increase in price, quantity supplied increases by a proportionately larger percentage, then supply is
elastic.
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If firms do not increase their quantity supplied when price changes, then supply is
Perfectly inelastic.
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If, for a given percentage decrease in price, quantity supplied decreases by a proportionately smaller percentage, then supply is
Relatively inelastic.
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Bringing oil to the market is a relatively long and costly process. The whole process from exploration to pumping significant amounts of oil can take years. What does this indicate about the price elasticity of supply for oil?
The elasticity coefficient is likely to be low and supply is highly inelastic.
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Over longer periods of time, increases in oil prices provide firms with incentives to explore and recover oil. What does this indicate about the long run price elasticity of supply for oil?