# Econ Ch 5

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question
According to the midpoint method, the price elasticity of demand for oranges between point X and point Y is approximately .2 which suggests that the demand for oranges is inelastic between points X and Y.
The price elasticity of demand measures the responsiveness of consumers to changes in price. For example, if consumers change their purchasing behavior very little in response to a drastic change in price, demand is said to be inelastic; but if consumers change their purchasing behavior a lot in response to a small change in price, demand is said to be elastic. The price elasticity of demand is the percentage change in quantity divided by the percentage change in price. According to the midpoint method, you can compute the percentage change in quantity of oranges demanded in this region in the following way:
question
A good without any close substitutes is likely to have relatively INELASTIC demand, since consumers cannot easily switch to a substitute good if the price of the good rises.
The price elasticity of demand measures the responsiveness of consumers to changes in price. For example, if consumers change their purchasing behavior very little in response to a drastic change in price, demand is said to be inelastic; but if consumers change their purchasing behavior a lot in response to a small change in price, demand is said to be elastic. If a good has several close substitutes, then many consumers will respond to an increase in the price of the good by purchasing one of those close substitutes. For example, many people believe that Coke and Pepsi are close substitutes for each other. Therefore, holding the price of Pepsi constant, if the price of Coke were to increase, many consumers would decide to switch to Pepsi. Therefore, the demand for Coke is relatively elastic. By contrast, there are no close substitutes for insulin as a treatment for diabetes. As a result, an increase in the price of insulin will not lead to a noticeable decline in insulin consumption. The demand for insulin is relatively inelastic.
question
A good's price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the least elastic demand?
A heart valve for heart attack victims When people buy a luxury good, such as a sports car, the price of the good and the prices of similar goods (e.g., sports cars) will be major factors in their purchasing decisions. When people decide whether to purchase a necessary medical treatment, price is much less of a factor—especially if no other treatments can achieve the same result. Since the price elasticity of demand measures the responsiveness of buyers to changes in price, the elasticity of demand for a heart valve for heart attack victims is likely to be much lower than the elasticity of demand for sports cars.
question
Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to have the least elastic demand, and which will have demand that falls in between. Merlot Wine Beverages
Merlot - Most Elastic Wine - In Between Beverages -Least Elastic The overall category of beverages has no close substitutes, so the demand for beverages, in general, is very inelastic. However, the more specific the type of beverages, the more close substitutes are available. If the price of wine rises, a consumer could purchase beer or soda, but most people would not consider those very close substitutes. If the price of merlot rises, consumers could switch to shiraz or cabernet.
question
Compared to the short-run demand for oil, the demand for oil in the long run will tend to be MORE elastic.
More substitutes are available in the long run than in the short run. If oil prices rise sharply, firms that currently use oil or oil-based products to produce goods and services will not be able to quickly switch to another energy input. Furthermore, consumers who rely on products derived from oil—such as gasoline for cars—will find it difficult to switch to alternative fuels in the short run. In the very short run, the demand for oil is highly inelastic. If the price of oil stays high for a long period of time, firms and families will begin moving away from or finding substitutions for oil-intensive activities and products. Firms may adopt alternative energy sources, such as solar power, coal, or ethanol. Households may begin to drive less and drive more fuel-efficient cars when they do. Since buyers of oil and oil-based products can pursue more alternatives to oil in the long run, the price elasticity of the long-run demand for oil is more elastic than the price elasticity of the short-run demand for oil.
question
Suppose that during the past year, the price of a laptop computer fell from \$2,350 to \$1,930. During the same time period, consumer sales increased from 436,000 to 537,000 laptops.
The ratio of the percentage change in quantity to the percentage change in price is 20.76%/19.63%=1.06 Therefore, the price elasticity of demand is 1.06. In other words, a 1.00% change in price leads to a 1.06% change in quantity demanded. Because the price elasticity of demand is greater than 1, economists would describe the demand for laptops as elastic in this region.
question
True or False: The value of the price elasticity of demand is not equal to the slope of the demand curve.
True
question
Between points A and B, curve LL is unit elastic. Between points A and D, curve NN is inelastic. Curve NN is less elastic between points A and D than curve MM is between points A and C.
FALSE TRUE TRUE The price elasticity of demand measures the responsiveness of consumers to changes in price. For example, if consumers change their purchasing behavior very little in response to a drastic change in price, demand is said to be inelastic; but if consumers change their purchasing behavior a lot in response to a small change in price, demand is said to be elastic. An economist would say that the flatter demand curve is relatively elastic, whereas the steeper demand curve is relatively inelastic. The previous graph shows the two most extreme types of demand elasticities: perfectly elastic and perfectly inelastic. Curve LL is perfectly elastic, as it indicates that quantity demanded is as responsive as possible to any given change in price. Intuitively, you can see this by observing that if price increases, quantity demanded falls to zero. On the other hand, curve OO is perfectly inelastic because no matter how much the price changes, quantity demanded is unaffected. The price elasticity of demand is the percentage change in quantity divided by the percentage change in price. Using the midpoint method, the percentage change in quantity demanded for curve NN between points A and D can be computed as follows: Because the elasticity is less than 1, demand is inelastic between points A and D. You can also see this by observing that the percentage change in quantity demanded is less than the percentage change in price between points A and D along curve NN. Again, using the midpoint method, the price elasticity of demand between points A and C along curve MM is 35.29%18.18%=1.9435.29%18.18%=1.94. Because the elasticity is greater than 1, demand is elastic between points A and C. Therefore, curve NN is less elastic than curve MM for the specified regions.
question
A good with many close substitutes is likely to have relatively ELASTIC demand, since consumers can easily choose to purchase one of the close substitutes if the price of the good rises.
The price elasticity of demand measures the responsiveness of consumers to changes in price. For example, if consumers change their purchasing behavior very little in response to a drastic change in price, demand is said to be inelastic; but if consumers change their purchasing behavior a lot in response to a small change in price, demand is said to be elastic. If a good has several close substitutes, then many consumers will respond to an increase in the price of the good by purchasing one of those close substitutes. For example, many people believe that Coke and Pepsi are close substitutes for each other. Therefore, holding the price of Pepsi constant, if the price of Coke were to increase, many consumers would decide to switch to Pepsi. Therefore, the demand for Coke is relatively elastic. By contrast, there are no close substitutes for insulin as a treatment for diabetes. As a result, an increase in the price of insulin will not lead to a noticeable decline in insulin consumption. The demand for insulin is relatively inelastic.
question
A good's price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the most elastic demand?
Diamond Necklace When people buy a luxury good, such as a diamond necklace, the price of the good and the prices of similar goods (e.g., diamond necklaces) will be major factors in their purchasing decisions. When people decide whether to purchase a necessary medical treatment, price is much less of a factor—especially if no other treatments can achieve the same result. Since the price elasticity of demand measures the responsiveness of buyers to changes in price, the elasticity of demand for amputation procedures for diabetes sufferers is likely to be much lower than the elasticity of demand for diamond necklaces.
question
Boot-cut jeans Pants Clothing
MOST ELASTIC IN BETWEEN LEAST ELASTIC The overall category of clothes has no close substitutes, so the demand for clothing, in general, is very inelastic. However, the more specific the type of clothing, the more close substitutes are available. If the price of pants rises, a consumer could purchase shorts or capris, but most people would not consider those very close substitutes. If the price of boot-cut jeans rises, consumers could switch to khakis or skinny jeans.
question
If the price of gasoline is relatively high for a long time, consumers are more likely to buy more fuel-efficient cars or switch to alternatives like public transportation. Therefore, the demand for gasoline is LESS elastic in the short run than in the long run.
Consumers will find it more difficult to minimize gas purchases in the short run than in the long run. For example, if you come out of your economics class to find that the price of gasoline has tripled, what are your options? If your car is low on gas, you have very few options. So, in the very short run, the demand for gasoline is extremely inelastic. If the price stays high for a few weeks, you may try to find someone to carpool with to class or you may cut down on the number of trips you make to the mall. If the price stays high long enough, you might continue to carpool and reduce your discretionary driving, but you might also decide to move closer to where you commute most or choose a more fuel-efficient vehicle. In the long run, people have more opportunities to find substitutes for or ways to reduce their use of gasoline-intensive transportation. Therefore, the quantity of gas demanded will be more responsive to changes in price in the long run than in the short run.
question
A good's price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the least elastic demand?
CHEMOTHERAPY FOR CANCER PATIENTS When people buy a luxury good, such as a yacht, the price of the good and the prices of similar goods (e.g., yachts) will be major factors in their purchasing decisions. When people decide whether to purchase a necessary medical treatment, price is much less of a factor—especially if no other treatments can achieve the same result. Since the price elasticity of demand measures the responsiveness of buyers to changes in price, the elasticity of demand for chemotherapy for cancer patients is likely to be much lower than the elasticity of demand for yachts.
question
Vegetables Food Red bell peppers
IN BETWEEN LEAST ELASTIC MOST ELASTIC The overall category of food has no close substitutes, so the demand for food, in general, is very inelastic. However, the more specific the type of food, the more close substitutes are available. If the price of vegetables rises, a consumer could purchase fruits or meats, but most people would not consider those very close substitutes. If the price of red bell peppers rises, consumers could switch to green bell peppers.
question
Other things being equal, the demand for natural gas will tend to be LESS elastic in the short run than in the long run.
More substitutes are available in the long run than in the short run. If the price of natural gas triples tomorrow, households that currently use natural gas will have very few alternatives for heating and cooking in their homes. In the very short run, the demand for natural gas is highly inelastic. If the price stays high for a few weeks, families will try to save on heating bills by dressing more warmly and reducing the average internal temperature in their homes. If the price of natural gas stays high for a very long period of time, more and more households will take measures to increase the heating efficiency of their homes or switch to alternatives such as solar power. Since consumers face fewer alternatives to natural gas in the short run, the short-run demand for natural gas is less elastic than the long-run demand for natural gas.
question
According to the midpoint method, the price elasticity of demand for apples between point X and point Y is approximately 5 , which suggests that the demand for apples is ELASTIC between points X and Y.
X (40,7) Y (20,8)
question
According to the midpoint method, the price elasticity of demand for tomatoes between point X and point Y is approximately 3.4 , which suggests that the demand for tomatoes is ELASTIC between points X and Y.
X (30,8) Y (20,9)
question
For each of the regions listed in the following table, use the midpoint method to identify if the demand for this good is elastic, (approximately) unit elastic, or inelastic.
X (5, 105) Y (7,75) = 1 = UNIT ELASTIC W (2, 210) X (5, 105) = 1.2 = ELASTIC Y (7,75) Z (14, 30) = .77 = INELASTIC
question
True or False: The value of the price elasticity of demand is equal to the slope of the demand curve.
FALSE
question
For each of the regions listed in the following table, use the midpoint method to identify if the demand for this good is elastic, (approximately) unit elastic, or inelastic.
X (21, 45) Y (27, 35) = 1 = UNIT ELASTIC Y (27, 35) Z (42, 10) = .39 = INELASTIC W (6, 70) X (21, 45) ELASTIC
question
Between points A and E, curve OO is perfectly inelastic. Curve MM is more elastic between points A and C than curve NN is between points A and D. Between points A and C, curve MM is inelastic.
A (100, 100) E ( 100, 130) TRUE, VERTICAL LINE INDICATES THIS A (100, 100) C (70, 20) = 1.9 = ELASTIC A (100, 100) D (80, 130) =.853 INELASTIC
question
Between points A and B, curve LL is perfectly inelastic. Between points A and C, curve MM is elastic. Curve MM is less elastic between points A and C than curve NN is between points A and D.
A (10, 10) B (7, 10) FALSE, HORIZONTAL LINE INDICATES THIS A (10, 10) C (7, 12) TRUE A (10, 10) D (8, 13) FALSE
question
According to the midpoint method, the price elasticity of demand between points A and B is approximately 0.14 .
A (90, 50) B (99, 25)
question
Suppose the price of bikes is currently \$25 per bike, shown as point B on the initial graph. Because the demand between points A and B is INELASTIC , a \$25-per-bike increase in price will lead to AN INCREASE in total revenue per day.
Recall that the price elasticity of demand between points A and B is 0.14. This means that the elasticity between these two points is less than 1. Therefore, demand is inelastic between these two points. Total revenue is equal to price times quantity. When price increases by \$25 per bike, quantity demanded decreases from 99 to 90 bikes per day, and total revenue rises from \$2,475 to \$4,500 per day. Holding everything else constant, an increase in price will increase total revenue, but a decrease in quantity will decrease total revenue. When demand is inelastic, such as between points A and B, the increase in price is large enough to more than offset the decrease in quantity. Therefore, the net effect is that total revenue rises.
question
In general, in order for a price decrease to cause a decrease in total revenue, demand must be INELASTIC .
When demand is inelastic, price and total revenue move in the same direction. This happens because inelastic demand means that consumers are not very sensitive to changes in price. Specifically, when price changes, the percentage change in quantity will be less than the percentage change in price. You can see this mathematically by examining the equation for price elasticity of demand when demand is inelastic: Total revenue is equal to price times quantity. Because price and quantity move in opposite directions when you move along a demand curve, a price change will cause total revenue to move in the direction of whichever variable is overpowering. When demand is inelastic, you know that the percentage change in price is larger than the percentage change in quantity. This means that total revenue will move in the same direction as the price change. Thus, when price increases, so does total revenue; when price decreases, total revenue decreases as well. When demand is elastic, you know that the percentage change in price is smaller than the percentage change in quantity, because consumers are highly sensitive to changes in price. This means that price and total revenue move in opposite directions. Thus, when price decreases, total revenue increases; when price increases, total revenue decreases. Finally, when demand is unit elastic, total revenue remains constant when the price changes in either direction because the change in quantity demanded is proportionately equal to the change in price.
question
According to the midpoint method, the price elasticity of demand between points A and B is approximately 3
A ( 20,80) B (30, 70)
question
Suppose the price of bikes is currently \$80 per bike, shown as point A on the initial graph. Because the demand between points A and B is ELASTIC , a \$10-per-bike decrease in price will lead to A INCREASE in total revenue per day.
Recall that the price elasticity of demand between points A and B is 3. This means that the elasticity between these two points is greater than 1. Therefore, demand is elastic between these two points. Total revenue is equal to price times quantity. When price decreases by \$10 per bike, quantity demanded increases from 20 to 30 bikes per day, and total revenue rises from \$1,600 to \$2,100 per day. Holding everything else constant, a decrease in price will decrease total revenue, but an increase in quantity will increase total revenue. When demand is elastic, such as between points A and B, the increase in quantity is large enough to more than offset the decrease in price. Therefore, the net effect is that total revenue rises.
question
In general, in order for a price increase to cause a decrease in total revenue, demand must be ELASTIC .
When demand is inelastic, price and total revenue move in the same direction. This happens because inelastic demand means that consumers are not very sensitive to changes in price. Specifically, when price changes, the percentage change in quantity will be less than the percentage change in price. You can see this mathematically by examining the equation for price elasticity of demand when demand is inelastic: Total revenue is equal to price times quantity. Because price and quantity move in opposite directions when you move along a demand curve, a price change will cause total revenue to move in the direction of whichever variable is overpowering. When demand is inelastic, you know that the percentage change in price is larger than the percentage change in quantity. This means that total revenue will move in the same direction as the price change. Thus, when price increases, so does total revenue; when price decreases, total revenue decreases as well. When demand is elastic, you know that the percentage change in price is smaller than the percentage change in quantity, because consumers are highly sensitive to changes in price. This means that price and total revenue move in opposite directions. Thus, when price decreases, total revenue increases; when price increases, total revenue decreases. Finally, when demand is unit elastic, total revenue remains constant when the price changes in either direction because the change in quantity demanded is proportionately equal to the change in price.
question
According to the midpoint method, the price elasticity of demand between points A and B is approximately 0.69 .
A (36, 100) B (42, 80)
question
Suppose the price of bikes is currently \$80 per bike, shown as point B on the initial graph. Because the demand between points A and B is INELASTIC , a \$20-per-bike increase in price will lead to AN INCREASE in total revenue per day.
Recall that the price elasticity of demand between points A and B is 0.69. This means that the elasticity between these two points is less than 1. Therefore, demand is inelastic between these two points. Total revenue is equal to price times quantity. When price increases by \$20 per bike, quantity demanded decreases from 42 to 36 bikes per day, and total revenue rises from \$3,360 to \$3,600 per day. Holding everything else constant, an increase in price will increase total revenue, but a decrease in quantity will decrease total revenue. When demand is inelastic, such as between points A and B, the increase in price is large enough to more than offset the decrease in quantity. Therefore, the net effect is that total revenue rises.
question
In general, in order for a price decrease to cause a decrease in total revenue, demand must be INELASTIC.
When demand is inelastic, price and total revenue move in the same direction. This happens because inelastic demand means that consumers are not very sensitive to changes in price. Specifically, when price changes, the percentage change in quantity will be less than the percentage change in price. You can see this mathematically by examining the equation for price elasticity of demand when demand is inelastic: Total revenue is equal to price times quantity. Because price and quantity move in opposite directions when you move along a demand curve, a price change will cause total revenue to move in the direction of whichever variable is overpowering. When demand is inelastic, you know that the percentage change in price is larger than the percentage change in quantity. This means that total revenue will move in the same direction as the price change. Thus, when price increases, so does total revenue; when price decreases, total revenue decreases as well. When demand is elastic, you know that the percentage change in price is smaller than the percentage change in quantity, because consumers are highly sensitive to changes in price. This means that price and total revenue move in opposite directions. Thus, when price decreases, total revenue increases; when price increases, total revenue decreases. Finally, when demand is unit elastic, total revenue remains constant when the price changes in either direction because the change in quantity demanded is proportionately equal to the change in price.
question
Data collected from the economy of Pokerville reveals that an 18% increase in income leads to the following changes: •A 29% increase in the quantity of houses demanded •A 17% decrease in the quantity of clubs demanded •A 14% increase in the quantity of flops demanded Compute the income elasticity of demand for each good. Then, based on its income elasticity, indicate whether each good is a normal good or an inferior good.
Houses = 29/18 =1.61 Normal Clubs = -17/18 = -0.94 Inferior Flops = 14/18 = 0.78 Normal Using the income elasticity of demand, you can then categorize goods as either normal or inferior. When an increase in income leads to an increase in quantity demanded (or a decrease in income leads to a decrease in quantity demanded), the good is called a normal good. Therefore, goods with a positive income elasticity of demand are normal goods. Since flops have an income elasticity of 0.780.78 and houses have an income elasticity of 1.611.61, both of these goods are considered normal goods. However, when an increase in income leads to a decrease in the quantity demanded (or a decrease in income leads to an increase in quantity demanded), the good is called an inferior good. Therefore, goods with a negative income elasticity of demand are inferior goods. Since clubs have an income elasticity of ?0.94?0.94, this good is considered an inferior good.
question
Which of the following three goods is most likely to be classified as a luxury good ?
HOUSES A luxury good is often viewed as a normal good that has an income elasticity greater than 1. Necessities (such as food) tend to have lower, positive income elasticities, as consumers must purchase them regardless of their incomes. Luxuries (such as gold jewelry or sailboats) tend to have large income elasticities, since consumers typically forgo them altogether if their incomes fall below certain levels. Thus, a given decrease in income will reduce the quantity demanded of luxuries more than that of necessities. Since the income elasticity of demand is largest for houses, the quantity of houses demanded is most responsive to changes in income. Therefore, it is the good most likely to be considered a luxury in Pokerville.
question
Data collected from the economy of Royal City reveals that an 11% decrease in income leads to the following changes: •A 9% increase in the quantity of spades demanded•A 10% decrease in the quantity of chips demanded•A 30% decrease in the quantity of aces demanded Compute the income elasticity of demand for each good and use the dropdown menus to complete the first column in the following table. Then, based on its income elasticity, indicate whether each good is a normal good or an inferior good. (Hint: Be careful to keep track of the direction of change. The sign of the income elasticity of demand can be positive or negative, and the sign confers important information.)
Spades = 9/-11 = -0.82 Inferior Chips= -10/-11 = 0.91 Normal Aces = -30/-11 = 2.73 Normal
question
Which of the following three goods is most likely to be classified as a luxury good ?
ACES A luxury good is often viewed as a normal good that has an income elasticity greater than 1. Necessities (such as food) tend to have lower, positive income elasticities, as consumers must purchase them regardless of their incomes. Luxuries (such as gold jewelry or sailboats) tend to have large income elasticities, since consumers typically forgo them altogether if their incomes fall below certain levels. Thus, a given decrease in income will reduce the quantity demanded of luxuries more than that of necessities. Since the income elasticity of demand is largest for aces, the quantity of aces demanded is most responsive to changes in income. Therefore, it is the good most likely to be considered a luxury in Royal City.
question
Data collected from the economy of Cardtown reveals that a 15% decrease in income leads to the following changes: •A 1% decrease in the quantity of horses demanded•A 10% increase in the quantity of clubs demanded•A 36% decrease in the quantity of diamonds demanded Compute the income elasticity of demand for each good and use the dropdown menus to complete the first column in the following table. Then, based on its income elasticity, indicate whether each good is a normal good or an inferior good. (Hint: Be careful to keep track of the direction of change. The sign of the income elasticity of demand can be positive or negative, and the sign confers important information.)
Horses = -1/-15 = 0.07 Normal Clubs = 10/-15 = -0.67 Inferior Diamonds = -36/-15 = 2.4 Normal The intuition behind this result is as follows: If income increases by 1% in Cardtown, then there is a 0.07% increase in the quantity of horses demanded. You can use the same equation to calculate that the income elasticity of clubs is ?0.67?0.67, and the income elasticity of diamonds is 2.42.4. Using the income elasticity of demand, you can then categorize goods as either normal or inferior. When an increase in income leads to an increase in quantity demanded (or a decrease in income leads to a decrease in quantity demanded), the good is called a normal good. Therefore, goods with a positive income elasticity of demand are normal goods. Since horses have an income elasticity of 0.070.07 and diamonds have an income elasticity of 2.42.4, both of these goods are considered normal goods. However, when an increase in income leads to a decrease in the quantity demanded (or a decrease in income leads to an increase in quantity demanded), the good is called an inferior good. Therefore, goods with a negative income elasticity of demand are inferior goods. Since clubs have an income elasticity of ?0.67?0.67, this good is considered an inferior good.
question
Which of the following three goods is most likely to be classified as a luxury good ?
DIAMONDS A luxury good is often viewed as a normal good that has an income elasticity greater than 1. Necessities (such as food) tend to have lower, positive income elasticities, as consumers must purchase them regardless of their incomes. Luxuries (such as gold jewelry or sailboats) tend to have large income elasticities, since consumers typically forgo them altogether if their incomes fall below certain levels. Thus, a given decrease in income will reduce the quantity demanded of luxuries more than that of necessities. Since the income elasticity of demand is largest for diamonds, the quantity of diamonds demanded is most responsive to changes in income. Therefore, it is the good most likely to be considered a luxury in Cardtown.
question
You work for a marketing firm that has just landed a contract with Run-of-the-Mills to help them promote three of their products: guppy gummies, flopsicles, and cannies. All of these products have been on the market for some time, but, to entice better sales, Run-of-the-Mills wants to try a new advertisement that will market two of the products that consumers will likely consume together. As a former economics student, you know that complements are typically consumed together while substitutes can take the place of other goods. Run-of-the-Mills provides your marketing firm with the following data: When the price of guppy gummies decreases by 4%, the quantity of flopsicles sold decreases by 4% and the quantity of cannies sold increases by 3%. Your job is to use the cross-price elasticity between guppy gummies and the other goods to determine which goods your marketing firm should advertise together.
Flopsicles = -4/-4 = 1 Substitute No Cannies = 3/-4 = -.75 Complement Yes Cross-Price Elasticity of DemandCross-Price Elasticity of Demand = Percentage Change in Quantity of Flopsicles Demanded / Percentage Change in Price of Guppy Gummies The cross-price elasticity of demand measures the sensitivity of the quantity demanded of one good to changes in the price of another good. To determine the cross-price elasticity of demand between guppy gummies and flopsicles, divide the percentage change in the quantity demanded of flopsicles (-4%) by the percentage change in the price of guppy gummies (-4%). (Note: Remember to keep track of the direction of change. The sign of the cross-price elasticity of demand can be positive or negative, and important information is conferred by the sign.) Using similar calculations, the cross-price elasticity of demand between guppy gummies and cannies is -0.75. Two goods are said to be complements when an increase in the price of one good decreases the quantity demanded for the other or when a decrease in the price of one good increases the quantity demanded for the other. On the other hand, two goods are said to be substitutes when an increase in the price of one good increases the quantity demanded for the other or when a decrease in the price of one good decreases the quantity demanded for the other. Because cross-price elasticity measures how the change in the price of one good affects the quantity demanded of another good, a negative value for cross-price elasticity indicates that the two goods are likely complements while a positive value for cross-price elasticity signals that the two goods are likely substitutes. A value of zero for cross-price elasticity would indicate that the two goods are unrelated—a change in the price of one good would not affect the quantity sold of the other good. Therefore, flopsicles are a substitute for guppy gummies, and cannies are a complement to guppy gummies. Your marketing firm should advertise guppy gummies and cannies together.
question
If average household income increases by 20%, from \$50,000 to \$60,000 per year, the quantity of rooms demanded at the Big Winner RISES from 300 rooms per night to 350 rooms per night. Therefore, the income elasticity of demand is POSITIVE , meaning that hotel rooms at the Big Winner area NORMAL GOOD .
When the Big Winner charges \$200 and average household income is \$50,000, it can fill 300 rooms per night at that price. However, if average household income increases to \$60,000, the quantity of rooms demanded rises to 350 rooms per night. The income elasticity of demand measures how much the quantity demanded of a good changes when there is a change in consumers' income. You can calculate the income elasticity of demand for Big Winner's hotel rooms by dividing the percentage change in quantity demanded by the percentage change in income: Income Elasticity of Demand = Percentage Change in Quantity Demanded / Percentage Change in Income Using the income elasticity of demand, you can then categorize goods as either normal or inferior. When an increase in income leads to an increase in quantity demanded (or a decrease in income leads to a decrease in quantity demanded), the good is called a normal good. Therefore, goods with a positive income elasticity of demand are normal goods. However, when an increase in income leads to a decrease in the quantity demanded (or a decrease in income leads to an increase in quantity demanded), the good is called an inferior good. Therefore, goods with a negative income elasticity of demand are inferior goods. Because the income elasticity of demand is positive for Big Winner's hotel rooms, it is a normal good. (Note: The percentage change calculations in this problem do not use the midpoint method.)
question
If the price of an airline ticket from LAX to LAS were to increase by 10%, from \$100 to \$110 roundtrip, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Big Winner FALLS from 300 rooms per night to 250 rooms per night. Because the cross-price elasticity of demand is NEGATIVE , hotel rooms at the Big Winner and airline trips between LAX and LAS are COMPLEMENTS .
The cross-price elasticity of demand measures the sensitivity of the quantity demanded of one good to changes in the price of another good. To determine the cross-price elasticity of demand between airline trips between LAX and LAS and hotel rooms at the Big Winner, divide the percentage change in the quantity demanded of hotel rooms at the Big Winner by the percentage change in the price of airline trips between LAX and LAS. (Note: Remember to keep track of the direction of change. The sign of the cross-price elasticity of demand can be positive or negative, and the sign confers important information.) Cross-Price Elasticity of Demand = Percentage Change in Quantity of Rooms Demanded at Big Winner / Percentage Change in Price of Airline Trips Between LAX and LAS Two goods are said to be complements when an increase in the price of one good decreases the quantity demanded of the other or when a decrease in the price of one good increases the quantity demanded of the other. On the other hand, two goods are said to be substitutes when an increase in the price of one good increases the quantity demanded for the other or when a decrease in the price of one good decreases the quantity demanded for the other. Because cross-price elasticity measures how the change in the price of one good affects the quantity demanded of another good, a negative value for cross-price elasticity indicates that the two goods are likely complements, while a positive value for cross-price elasticity signals that the two goods are likely substitutes. A value of zero for cross-price elasticity would indicate that the two goods are unrelated—a change in the price of one good would not affect the quantity sold of the other good. In this case, because hotel guests often come via airplane, an increase in the cost of getting to Las Vegas will decrease the demand for hotel rooms in Las Vegas, so hotel rooms at the Big Winner and airline trips between LAX and LAS are complements. (Note: The percentage change calculations in this problem do not use the midpoint method.)
question
Big Winner is debating decreasing the price of its rooms to \$175 per night. Under the initial demand conditions, you can see that this would cause its total revenue to DECREASE. Decreasing the price will always have this effect on revenue when Big Winner is operating on the INELASTIC portion of its demand curve.
When the Big Winner charges \$200, it can fill 300 rooms at that price. Total revenue is equal to price times quantity. Therefore, you can compute Big Winner's revenue at this price in the following way: Total Revenue = Price×Quantity \$200*300 = 60000 By lowering its price to \$175, Big Winner can fill 325 rooms. In this case, total revenue is \$175 per room per night×325 rooms=\$56,875 per night\$175 per room per night×325 rooms=\$56,875 per night, a decrease of \$3,125. When demand is inelastic, you know that the percentage change in price is larger than the percentage change in quantity. This means that total revenue will move in the same direction as the price change. Thus, when price increases, so does total revenue; when price decreases, total revenue decreases as well. When demand is elastic, you know that the percentage change in price is smaller than the percentage change in quantity, because consumers are highly sensitive to changes in price. This means that price and total revenue move in opposite directions. Thus, when price decreases, total revenue increases; when price increases, total revenue decreases. Because total revenue decreases when Big Winner decreases its price, it must be operating on the inelastic portion of its demand curve. Another way to confirm this is by directly examining the price elasticity of demand for Big Winner's rooms. The price elasticity of demand measures the responsiveness of consumers to changes in price. For example, if consumers change their purchasing behavior very little in response to a drastic change in price, demand is said to be inelastic; if consumers change their purchasing behavior a lot in response to a small change in price, demand is said to be elastic. The price elasticity of demand is the percentage change in quantity divided by the percentage change in price. If the Big Winner drops its price from \$200 to \$175 per night—a decrease of 12.5%—the quantity of rooms demanded increases from 300 to 325, an increase of about 8.3%: Price Elasticity of Demand = Percentage Change in Quantity / Percentage Change in Price Since the percentage change in quantity demanded is less than the percentage change in price, the price elasticity of demand is less than 1, and demand is inelastic in this region. (Note: The percentage change calculations in this problem do not use the midpoint method. )
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Peacock is debating decreasing the price of its rooms to \$275 per night. Under the initial demand conditions, you can see that this would cause its total revenue to INCREASE . Decreasing the price will always have this effect on revenue when Peacock is operating on the ELASTIC portion of its demand curve.
When the Peacock charges \$300, it can fill 200 rooms at that price. Total revenue is equal to price times quantity. Therefore, you can compute Peacock's revenue at this price in the following way: Total Revenue = Price×Quantity \$300*200 = \$60,000 By lowering its price to \$275, Peacock can fill 225 rooms. In this case, total revenue = \$275×225 rooms=\$61,875 an increase of \$1,875. When demand is inelastic, you know that the percentage change in price is larger than the percentage change in quantity. This means that total revenue will move in the same direction as the price change. Thus, when price increases, so does total revenue; when price decreases, total revenue decreases as well. When demand is elastic, you know that the percentage change in price is smaller than the percentage change in quantity, because consumers are highly sensitive to changes in price. This means that price and total revenue move in opposite directions. Thus, when price decreases, total revenue increases; when price increases, total revenue decreases. Because total revenue decreases when Peacock decreases its price, it must be operating on the inelastic portion of its demand curve. Another way to confirm this is by directly examining the price elasticity of demand for Peacock's rooms. The price elasticity of demand measures the responsiveness of consumers to changes in price. For example, if consumers change their purchasing behavior very little in response to a drastic change in price, demand is said to be inelastic; if consumers change their purchasing behavior a lot in response to a small change in price, demand is said to be elastic. The price elasticity of demand is the percentage change in quantity divided by the percentage change in price. If the Peacock drops its price from \$300 to \$275 per night—a decrease of 8.3%—the quantity of rooms demanded increases from 200 to 225, an increase of about 12.5%: Price Elasticity of Demand= Percentage Change in Quantity / Percentage Change in Price Since the percentage change in quantity demanded is greater than the percentage change in price, the price elasticity of demand is greater than 1, and demand is elastic in this region.
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The following graph shows the short-run supply curve for pears. Place the orange line (square symbol) on the following graph to show the most likely long-run supply curve for pears. (Note: Place the points of the line either on X and I or on X and T.)
Supply is typically more elastic in the long run than in the short run. In the short run, pear growers cannot quickly expand production in response to an increase in prices. In the long run, however, there are more ways to adjust the quantity produced in response to changes in the market price of pears. For example, growers can expand existing pear groves, plant new varieties of trees, or convert land from other uses into pear groves. Only a long-run supply curve passing through the points X and I shows a long-run supply curve in which the quantity supplied is more responsive to price than in the short run. A long-run supply curve passing through points X and T shows a long-run supply curve in which quantity supplied is less responsive to price than in the short run.
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The following graph shows the long-run supply curve for persimmons. Place the orange line (square symbol) on the following graph to show the most likely short-run supply curve for persimmons. (Note: Place the points of the line either on N and K or on N and H.)
Supply is typically more elastic in the long run than in the short run. In the short run, persimmon growers cannot quickly expand production in response to an increase in prices. In the long run, however, there are more ways to adjust the quantity produced in response to changes in the market price of persimmons. For example, growers can expand existing persimmon groves, plant new varieties of trees, or convert land from other uses into persimmon groves. Only a short-run supply curve passing through the points N and H shows a short-run supply curve in which the quantity supplied is less responsive to price than in the long run. A short-run supply curve passing through points N and K shows a short-run supply curve in which quantity supplied is more responsive to price than in the long run.
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Ginny is a stay-at-home parent who lives in Detroit and does some consulting work for extra cash. At a wage of \$30 per hour, she is willing to work 3 hours per week. At \$50 per hour, she is willing to work 7 hours per week. Using the midpoint method, the elasticity of Ginny's labor supply between the wages of \$30 and \$50 per hour is approximately 1.6 , which means that Ginny's supply of labor over this wage range is ELASTIC .
The price elasticity of supply measures the responsiveness of suppliers to changes in price. For example, if suppliers change their production behavior very little in response to a drastic change in price, supply is said to be inelastic; but if suppliers change their production behavior a lot in response to a small change in price, supply is said to be elastic. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price. According to the midpoint method, you can compute the percentage change in the hours Ginny is willing to work in the following way: Percentage Change in Quantity = 100× (Q2?Q1) / [(Q2+Q1)/2] = 80% Percentage Change in Price = 100× (P2?P1) / [(P2+P1)/2] = 50% Price Elasticity of Supply = Percentage Change in Quantity / Percentage Change in Price =50/80 = 1.6
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Jake is a retired teacher who lives in San Diego and provides math tutoring for extra cash. At a wage of \$20 per hour, he is willing to tutor 7 hours per week. At \$35 per hour, he is willing to tutor 10 hours per week. Using the midpoint method, the elasticity of Jake's labor supply between the wages of \$20 and \$35 per hour is approximately 0.65 , which means that Jake's supply of labor over this wage range is INELASTIC .
Because Jake's price elasticity of supply is less than 1, his supply of labor hours is inelastic.
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Y (80, 90) Z (90, 180) =.175 INELASTIC W (10,15) X (25, 20) = 3 ELASTIC
The price elasticity of supply measures the responsiveness of producers to changes in price. If producers change their production and selling behavior very little in response to a drastic change in price, supply is said to be inelastic; on the other hand, if producers change their production behavior a lot in response to a small change in price, supply is said to be elastic. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price. Supply is elastic when the price elasticity of supply is greater than 1. This occurs when the percentage change in quantity supplied is larger than the percentage change in price. Using the midpoint method, you can compute the percentage change in quantity and price between points W and X in the following way: Since the percentage change in quantity is greater than the percentage change in price, the price elasticity of supply is greater than 1, and supply is elastic between points W and X. Supply is inelastic if the price elasticity of supply is less than 1. This occurs when the percentage change in quantity supplied is smaller than the percentage change in price. Using the midpoint method, the percentage change in price between points Y and Z is 67%, and the percentage change in quantity between points Y and Z is 12%. This means the price elasticity of supply equals 12%67%=0.1812%67%=0.18. Since the percentage change in quantity supplied is smaller than the percentage change in price, the price elasticity of supply is less than 1, and supply is inelastic between points Y and Z. In general, supply tends to be elastic at relatively low levels of output and inelastic at relatively high levels of output.
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True or False: For high levels of quantity supplied where firms have reached near maximum capacity, supply becomes more elastic because firms may need to invest in additional capital in order to increase production further
FALSE Since firms typically have a limited capacity for production, the elasticity of supply tends to be high at low levels of quantity supplied and low at high levels of quantity supplied. At low levels of quantity supplied, firms typically have substantial capacity available for use, so small increases in price make it profitable for firms to begin to use this idle capacity. Thus, the responsiveness of quantity supplied to changes in price is high in this region of the supply curve. However, as capacity becomes fully utilized, increasing production requires additional investment in capital (for example, plant and equipment). Since the price must rise substantially to cover this additional expense, supply becomes less elastic at high levels of output.
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True or False: For high levels of quantity supplied where firms have reached near maximum capacity, supply becomes less elastic because firms may need to invest in additional capital in order to increase production further.