question 1 price of good a quantity demanded of good a quantity demanded of good b $101005 811010...

Question 1Price of Good A

Quantity demanded of Good A

Quantity demanded of Good B

$10 100 5

8 110 10

1. Using midpoint method, calculate price elasticity of demand for good A.

2. Give the formula for calculating the cross-price elasticity of demand between good A and B.

3. Using midpoint method, calculate cross-price elasticity of demand between good A and B.

4. What is the relationship between the two goods? Explain.

Question 1Price of Good A

Quantity demanded of Good A

Quantity demanded of Good B

$10 100 5

8 110 10

1. 0.432. % change in quantity of

good B/% change in price of good A

3. -34. Complements. Cross-

price elasticity is negative. When price of A goes down, people buy more of good A, and more of good B to go along with it.

Question 2• Price of corn increases by 20% and this causes

suppliers to increase the quantity of corn supplied by 40%.– A. Calculate the price elasticity of supply.– B. In this case, is supply elastic or inelastic?– C. Draw a correctly labeled graph of a supply curve

illustrating the most extreme case of the category of elasticity you found in part b (either perfectly elastic or perfectly inelastic).

– D. What would likely be true of the availability of inputs for a firm with the supply curve you drew in part c?

Question 2

• Price of corn increases by 20% and this causes suppliers to increase the quantity of corn supplied by 40%.– A. 40%/20% = 2– B. Elastic– C. (horizontal graph)– D. Inputs are available and can be used in the

production at zero to low cost.

Question 3

a. Draw a correctly labeled graph of a perfectly inelastic demand curve.

b. What is the price elasticity of demand for this good?

c. What is the slope of the demand curve for this good?

d. Is this good more likely to be a luxury or a necessity? Why?

Question 3

a. (vertical graph)b. Zero.c. Infinite.d. Necessity. You gotta have it, so even if the

price changes, you’re not really going to change your buying habits.

Question 4

• Draw a correctly labeled graph illustrating a demand curve that is a straight line and is neither perfectly elastic nor perfectly inelastic.

• On the graph, indicate the half of the demand curve along which demand is elastic.

• In the elastic range, how will an increase in price affect total revenue? Why?

Question 4

• Graph• Price increases decrease total revenue on the

elastic side. The quantity effect is bigger than the price effect.

Question 5Price Quantity

demanded ofGood X

$2 800

$4 500

• Define price elasticity of demand and provide the formula for calculating price elasticity of demand using midpoint method.

• Using the midpoint method, calculate price elasticity of demand for good X.

• Based on your calculation, if price increases by 10%, in what direction and what percentage will quantity demanded change?

Question 5Price Quantity

demanded ofGood X

$2 800

$4 500

• Elasticity is a measure of how consumers react to a change in price.

• 0.69• Quantity demanded will

decrease by 6.9%.

Question 6

• For each case, choose the condition that characterizes demand: elastic, inelastic, unit-elastic.– Total revenue decreases when price increases.– Price decreases. Additional revenue generated by

increase in quantity demanded is exactly offset by revenue lost from decrease in price received per unit.

– Total revenue decreases when output increases.– Producers find they can increase total revenue by

working together to reduce industry output.

Question 6

• For each case, choose the condition that characterizes demand: elastic, inelastic, unit-elastic.– Elastic.– Unit-elastic.– Inelastic.– Inelastic.

Question 7

• For the following goods, is demand elastic, inelastic, or unit-elastic? What is the shape of the demand curve?– Demand for a snake-bite victim for an antidote.– Demand by students for blue pencils.

Question 7

• For the following goods, is demand elastic, inelastic, or unit-elastic? What is the shape of the demand curve?– Perfectly inelastic.– Perfectly elastic.

Question 8

• Substitution effect measures– A. Effect of a price change on quantity of good

consumed.– B. Change in consumer’s purchasing power when

the price of the good changes.– C. Degree to which good Y can be replaced by

good X.– D. Total utility an individual gets from consuming

a particular consumption bundle.

Question 9

• When the price of a good increases and expenditures on that good represent a substantial amount of the individual’s income, then the income effect makes that individual poorer because the price increase effectively– A. Reduces that individual’s purchasing power.– B. Increases that individual’s purchasing power.

Question 10

• If the price is initially $10 and then increases to $15, the absolute value of the percentage change in price using the midpoint method is:– A. 50%– B. 40%– C. 5%– D. 4%

Question 11

• A horizontal demand curve is perfectly– A. Elastic.– B. Inelastic.

Question 13

• Which of the following statements is true?– A. The longer the time period of adjustment to a

change in the price of the good, the more elastic the demand for that good.

– B. Goods that have many close substitutes typically have price elastic demand.

– C. The demand for nonessential goods is more elastic than the demand for goods that are necessities.

– D. All of the above statements are true.

Question 14• This year Joe’s income increased by 15% while

the quantity of bananas he demanded increased by 8% and the quantity of orange juice he demanded increased by 6%. Which of the following statements is true for Joe?– A. Bananas are a normal good and orange juice is an

inferior good.– B. Bananas are an inferior good and orange juice is a

normal good.– C. Bananas and orange juice are both normal goods.– D. Bananas and orange juice are both inferior goods.

Question 16Good Qd

initialPrice initial

Qd after Price change

New Price

Pizza 10 $6 8 $6

Books 4 2 5 9

• What is the relationship between pizza and books given this cross-price elasticity of demand value?

• A. Pizza and books are complements.

• B. Pizza and books are substitutes.

• C. Pizza is an inferior good and books are a normal good.

• D. Pizza is a normal good and books are an inferior good.

Question 17

• Acme Manufacturing produces 1,000 widgets when the price of widgets is $20 per widget, and 1,200 widgets when the price of widgets is $22 per widget. Using the midpoint method, what is the value of the price elasticity of supply?– A. 1.9– B. 0.6– C. 0.5– D. 2

• Definitions: elasticity of demand, elasticity of supply

• Midpoint method• Calculating Ed• Inelastic/elastic/unit

elastic• Substitution and

income effects• Reading elasticity off a

curve• Quantity effect vs. price

effect

• Total revenue• Perfectly elastic

(infinite); Perfectly inelastic (0)

• Cross-Price Elasticity• Income Elasticity• Elasticity of Supply

question 1 price of good a quantity demanded of good a quantity demanded of good b $101005 811010...

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