Chapter 3

Question 1

Elasticity

Answer 1

Measures the responsiveness of one variable to changes in another variable

Question 2

What are the important aspects of an elasticity?

Answer 2

Whether it is positive or negative and whether it is greater than 1 or less than 1 in absolute value

Question 3

Positive elasticity

Answer 3

An increase in S leads to an increase in G

Question 4

Negative elasticity

Answer 4

An increase in S leads to a decrease in G

Question 5

What does an absolute value of an elasticity over 1 mean?

Answer 5

The numerator is larger than the denominator and a small change in S will lead to a large change in G

Question 6

What does an absolute value of an elasticity below 1 mean?

Answer 6

A change in S will lead to a relatively small percentage change in G

Question 7

Own price elasticity of demand

Answer 7

A measure of the responsiveness of the quantity demanded of a good to a change in the price of that good; the percentage change in quantity demanded divided by the percentage change in the price of the good

Question 8

Elastic demand

Answer 8

The absolute value of the own price elasticity is greater than 1

Question 9

Inelastic demand

Answer 9

The absolute value of the own price elasticity is less than 1

Question 10

Unitary elastic demand

Answer 10

The absolute value of the own price elasticity is equal to 1

Question 11

Perfectly elastic demand

Answer 11

Demand is perfectly elastic if the own price elasticity is infinite in absolute value. In this case, the demand curve is horizontal.

Question 12

Perfectly inelastic demand

Answer 12

Demand is perfectly inelastic if the own price elasticity is zero. In this case, the demand curve is vertical.

Question 13

Total revenue test

Answer 13

If demand is elastic, an increase (decrease) in price will lead to a decrease (increase) in total revenue. If demand is inelastic, an increase (decrease) in price will lead to an increase (decrease) in total revenue. FInally, total revenue is maximized at the point where demand is unitary elastic.

Question 14

Cross-price elasticity

Answer 14

A measure of the responsiveness of the demand for a good to changes in the price of a related good; the percentage change in the quantity demanded of one good divided by the percentage change in the price of a related good.

Question 15

Income elasticity

Answer 15

A measure of the responsiveness of the demand for a good to changes in consumer income; the percentage change in quantity demanded divided by the percentage change in income.

Question 16

Log-linear demand

Answer 16

Demand is log-linear if the logarithm of demand is a linear function of the logarithms of prices, income, and other variables

Question 17

Least squares regression

Answer 17

The line that minimizes the sum of squared deviations between the line and the actual data points

Question 18

t-statistic

Answer 18

The ratio of the value of a parameter estimate to the standard error of the parameter estimate

Question 19

Rule of Thumb for t-Statistics

Answer 19

When the absolute value of the t-statistic is greater than 2, the manager can be 95 percent confident that the true value of the underlying parameter in the regression is not zero.