Chapter 5 - Elasticity and It's Applications

Question 1

Elasticity

Answer 1

A measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants.

Question 2

Price Elasticity of Demand

Answer 2

A measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity divided by the percentage change in price.

Question 3

What does it mean if quantity demanded responds substantially to changes in price?

Answer 3

The demand is elastic.

Question 4

What does it mean if quantity demanded responds slightly to changes in price?

Answer 4

The demand is inelastic

Question 5

How does the availability of close substitutes impact elasticity?

Answer 5

More close substitutes → more elastic demand
Less close substitutes → less elastic demand

Question 6

How is elasticity different for a necessity versus a luxury?

Answer 6

Necessities have inelastic demand
Luxuries have elastic demand

Question 7

How does the definition of the market impact elasticity?

Answer 7

Narrowly defined markets have elastic demand
Broadly defined markets have inelastic demand

Question 8

What is the equation for price elasticity of demand?

Answer 8

price elasticity of demand = % quantity demanded / % price

Question 9

What is the mid point method equation for price elasticity of demand?

Answer 9

Price Elasticity of Demand = (Q2- Q1)/[(Q2+ Q1)2] / (P2- P1)/[(P2+ P1)2]

Question 10

Is an elastic demand curve
a) >1
b) <1
c) =1

Answer 10

a

Question 11

Is an inelastic demand curve
a) >1
b) <1
c) =1

Answer 11

b

Question 12

Is an unit elastic demand curve
a) >1
b) <1
c) =1

Answer 12

c

Question 13

Total Revenue

Answer 13

The amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold.

Question 14

Formula for Total Revenue

Answer 14

P x Q