Chapter 6

Question 1

Elasticity

Answer 1

A measure of how much one economic variable responds to changes in another economic variable, based on percentage changes in the variables.

Question 2

How to calculate the price elasticity of demand

Answer 2

E = %deltaQ/%deltaP

Question 3

Determinants of the price elasticity of demand

Answer 3

The availability of close substitutes
The passage of time
Whether the good is a luxury or a necessity
The definition of a market
The share of a good in a consumer’s budget

Question 4

Explain the relationship between the price elasticity of demand and total revenue

Answer 4

If demand is elastic: An increase in price, decreases revenue while a decrease in price increases revenue.
If demand is inelastic: An increase in price, increases revenue while a decrease in price decreases revenue.
If demand is unit elastic: Change in price has no affect on revenue

Question 5

Define and calculate the cross-price elasticity of demand

Answer 5

The percentage change in the quantity demanded of one good divided by the percentage change in the price of another good.
If products are substitutes: Positive demand of cross-price elasticity
Complements: Negative demand of cross-price elasticity
Unrelated: zero

Question 6

Define price elasticity of supply and explain its determinants and how it is measured

Answer 6

The responsiveness of the quantity supplied to a change in price, measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the product’s price.

Question 7

Elastic

Answer 7

E > 1

Question 8

Inelastic

Answer 8

E < 1

``

Question 9

unit elastic

Answer 9

E =1

Question 10

Midpoint formula inclu percentage change

Answer 10

(A-B)/(A+B)/2

Question 11

The availability of close substitutes

Answer 11

If a product has more substitutes available, it will have more elastic demand

Question 12

The passage of time

Answer 12

Over time, people can adjust their buying habits more easily. Elasticity is higher in the long run than the short run.

Question 13

Whether a good is a luxury or a necessity

Answer 13

People are more flexible with luxuries than necessities, so price elasticity of demand is higher for luxuries.

Question 14

The definition of the market

Answer 14

The more narrowly defined the market, the more substitutes are available, and hence the more elastic is demand.

Question 15

The share of a good in a consumer’s budget

Answer 15

If a good is a small portion of your budget you will likely not be very sensitive to its price

Question 16

the income elasticity of demand and explain their determinants

Answer 16

Is a measure of the responsiveness of quantity demanded to changes in income, measured by the percentage change in the quantity divided by the percentage change in income.

Question 17

If income elasticity of demand is positive but less than one

Answer 17

Normal and a necessity

Question 18

If income elasticity is positive but greater than 1``

Answer 18

Normal and a luxury

Question 19

If income elasticity is negative

Answer 19

Inferior

Question 20

Determinants of the price elasticity of supply

Answer 20

Price elasticity of supply depends on the ability and the willingness of firms to alter the quantity they produce as price increases as well as the time period