Chapter 6

Question 1

Define price elasticity of demand

Answer 1

Price elasticity of demand:
the size of the responsiveness of consumers to a change in the price of a good, defined by the formula
delta Q^d / delta P (absolute value)

The word we use to describe how “responsive” consumers are to a variety of potential changes is called elasticity

. When something is “more elastic

,” there is more response. When something is “less elastic,” there is less response.

Question 2

Identify ranges for price elasticity of demand

Answer 2

See the table in Section 3

Question 3

Derive determinants of price elasticity of demand

Answer 3

The availability of substitutes
The proportion of income a purchase takes
Time available to make a decision about a purchase

Question 4

Calculate price elasticity of demand along a linear demand curve

Answer 4

See Figure 6.3

Question 5

Identify ranges of price elasticity of demand along a linear demand curve

Answer 5

See Figure 6.3

Question 6

Recognize perfectly elastic and perfectly inelastic demand curves

Answer 6

Perfectly inelastic:
price elasticity equal to zero yielding a demand or supply curve that is vertical

Perfectly elastic:
price elasticity equal to infinity yielding a demand curve that is horizontal

Question 7

Graph perfectly elastic and perfectly inelastic demand curves

Answer 7

See Figure 6.4 and 6.5

Question 8

Calculate price elasticities of demand in extreme cases

Answer 8

inelastic if the quantity demanded doesn’t change as price changes, the demand curve is vertical (price will rise?)

A horizontal demand curve might indicate that consumers have so many options to choose from that sellers can’t adjust prices at all without losing every one of their customers. In that case, the only price sellers can charge is a price that mirrors what competitors are charging for the same product.

Question 9

Define revenue

Answer 9

Revenue:
the product of price and quantity demanded

Question 10

Predict changes in revenue based on the price elasticity of demand

Answer 10

See Figure 6.6

Question 11

Graph changes in revenue along a linear demand curve

Answer 11

See Figure 6.6

Question 12

Define, calculate, and interpret cross-price elasticity

Answer 12

Cross-price elasticity of demand:
a measure of the responsiveness of quantity demanded by consumers to a change in the price of a different good, defined by the formula
%deltaQ_x^d / %delta P_y

Question 13

Define, calculate, and interpret income elasticity

Answer 13

Income elasticity of demand:
a measure of the responsiveness of quantity demanded by consumers to a change in income, defined by the formula %deltaQ^d %deltaIncome

Question 14

Define, calculate, and interpret price elasticity of supply

Answer 14

Price elasticity of supply:
the responsiveness of the quantity supplied by sellers to changes in the price of a good, defined by the formula

Question 15

Derive the determinants of the price elasticity of supply

Answer 15

the responsiveness of the quantity supplied by sellers to changes in the price of a good, defined by the formula %deltaQ^s/%deltaP