Chapter 6

Question 1

What is the formula for calculating price elasticity of demand?

Answer 1

Percentage change, point, arch elasticity methods

These methods assess how quantity demanded responds to price changes.

Question 2

What does a perfectly inelastic demand coefficient indicate?

Answer 2

ep = 0

This means quantity demanded does not change with price changes.

Question 3

What range of values defines inelastic demand?

Answer 3

ep lies between 0 and 1

This indicates that quantity demanded changes less than proportionately to price changes.

Question 4

What is unitarily elastic demand?

Answer 4

ep = 1

Quantity demanded changes proportionately to price changes.

Question 5

What range of values defines elastic demand?

Answer 5

ep lies between 1 and ∞

Quantity demanded changes more than proportionately to price changes.

Question 6

What does a perfectly elastic demand coefficient indicate?

Answer 6

ep = ∞

Demand changes infinitely with any price change.

Question 7

How does price elasticity of demand relate to total revenue?

Answer 7

Relationship between price elasticity and total revenue

Elastic demand increases total revenue when prices fall; inelastic demand decreases total revenue when prices fall.

Question 8

What are some determinants of price elasticity of demand?

Answer 8

• Substitution possibilities
• Degree of complementarity
• Type of want satisfied
• Time period
• Proportion of income spent
• Definition of the product
• Advertising
• Durability
• Addiction

These factors influence how sensitive consumers are to price changes.

Question 9

How is cross price elasticity calculated?

Answer 9

Calculation of cross price elasticity and interpretation of coefficients

Measures how the quantity demanded of one good responds to price changes in another good.

Question 10

What is income elasticity of demand?

Answer 10

Calculation of income elasticity of demand and interpretation of coefficients

Measures how the quantity demanded changes as consumer income changes.

Question 11

What methods are used to calculate price elasticity of supply?

Answer 11

Percentage, point, arch elasticity methods

These methods assess how quantity supplied responds to price changes.

Question 12

What are some determinants of price elasticity of supply?

Answer 12

• Price expectations
• Stockpiling
• Excess capacity
• Availability of inputs

These factors influence how responsive producers are to price changes.