Chapter 7

Question 1

What does the price elasticity of demand tell us?

Answer 1

the price elasticity of demand tells us how sensitive consumers are when the price changes

Question 2

How do you calculate the price elasticity of demand?

Answer 2

price elasticity of demand:

percent change in price

Question 3

What does it mean when the ratio is bigger?

Answer 3

it means consumers are more sensitive and responsive to changes in price

Question 4

What do the numbers found from price elasticity of demand tell us?

Answer 4

1. price elasticity of demand is greater than 1: demand is price elastic
2. price elasticity of demand is less than 1: demand is price inelastic
3. price elasticity of demand equals 1: demand is unit elastic

Question 5

What does the midpoint formula tell us?

Answer 5

the midpoint formula tells us the percentage change between two prices or quantities on a demand curve

Question 6

What’s the midpoint formula?

Answer 6

the midpoint formula is

the change in quantity demanded average price
————————————————- x ————————
change in price average quantity

Question 7

When’s demand for a good perfectly inelastic?

Answer 7

When changes in the price have NO EFFECT on the quantity demanded.

Question 8

What does perfectly inelastic look like on a graph?

Answer 8

perfectly inelastic is a VERTICAL line.

Question 9

When’s demand for a good perfectly elastic?

Answer 9

When a change in price causes the quantity demanded to change without limits

Question 10

What does perfectly elastic look like on a graph?

Answer 10

perfectly elastic is a HORIZONTAL line.

Question 11

The more vertical a good’s demand curve is, _____

Answer 11

the more INELASTIC it is

Question 12

The more horizontal a good’s demand curve is, _____

Answer 12

the more ELASTIC it is

Question 13

What’s the income elasticity?

Answer 13

income elasticity is how sensitive consumers are when their incomes change

Question 14

How do you calculate income elasticity?

Answer 14

income elasticity:
percent change in the quantity demanded
————————————————————
percent change in income

Question 15

What’re luxury goods?

Answer 15

as income increases, the demand for the good increases A LOT

Question 16

What’re necessities?

Answer 16

as income increases, the demand for the good increases A LITTLE.

Question 17

What does income elasticity tell us?

Answer 17

1. income elasticity is greater than 1: the good is income elastic and is a luxury
2. income elasticity is between 0 and 1: the good is income inelastic and is a necessity
3. income elasticity is less than 0: the good is inferior

Question 18

What’s the cross price elasticity of demand?

Answer 18

the cross price elasticity of demand is the sensitivity of consumption of good X to a change in the price of Good Y.

Question 19

How to calculate the cross price elasticity of demand?

Answer 19

cross price elasticity of demand
percent change in the quantity demanded of good X
—————————————————————————-
percent chance in the price of Good Y

Question 20

What does the cross price elasticity of demand number tell us?

Answer 20

1. cross price elasticity of demand is less than zero means they are COMPLEMENTARY goods
2. cross price elasticity of demand greater than zero means they are SUBSTITUTE goods

Question 21

What’s the cross price elasticity of supply?

Answer 21

cross price elasticity of supply is how much the quantity supplied changes when the price changes

Question 22

What’s the cross price elasticity of supply formula?

Answer 22

cross price elasticity of supply formula

percent change in the price of Good X

Question 23

What does the cross price elasticity of supply tell us?

Answer 23

the greater the cross price elasticity of supply, the MORE SENSITIVE or RESPONSIVE suppliers are to a change in price

Question 24

How do taxes affect the market equilibrium?

Answer 24

taxes create dead weight loss by moving away from equilibrium

Question 25

What’s a revenue tariff?

Answer 25

a revenue tariff is a tax on imports

Question 26

What’s a protective tariff?

Answer 26

a protective tariff is a tax on exports

Question 27

How are tariffs and quotes similar in their economic effects?

Answer 27

1. both raise prices
2. both decrease consumer surplus
3. both create deadweight loss

Question 28

What’s utility?

Answer 28

happiness

Question 29

How do you calculate marginal utility?

Answer 29

marginal utility equals
the change in total utility
————————————————-
the change in quantity demanded

Question 30

What happens to marginal utility as you consume more of something?

Answer 30

marginal utility DECREASES with each additional unit

Question 31

How do you get the most bang for your buck?

Answer 31

maximizing utility equation
marginal utility of good A marginal utility of good B
————————————- = ————————————–
price of good A price of good B