Econ Exam 3

Question 1

steep slope

Answer 1

elasticity is less than one or low

Question 2

flat slope

Answer 2

elasticity is greater than one or high

Question 3

what happens to elasticity when the percentage of a budget spent increases

Answer 3

elasticity also increases

Question 4

price differences in elasticity

Answer 4

Cars are much more elastic than goods such as food, as small percentages of more costly items are still more expensive than those of inexpensive goods.

Question 5

Luxury VS Necessity

Answer 5

elasticity of luxury items is much higher than basic necessities, as luxuries are more sensitive to a change in price

Question 6

Elasticity as it relates to time

Answer 6

an increase in time taken to develop or produce a good makes it more elastic. this is caused by an increased time for consumers to respond and make purchases. an example would be the automotive industry transitioning into an era of producing smaller, more compact vehicles.

Question 7

Special cases of demand elasticity

Answer 7

generally, flatter slopes mean that a good is more elastic than that of a good with a steep slope. perfectly elastic goods have a flat slope in which one price satisfies every quantity demanded. perfectly inelastic goods have a single demand, that satisfies all prices.

Question 8

cross-price elasticity

Answer 8

the responsiveness of the quantity demanded of good 2, as it relates to the price change of good one. If coke prices go up, the demand for Pepsi will also increase because the goods are substitute. Substitute goods always have positive cross price elasticity, while complement goods have negative elasticity. For example, if the price of gas goes up, the demand for tires will go down because less people on the road due to the increase in gas prices.

Question 9

income elasticity

Answer 9

how much consumption changes, relative to a change in income. increase in income leads to an increase in the consumption of normal goods such as steak. increase in income leads to a decrease in the consumption of inferior goods such as ramen.

Question 10

price elasticity of supply

Answer 10

How much does quantity supplied change relative to a change in price? if E>1, supply is elastic and vice versa. If E=1, price is unit elastic. for example, concert ticket prices will go up, based on how much demand there is for the tickets. Sold out shows have expensive tickets while empty arenas will have cheap tickets.

Question 11

Factors affecting supply

Answer 11

it takes time to change production and R&D takes time. elasticity will increase over time as the curve flattens out.

Question 12

Excise tax and affects

Answer 12

fixed tax per unit sold. examples would be gas beer and cigarettes. causes the S&D curve to shift by the amount of the tax. shift gives the new equilibrium price and quantity. New Pe is what consumers pay (Pc). Ps is what the supplier gets to keep and can be found on the original supply line, combined with the line from the new line. the tax formula is tax=Pc-Ps

Question 13

elasticity

Answer 13

a measurement in the sensitivity of X in relation to Y

Question 14

Why is elasticity important to business?

Answer 14

Deciding whether to increase or decrease the price of a good in an attempt to bring more revenue to a company.

Question 15

arc elasticity

Answer 15

average between two points on the graph

Question 16

Firms

Answer 16

they get scarce resources together then produce and sell goods and services

Question 17

why do firms produce?

Answer 17

max utility subject to constraint for firms is to make a profit, while avoiding two constraints; costs and competition

Question 18

production cost

Answer 18

how much $ to produce a quantity of a good. quantity line is crucial because costs pertain to a set number of goods.

Question 19

total cost (TC) =

Answer 19

wL+rK (labor and capital)

Question 20

w

Answer 20

wage

Question 21

r

Answer 21

interest rate of capital, which also represents and opportunity cost of doing something else with the money.

Question 22

Production cost time frames

Answer 22

short run and long run

Question 23

short run

Answer 23

time period short enough that one input remains constant

Question 24

long run

Answer 24

a time period long enough that both inputs can change

Question 25

why is long run variable

Answer 25

capital is an opportunity cost because the money could be used to fund something else

Question 26

total cost =

Answer 26

total fixed cost + total variable costs

Question 27

explicit costs

Answer 27

money changes hands, for example buying lunch

Question 28

implicit costs

Answer 28

opportunity costs of resources owned by the producer, for example starting a business, your resources are time and money, which could be used for alternatives

Question 29

fixed costs

Answer 29

either implicit or explicit. paying wages means money leaves your pocket, while owning a building would be implicit because you could rent out the space if you wanted.

Question 30

variable costs

Answer 30

explicit only because you have to pay a labor cost.