Economics Chapter 5-8

Question 1

Price elasticity

Answer 1

the relationship between the percent change in price resulting in a corresponding percentage change in the quantity demanded or supplied

Question 1

Price Elasticity of Demand

Answer 1

Percentage change in the quantity demanded of a good or service divided the percentage change in price

Question 2

Price Elasticity of Supply

Answer 2

Percentage change in the quantity supplied divided by the percentage change in price (Price elasticity of demand should be an absolute value)

Question 3

Elastic demand

Answer 3

When the elasticity of demand is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price

Question 4

Elastic supply

Answer 4

When the elasticity of either supply is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price

Question 5

Inelastic supply

Answer 5

when the elasticity of supply is less than one, indicating that a 1 percent increase in price paid to the firm will result in a less than 1 percent increase in production by the firm; this indicates a low responsiveness of the firm to price increases (and vice versa if prices drop)

Question 6

inelastic demand

Answer 6

when the elasticity of demand is less than one, indicating that a 1 percent increase in price paid by the consumer leads to less than a 1 percent change in purchases (and vice versa); this indicates a low responsiveness by consumers to price changes

Question 7

Unitary elasticities

Answer 7

when the calculated elasticity is equal to one indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied

Question 8

Midpoint Method for Elasticity

Answer 8

The average percent change in both quantity and price

Question 9

Midpoint Method for Elasticity Equation

Answer 9

% change in quantity= (Q2–Q1)/((Q2+Q1)/2) × 100

% change in price=P2–P1/((P2+P1)/2) × 100

Question 10

The advantage of the Midpoint Method

Answer 10

You obtain the same elasticity between two price points whether there is a price increase or decrease. This is because the formula uses the same base (average quantity and average price) for both cases.

Question 11

Infinite elasticity (perfect elasticity)

Answer 11

the extremely elastic situation of demand or supply where quantity changes by an infinite amount in response to any change in price; horizontal in appearance

Question 12

Examples of goods with readily available inputs and whose production can easily expand will feature highly elastic supply curves (close to perfect)

Answer 12

pizza, bread, books, and pencils.

Question 13

Examples of items that take a large share of individuals’ income, and goods with many substitutes are likely to have highly elastic demand curves.

Answer 13

Caribbean cruises and sports vehicles.

Question 14

An infinite elasticity curve will be

Answer 14

perfectly horizontal

Question 15

Zero elasticity (perfect inelasticity)

Answer 15

The highly inelastic case of demand or supply in which a percentage change in price, no matter how large, results in zero change in the quantity; vertical in appearance

Question 16

Examples of goods with limited supply of inputs are likely to feature highly inelastic supply curves.

Answer 16

diamond rings or housing in prime locations such as apartments facing Central Park in New York City.

Question 17

Examples of necessities with no close substitutes are likely to have highly inelastic demand curves.

Answer 17

Life-saving drugs and gasoline.

Question 18

Constant unitary elasticity, in either a supply or demand curve, occurs when

Answer 18

A price change of one percent results in a quantity change of one percent.

Question 19

Unlike the demand curve with unitary elasticity

Answer 19

the supply curve with unitary elasticity is represented by a straight line, and that line goes through the origin.

Question 20

If demand is elastic (% change in Qd > % change in P)

Answer 20

A given % rise in P will be more than offset by a larger % fall in Q so that total revenue (P × Q) falls.

Question 21

If demand is unitary (% change in Qd=% change in P)

Answer 21

A given % rise in P will be exactly offset by an equal % fall in Q so that total revenue (P × Q) is unchanged.

Question 22

Inelastic (% change in Qd< % change in P)

Answer 22

A given % rise in P will cause a smaller % fall in Q so that total revenue (P × Q) rises.

Question 23

Since demand for food is generally inelastic, farmers may often face the situation that

Answer 23

A surge in production leads to a severe drop in price that can actually decrease the total revenue that farmers receive.

Question 24

Example of products that for which producers can pass higher costs on to consumers.

Answer 24

Addictive substances

Question 25

tax incidence

Answer 25

manner in which the tax burden is divided between buyers and sellers

Question 26

For tax burden: If demand is more inelastic than supply, ____________ and if supply is more inelastic than demand,

Answer 26

consumers bear most of the tax burden, sellers bear most of the tax burden.

Question 27

Pc

Answer 27

price paid by consumers

Question 28

Pp

Answer 28

price received by producers

Question 29

Tax rate

Answer 29

The distance between Pc and Pp

Question 30

Since we can view a tax as raising the costs of production, this could also be represented by a

Answer 30

leftward shift of the supply curve,

Question 31

The tax revenue is given by the shaded area, which we obtain by multiplying

Answer 31

the tax per unit by the total quantity sold Qt.

Question 32

The tax incidence on the consumers is given by the

Answer 32

difference between the price paid Pc and the initial equilibrium price Pe.

Question 33

The tax incidence on the sellers is given by the

Answer 33

difference between the initial equilibrium price Pe and the price they receive after the tax is introduced Pp.

Question 34

The more elastic the demand curve, the more likely that consumers will

Answer 34

reduce quantity instead of paying higher prices.

Question 35

The more elastic the supply curve, the more likely that sellers will

Answer 35

reduce the quantity sold, instead of taking lower prices.

Question 36

In a market where both the demand and supply are very elastic,

Answer 36

the imposition of an excise tax generates low revenue.

Question 37

Elasticities are often lower in the short run than in the long run. (T/F)

Answer 37

T

Question 38

On the supply side of markets, producers of goods and services typically find it easier to expand production in the long term of several years rather than in the short run of a few months. (T/F)

Answer 38

T

Question 39

The income elasticity of demand is the

Answer 39

percentage change in quantity demanded divided by the percentage change in income.

Question 40

What types of products will experience a lower quantity demanded as income increases?

Answer 40

Inferior goods

Question 41

cross-price elasticity of demand

Answer 41

the percentage change in the quantity of good A that is demanded as a result of a percentage change in the price of good B

Question 42

Substitute goods have _______ cross-price elasticities of demand

Answer 42

positive

Question 43

Complement goods have _______ cross-price elasticities of demand

Answer 43

negative

Question 44

Wage elasticity of labor supply

Answer 44

the percentage change in hours worked divided by the percentage change in wages

Question 45

Elasticity of savings

Answer 45

the percentage change in the quantity of savings divided by the percentage change in interest rates

Question 46

Is the wage elasticity of labor supply more elastic in younger or older workers?

Answer 46

younger

Question 47

at least in the short run, the elasticity of savings with respect to the interest rate appears fairly

Answer 47

inelastic

Question 48

Average Household Income before Taxes

Answer 48

$62,481

Question 49

Average Annual Expenditures

Answer 49

$48,109

Question 50

budget constraint (or budget line)

Answer 50

shows the possible combinations of two goods that are affordable given a consumer’s limited income

Question 51

total utility

Answer 51

satisfaction derived from consumer choices

Question 52

choices. In a budget constraint line, the quantity of one good is on the ________ and the quantity of the other good on the ________.

Answer 52

horizontal axis, vertical axis

Question 53

marginal utility

Answer 53

the additional utility provided by one additional unit of consumption

Question 54

MU equation

Answer 54

Change in total utility/change in quantity

Question 55

diminishing marginal utility

Answer 55

the common pattern that each marginal unit of a good consumed provides less of an addition to utility than the previous unit

Question 56

marginal utility per dollar

Answer 56

the additional satisfaction gained from purchasing a good given the price of the product; MU/Price

Question 57

consumer equilibrium (utility maximizing choice)

Answer 57

point on the budget line where the consumer gets the most satisfaction; this occurs when the ratio of the prices of goods is equal to the ratio of the marginal utilities.

Question 58

Consumer equilibrium equation

Answer 58

MU1/P1 = MU2/P2

Question 59

Consumer equilibrium other rule

Answer 59

the ratio of the prices of the two goods should be equal to the ratio of the marginal utilities. p1/p2 = MU1/MU2

Question 60

How income affects consumer choices

Answer 60

Rise = usually rise in consumption Rise = change in preferences (inferior -> normal goods)