Transcript Document

Question 1
Price of
Good A
Quantity
demanded
of Good A
Quantity
demanded
of Good B
$10
100
5
8
110
10
1. Using midpoint method,
calculate price elasticity of
demand for good A.
2. Give the formula for
calculating the cross-price
elasticity of demand
between good A and B.
3. Using midpoint method,
calculate cross-price
elasticity of demand
between good A and B.
4. What is the relationship
between the two goods?
Explain.
Question 1
Price of
Good A
Quantity
demanded
of Good A
Quantity
demanded
of Good B
$10
100
5
8
110
10
1. 0.43
2. % change in quantity of
good B/% change in
price of good A
3. -3
4. Complements. Crossprice elasticity is
negative. When price of
A goes down, people
buy more of good A, and
more of good B to go
along with it.
Question 2
• Price of corn increases by 20% and this causes
suppliers to increase the quantity of corn
supplied by 40%.
– A. Calculate the price elasticity of supply.
– B. In this case, is supply elastic or inelastic?
– C. Draw a correctly labeled graph of a supply curve
illustrating the most extreme case of the category of
elasticity you found in part b (either perfectly elastic
or perfectly inelastic).
– D. What would likely be true of the availability of
inputs for a firm with the supply curve you drew in
part c?
Question 2
• Price of corn increases by 20% and this causes
suppliers to increase the quantity of corn
supplied by 40%.
– A. 40%/20% = 2
– B. Elastic
– C. (horizontal graph)
– D. Inputs are available and can be used in the
production at zero to low cost.
Question 3
a. Draw a correctly labeled graph of a perfectly
inelastic demand curve.
b. What is the price elasticity of demand for this
good?
c. What is the slope of the demand curve for
this good?
d. Is this good more likely to be a luxury or a
necessity? Why?
Question 3
a.
b.
c.
d.
(vertical graph)
Zero.
Infinite.
Necessity. You gotta have it, so even if the
price changes, you’re not really going to
change your buying habits.
Question 4
• Draw a correctly labeled graph illustrating a
demand curve that is a straight line and is
neither perfectly elastic nor perfectly inelastic.
• On the graph, indicate the half of the demand
curve along which demand is elastic.
• In the elastic range, how will an increase in
price affect total revenue? Why?
Question 4
• Graph
• Price increases decrease total revenue on the
elastic side. The quantity effect is bigger than
the price effect.
Question 5
Price
Quantity
demanded of
Good X
$2
800
$4
500
• Define price elasticity of
demand and provide the
formula for calculating price
elasticity of demand using
midpoint method.
• Using the midpoint method,
calculate price elasticity of
demand for good X.
• Based on your calculation, if
price increases by 10%, in
what direction and what
percentage will quantity
demanded change?
Question 5
Price
Quantity
demanded of
Good X
$2
800
$4
500
• Elasticity is a measure
of how consumers react
to a change in price.
• 0.69
• Quantity demanded will
decrease by 6.9%.
Question 6
• For each case, choose the condition that
characterizes demand: elastic, inelastic, unitelastic.
– Total revenue decreases when price increases.
– Price decreases. Additional revenue generated by
increase in quantity demanded is exactly offset by
revenue lost from decrease in price received per unit.
– Total revenue decreases when output increases.
– Producers find they can increase total revenue by
working together to reduce industry output.
Question 6
• For each case, choose the condition that
characterizes demand: elastic, inelastic, unitelastic.
– Elastic.
– Unit-elastic.
– Inelastic.
– Inelastic.
Question 7
• For the following goods, is demand elastic,
inelastic, or unit-elastic? What is the shape of
the demand curve?
– Demand for a snake-bite victim for an antidote.
– Demand by students for blue pencils.
Question 7
• For the following goods, is demand elastic,
inelastic, or unit-elastic? What is the shape of
the demand curve?
– Perfectly inelastic.
– Perfectly elastic.
Question 8
• Substitution effect measures
– A. Effect of a price change on quantity of good
consumed.
– B. Change in consumer’s purchasing power when
the price of the good changes.
– C. Degree to which good Y can be replaced by
good X.
– D. Total utility an individual gets from consuming
a particular consumption bundle.
Question 8
• Substitution effect measures
– A. Effect of a price change on quantity of good
consumed.
– B. Change in consumer’s purchasing power when
the price of the good changes.
– C. Degree to which good Y can be replaced by
good X.
– D. Total utility an individual gets from consuming
a particular consumption bundle.
Question 9
• When the price of a good increases and
expenditures on that good represent a
substantial amount of the individual’s income,
then the income effect makes that individual
poorer because the price increase effectively
– A. Reduces that individual’s purchasing power.
– B. Increases that individual’s purchasing power.
Question 9
• When the price of a good increases and
expenditures on that good represent a
substantial amount of the individual’s income,
then the income effect makes that individual
poorer because the price increase effectively
– A. Reduces that individual’s purchasing power.
– B. Increases that individual’s purchasing power.
Question 10
• If the price is initially $10 and then increases
to $15, the absolute value of the percentage
change in price using the midpoint method is:
– A.
– B.
– C.
– D.
50%
40%
5%
4%
Question 10
• If the price is initially $10 and then increases
to $15, the absolute value of the percentage
change in price using the midpoint method is:
– A.
– B.
– C.
– D.
50%
40%
5%
4%
Question 11
• A horizontal demand curve is perfectly
– A. Elastic.
– B. Inelastic.
Question 11
• A horizontal demand curve is perfectly
– A. Elastic.
– B. Inelastic.
Question 13
• Which of the following statements is true?
– A. The longer the time period of adjustment to a
change in the price of the good, the more elastic
the demand for that good.
– B. Goods that have many close substitutes
typically have price elastic demand.
– C. The demand for nonessential goods is more
elastic than the demand for goods that are
necessities.
– D. All of the above statements are true.
Question 13
• Which of the following statements is true?
– A. The longer the time period of adjustment to a
change in the price of the good, the more elastic
the demand for that good.
– B. Goods that have many close substitutes
typically have price elastic demand.
– C. The demand for nonessential goods is more
elastic than the demand for goods that are
necessities.
– D. All of the above statements are true.
Question 14
• This year Joe’s income increased by 15% while
the quantity of bananas he demanded increased
by 8% and the quantity of orange juice he
demanded increased by 6%. Which of the
following statements is true for Joe?
– A. Bananas are a normal good and orange juice is an
inferior good.
– B. Bananas are an inferior good and orange juice is a
normal good.
– C. Bananas and orange juice are both normal goods.
– D. Bananas and orange juice are both inferior goods.
Question 14
• This year Joe’s income increased by 15% while
the quantity of bananas he demanded increased
by 8% and the quantity of orange juice he
demanded increased by 6%. Which of the
following statements is true for Joe?
– A. Bananas are a normal good and orange juice is an
inferior good.
– B. Bananas are an inferior good and orange juice is a
normal good.
– C. Bananas and orange juice are both normal goods.
– D. Bananas and orange juice are both inferior goods.
Question 16
Good
Qd
initial
Price
initial
Qd
after
Price
chang
e
New
Price
Pizza
10
$6
8
$6
Books
4
2
5
9
• What is the relationship
between pizza and books
given this cross-price
elasticity of demand value?
• A. Pizza and books are
complements.
• B. Pizza and books are
substitutes.
• C. Pizza is an inferior good
and books are a normal
good.
• D. Pizza is a normal good
and books are an inferior
good.
Question 16
Good
Qd
initial
Price
initial
Qd
after
Price
chang
e
New
Price
Pizza
10
$6
8
$6
Books
4
2
5
9
• What is the relationship
between pizza and books
given this cross-price
elasticity of demand value?
• A. Pizza and books are
complements.
• B. Pizza and books are
substitutes.
• C. Pizza is an inferior good
and books are a normal
good.
• D. Pizza is a normal good
and books are an inferior
good.
Question 17
• Acme Manufacturing produces 1,000 widgets
when the price of widgets is $20 per widget, and
1,200 widgets when the price of widgets is $22
per widget. Using the midpoint method, what is
the value of the price elasticity of supply?
–
–
–
–
A.
B.
C.
D.
1.9
0.6
0.5
2
Question 17
• Acme Manufacturing produces 1,000 widgets
when the price of widgets is $20 per widget, and
1,200 widgets when the price of widgets is $22
per widget. Using the midpoint method, what is
the value of the price elasticity of supply?
–
–
–
–
A.
B.
C.
D.
1.9
0.6
0.5
2
Figure 47.2 (a) Unit-Elastic Demand, Inelastic Dem
Ray and Anderson: Krugman’s Economics for AP, Fi
Figure 47.2 (b) Unit-Elastic Demand, Inelastic Dem
Ray and Anderson: Krugman’s Economics for AP, Fi
Figure 47.2 (c) Unit-Elastic Demand, Inelastic Dem
Ray and Anderson: Krugman’s Economics for AP, Fi