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Question 1

Question 1. Using midpoint method, calculate price elasticity of demand for good A. Give the formula for calculating the cross-price elasticity of demand between good A and B. Using midpoint method, calculate cross-price elasticity of demand between good A and B.

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Question 1

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  1. Question 1 • Using midpoint method, calculate price elasticity of demand for good A. • Give the formula for calculating the cross-price elasticity of demand between good A and B. • Using midpoint method, calculate cross-price elasticity of demand between good A and B. • What is the relationship between the two goods? Explain.

  2. Question 1 • 0.43 • % change in quantity of good B/% change in price of good A • -3 • Complements. Cross-price 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.

  3. 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?

  4. 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.

  5. Question 3 • Draw a correctly labeled graph of a perfectly inelastic demand curve. • What is the price elasticity of demand for this good? • What is the slope of the demand curve for this good? • Is this good more likely to be a luxury or a necessity? Why?

  6. Question 3 • (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.

  7. 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?

  8. Question 4 • Graph • Price increases decrease total revenue on the elastic side. The quantity effect is bigger than the price effect.

  9. Question 5 • 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?

  10. Question 5 • Elasticity is a measure of how consumers react to a change in price. • 0.69 • Quantity demanded will decrease by 6.9%.

  11. Question 6 • For each case, choose the condition that characterizes demand: elastic, inelastic, unit-elastic. • 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.

  12. Question 6 • For each case, choose the condition that characterizes demand: elastic, inelastic, unit-elastic. • Elastic. • Unit-elastic. • Inelastic. • Inelastic.

  13. 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.

  14. 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.

  15. 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.

  16. 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.

  17. 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.

  18. 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.

  19. 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. 50% • B. 40% • C. 5% • D. 4%

  20. 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. 50% • B. 40% • C. 5% • D. 4%

  21. Question 11 • A horizontal demand curve is perfectly • A. Elastic. • B. Inelastic.

  22. Question 11 • A horizontal demand curve is perfectly • A. Elastic. • B. Inelastic.

  23. 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.

  24. 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.

  25. 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.

  26. 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.

  27. Question 16 • 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.

  28. Question 16 • 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.

  29. 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. 1.9 • B. 0.6 • C. 0.5 • D. 2

  30. 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. 1.9 • B. 0.6 • C. 0.5 • D. 2

  31. Definitions: elasticity of demand, elasticity of supply • Midpoint method • Calculating Ed • Inelastic/elastic/unit elastic • Substitution and income effects • Reading elasticity off a curve • Quantity effect vs. price effect • Total revenue • Perfectly elastic (infinite); Perfectly inelastic (0) • Cross-Price Elasticity • Income Elasticity • Elasticity of Supply

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