Question 1

Define the following types of goods in terms of their associated elasticity values: normal goods, luxury goods, inferior goods, substitutes, and complements.

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Question 2

Define income elasticity and use this concept to classify normal, inferior, and luxury goods.

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Question 3

Describe cross elasticity of demand and use this concept to define substitutes and complements.

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Question 4

How is price elasticity of supply computed and how does it relate to changes in quantity supplied and changes in price?

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Question 5

Describe how time affects price elasticity of supply.

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Question 6

Describe the time periods economists use to study elasticity of supply and describe the variables that companies can change during each time period.

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Question 7

Explain why the short run and long run vary by industry.

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Question 8

Using the concept of elasticity, explain why sin taxes (excise taxes on alcohol and tobacco) are popular with taxing authorities.

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Question 9

If the price of electricity falls by 10% per kilowatt hour, and the quantity demanded of electricity subsequently increases by 8%, the price elasticity of demand for electricity is _____, and it would be classified as _____.
A) 0.8; inelastic
B) 0.8; elastic
C) 1.25; inelastic
D) 1.25; elastic

Accepted Answer

The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price, which is 8% / 10% = 0.8. A value of less than 1 indicates inelastic demand, meaning the quantity demanded is relatively unresponsive to price changes.

Question 10

Jack owns a pumpkin patch and has been selling pumpkins for $10. As Halloween approaches, he worries about having too many unsold pumpkins, so he lowers the price by 20%. If the price elasticity of demand for pumpkins is 1.5, how many more pumpkins will Jack sell?
A) 10% more
B) 13.3% more
C) 25% more
D) 30% more

Accepted Answer

The price elasticity of demand formula is: % change in quantity demanded = elasticity * % change in price. Here, elasticity is 1.5 and the price change is -20%, so the quantity change is 1.5 * (-20%) = 30% increase in quantity demanded.

Question 11

Demand for which of the following would be MOST inelastic?
A) a spring break vacation to Cancun
B) a vacation home in the Smokey Mountains
C) a cavity filled at the dentist
D) a pair of casual shoes at a large shoe store at the mall

Accepted Answer

Demand for getting a cavity filled at the dentist is considered most inelastic because it is a necessary medical treatment, not influenced much by changes in price. Unlike discretionary purchases such as vacations or shoes, dental care for a cavity is a health necessity, making consumers less sensitive to price changes.

Question 12

Which factor would increase elasticity of demand the MOST?
A) an increase in the number of tablet brands offered
B) a decrease in the proportion of one's income spent on televisions
C) a service, such as high-speed Internet access, that has become a greater necessity
D) a shorter time period to make decisions

Accepted Answer

An increase in the number of tablet brands offered would increase the elasticity of demand the most because consumers have more substitutes to choose from, making them more sensitive to changes in price.

Question 13

Suppose the price of a bag of jellybeans rises from $1.60 to $2.00, causing sales of jellybeans to fall from 120 bags to 80 bags per day. Using the midpoint method, what is the elasticity of demand for jellybeans?
A) 0.55
B) 0.75
C) 1.33
D) 1.80

Accepted Answer

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Question 14

The day after Halloween, grocery stores discount the price of candy from $4 per bag to $2 per bag. The percentage change in price using the base method is _____ and using the midpoint method is _____.
A) -50%; -50%
B) -50%; -67%
C) -67%; -50%
D) -67%; -67%

Accepted Answer

Using the base method, the percentage change is calculated as (New Price - Old Price) / Old Price * 100 = (2 - 4) / 4 * 100 = -50%. Using the midpoint method, the percentage change is calculated as (New Price - Old Price) / ((Old Price + New Price) / 2) * 100 = (2 - 4) / ((4 + 2) / 2) * 100 = -2 / 3 * 100 = -66.67%, which rounds to -67%.

Question 15

If the price of snorkeling tours decreases by 15% and this leads to an increase in the quantity demanded of 30%, the price elasticity of demand is _____ and the demand for snorkeling tours is _____.
A) 0.5; elastic
B) 0.5; inelastic
C) 2; elastic
D) 2; inelastic

Accepted Answer

The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. Here, it is 30% / 15% = 2. A value greater than 1 indicates that the demand is elastic.

Question 16

Which of these factors is MOST likely to increase the price elasticity of demand for plug-in electric cars?
A) decrease in the price of gasoline
B) significant decrease in the price of plug-in electric cars
C) reduction in the time needed to make a decision on a car purchase
D) increase in the number of car companies producing plug-in electric cars

Accepted Answer

An increase in the number of car companies producing plug-in electric cars would increase the availability of substitutes, making consumers more sensitive to price changes, thus increasing the price elasticity of demand.

Question 17

Suppose that the price of unlimited monthly wireless data plans increases from $80 to $120, and as a result, the quantity demanded of this plan decreases by 10%. Using the midpoint method, the price elasticity of demand is
A) 0.20.
B) 0.25.
C) 4.
D) 5.

Accepted Answer

The midpoint method for calculating elasticity is given by the formula: [(Q2 - Q1) / ((Q2 + Q1)/2)] / [(P2 - P1) / ((P2 + P1)/2)], where Q1 and Q2 are the initial and final quantities, and P1 and P2 are the initial and final prices. Applying the given values: [(0.9Q - Q) / (0.95Q)] / [($120 - $80) / ($100)] = -0.1 / 0.4 = -0.25. The negative sign indicates the direction of the change (demand decreases as price increases), but elasticity is often reported as an absolute value, making the answer 0.25.

Question 18

Using the midpoint method, the price elasticity of demand between points a and b on the graph is

A) 2.
B) 0.5.
C) 2.6.
D) 0.38.

Accepted Answer

The answer of Using the midpoint method, the price elasticity...

Question 19

Due to a drought in Georgia, the market price for peanuts rises by 20% nationwide. If the price elasticity of demand for peanuts is 0.8, what would happen to total revenue for peanut farmers who were not affected by the drought?
A) Total revenue would fall as quantity demanded falls by 16%.
B) Total revenue would rise as quantity demanded falls by 16%.
C) Total revenue would fall as quantity demanded falls by 25%.
D) Total revenue would rise as quantity demanded falls by 25%.

Accepted Answer

The price elasticity of demand formula is % change in quantity demanded / % change in price. Given a 20% increase in price and an elasticity of 0.8, the quantity demanded would fall by 16% (0.8 * 20%). However, because the price increase is larger in percentage terms than the fall in quantity demanded, total revenue (price * quantity) for peanut farmers not affected by the drought would rise.

Question 20

Tracey sells 100 gourmet cupcakes per day at $2 each. She is considering raising her price to $2.50 per cupcake in order to increase her total revenue. If the price elasticity of demand for Tracey's cupcakes is 2, would she increase her total revenue?
A) Yes; total revenue would rise, since she would sell even more cupcakes due to the high elasticity.
B) Yes; total revenue would rise despite selling fewer cupcakes per day.
C) No; total revenue would fall because she would sell far fewer cupcakes.
D) No; total revenue would fall despite selling more cupcakes due to the high elasticity.

Accepted Answer

The price elasticity of demand is 2, which means demand is elastic. Raising the price will lead to a proportionally larger decrease in quantity demanded, thus reducing total revenue.

Quiz 5: Elasticity

Define the following types of goods in terms of their associated elasticity values: normal goods, luxury goods, inferior goods, substitutes, and complements.

Define income elasticity and use this concept to classify normal, inferior, and luxury goods.

Describe cross elasticity of demand and use this concept to define substitutes and complements.

How is price elasticity of supply computed and how does it relate to changes in quantity supplied and changes in price?

Describe how time affects price elasticity of supply.

Describe the time periods economists use to study elasticity of supply and describe the variables that companies can change during each time period.

Explain why the short run and long run vary by industry.

Using the concept of elasticity, explain why sin taxes (excise taxes on alcohol and tobacco) are popular with taxing authorities.

If the price of electricity falls by 10% per kilowatt hour, and the quantity demanded of electricity subsequently increases by 8%, the price elasticity of demand for electricity is _, and it would be classified as _.

Jack owns a pumpkin patch and has been selling pumpkins for $10. As Halloween approaches, he worries about having too many unsold pumpkins, so he lowers the price by 20%. If the price elasticity of demand for pumpkins is 1.5, how many more pumpkins will Jack sell?

Demand for which of the following would be MOST inelastic?

Which factor would increase elasticity of demand the MOST?

Suppose the price of a bag of jellybeans rises from $1.60 to $2.00, causing sales of jellybeans to fall from 120 bags to 80 bags per day. Using the midpoint method, what is the elasticity of demand for jellybeans?

The day after Halloween, grocery stores discount the price of candy from $4 per bag to $2 per bag. The percentage change in price using the base method is _ and using the midpoint method is _.

If the price of snorkeling tours decreases by 15% and this leads to an increase in the quantity demanded of 30%, the price elasticity of demand is _ and the demand for snorkeling tours is _.

Which of these factors is MOST likely to increase the price elasticity of demand for plug-in electric cars?

Suppose that the price of unlimited monthly wireless data plans increases from $80 to $120, and as a result, the quantity demanded of this plan decreases by 10%. Using the midpoint method, the price elasticity of demand is

Using the midpoint method, the price elasticity of demand between points a and b on the graph is

Due to a drought in Georgia, the market price for peanuts rises by 20% nationwide. If the price elasticity of demand for peanuts is 0.8, what would happen to total revenue for peanut farmers who were not affected by the drought?

Tracey sells 100 gourmet cupcakes per day at $2 each. She is considering raising her price to $2.50 per cupcake in order to increase her total revenue. If the price elasticity of demand for Tracey's cupcakes is 2, would she increase her total revenue?