Download Micro+Macro Module 3 Elasticity - Instructor Answer

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Module: Elasticity
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3.0.0.0 Measure how changes in price, income, or things affect the behavior of buyers and sellers – Short Title: Elasticity 3.1.0.0 Define the concept of elasticity Short Title: Defining Elasticity 3.1.0.1 Which of these questions is the best example of elasticity? § How much will a change in price or quantity impact consumer and producer behavior?* § What is the least amount of goods a supplier can produce without upsetting the customers? § How will a change in consumer behavior affect the overall consumer experience? // Content Page – Reading: Introduction to Elasticity 3.1.0.2 Elasticity refers to § how responsive one variable is to changes in another* § how frequently a demand curve or supply curve changes slope § how long it takes a market to reach equilibrium // Content Page – Reading: Introduction to Elasticity 3.1.0.3 Elasticity is relevant when trying to understand § how a change in price affects quantity supplied* § how a change in price affects quantity demanded* § how raising a tax on a good affects the revenue from the tax* // Content Page – Reading: Introduction to Elasticity 3.2.0.0 Explain the price elasticity of demand and be able to compute it using the midpoint analysis Short Title: Price Elasticity of Demand Calculating Price Elasticity 3.2.0.1 The price elasticity of demand measures the responsiveness of: quantity demanded to a change in quantity supplied. price to a change in quantity demanded. October 30, 2015 quantity demanded to a change in price.* // Content Page -­‐ Reading: Price Elasticity of Demand and Supply 3.2.0.2 The elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in __________. § quantity supplied § the slope of the demand curve § price* // Content Page -­‐ Reading: Price Elasticity of Demand and Supply 3.2.0.3 The size of the change in the quantity demanded of a good or service due to change in its price is measured by the elasticity of demand. When the percentage change in the quantity demanded for a good or service is less than the percentage change in price, the demand for that good or service is ________. inelastic* elastic unitarian // Content Page -­‐ Reading: Price Elasticity of Demand and Supply // Updated 10/26/2015 question wording improved 3.2.0.4 The price elasticity of demand measures the ________. § responsiveness of quantity demanded to a change in price* § responsiveness of price to a change in quantity demanded § responsiveness of quantity demanded to a change in quantity supplied // Content Page -­‐ Reading: Price Elasticity of Demand and Supply 3.2.0.5 The slope of a demand curve represents how much demand will respond to a change in price. The flatter the slope, the _______ the response will be. § greater* § less § does not apply // Content Page -­‐ Reading: Price Elasticity of Demand and Supply 3.2.0.6 When the demand for a good or service does NOT vary when there is a change in price, the good is _______? § perfectly elastic § perfectly inelastic* § unitarian // Content Page – Readings: Polar Cases of Elasticity and Constant Elasticity 3.2.0.7 A 10% decrease in the price of one product that you buy causes an 8% increase in quantity demanded of that product. How would another 10% drop in price affect the quantity demanded? The second 10% decrease in price would likely lead to a more than 8% increase in quantity demanded because demand elasticity increases as prices drop and quantities increase. The second 10% decrease in price would likely lead to about the same increase in quantity demanded (around 8%) because the increase in quantity holds steady with an identical change in price. October 30, 2015 The second 10% decrease in price would likely lead to a less than 8% increase in quantity demanded because demand elasticity decreases as prices drop and quantities increase.* // Content Page – Reading: Price Elasticity of Demand and Supply 3.2.0.8 The elasticity of demand is defined as the change in the quantity demanded of a good or service due to change in its price. When the percentage of change in the quantity demanded is less than the percentage change in the price, the good is ________. § inelastic* § elastic § unitary // Content Page – Reading: Price Elasticity of Demand and Supply 3.2.0.9 The size of the change in the quantity demanded of a good or service due to change in its price is measured by the elasticity of demand. When the percentage change in the quantity demanded is greater than the percentage change of the price, the good is ________. § elastic* § inelastic § unitarian // Content Page – Reading: Price Elasticity of Demand and Supply 3.2.0.10 Demand “D” represents a demand curve that is? (img https://s3-­‐us-­‐west-­‐2.amazonaws.com/textimgs/Econ+assessment+images/demand+elasticity.jpg) § perfectly inelastic* § relatively inelastic § perfectly elastic // Content Page – Readings: Polar Cases of Elasticity and Constant Elasticity 3.2.0.11 Demand “C” represents a demand curve that is? October 30, 2015 (img https://s3-­‐us-­‐west-­‐2.amazonaws.com/textimgs/Econ+assessment+images/demand+elasticity.jpg) § relatively inelastic* § perfectly inelastic § perfectly elastic // Content Page – Readings: Polar Cases of Elasticity and Constant Elasticity 3.2.0.12 Demand “B” represents a demand curve that is? (img https://s3-­‐us-­‐west-­‐2.amazonaws.com/textimgs/Econ+assessment+images/demand+elasticity.jpg) § relatively elastic* § perfectly inelastic § perfectly elastic // Content Page – Readings: Polar Cases of Elasticity and Constant Elasticity 3.3.0.0 Explain the income elasticity of demand and the cross-­‐price elasticity of demand and be able to compute it using the midpoint analysis Short Title: Income and Cross-­‐Price Elasticity 3.3.0.1 When income increases and the demand for a good increases, the good is considered a § normal good* § inferior good § complementary good October 30, 2015 // Content Page – Reading: Elasticity in Areas Other Than Price 3.3.0.2 When income increases and demand for a good falls, the good is considered a § normal good § inferior good* § complementary good // Content Page – Reading: Elasticity in Areas Other Than Price 3.3.0.3 When a 5% increase change in income elicits a 3% drop in quantity demanded of a good, § the income elasticity is .6 and the good is an inferior good.* § the cross-­‐price elasticity is .6 and the good is an inferior good. § the income elasticity is 1.67 and the good is a normal good. // Content Page – Reading: Elasticity in Areas Other Than Price 3.3.0.4 A 10 percent decrease in the price of potato chips leads to a 30 percent increase in the quantity of soda demanded. It appears that: § elasticity of demand for potato chips is 3. § cross-­‐price elasticity of demand for soda is -­‐3.* § elasticity of demand for soda is 3. // Content Page – Reading: Elasticity in Areas Other Than Price 3.3.0.5 If consumers find cola and iced tea good substitutes, then it is likely that: § the goods’ cross price elasticities are greater than zero.* § the goods’ price elasticities of demand are less than one. § the goods’ income elasticities are less than zero. // Content Page – Reading: Elasticity in Areas Other Than Price 3.3.0.6 Negative Cross Price Elasticity of Demand between two goods indicates that the two goods are ________. substitutes inferior goods complements* // Content Page – Reading: Elasticity in Areas Other Than Price // Updated 10/26/2015 typo corrected 3.4.0.0 Explain the price elasticity of supply and be able to compute it using the midpoint analysis Short Title: Price Elasticity of Supply 3.4.0.1 The elasticity of supply is defined as the ________ change in quantity supplied divided by the _______ change in price. total : percentage marginal : percentage percentage : percentage* // Content Page – Readings: Price Elasticity of Demand and Supply 3.4.0.2 Supply is said to be ____________ when the quantity supplied is very responsive to changes in price. § inelastic October 30, 2015 § unit elastic § elastic* // Content Page – Readings: Price Elasticity of Demand and Supply 3.4.0.3 If the supply curve for a product is vertical, then the elasticity of supply is: § equal to zero.* § equal to 1. § equal to infinity. // Content Page – Reading: Polar Cases of Elasticity and Constant Elasticity 3.4.0.4 If the supply curve for a product is horizontal, then the elasticity of supply is: § equal to infinity.* § equal to 1. § equal to zero. // Content Page – Reading: Polar Cases of Elasticity and Constant Elasticity 3.4.0.5 A perfectly elastic supply curve is: § upward sloping to the right. § horizontal.* § vertical. // Content Page – Reading: Polar Cases of Elasticity and Constant Elasticity 3.5.0.0 Explain the relationship between a firm’s price elasticity of demand and total revenue Short Title: Price Elasticity and Total Revenue 3.5.0.1 You are the manager of the public transit system. You are informed that the system faces a deficit, but you cannot cut service, which means you cannot cut costs. Your only hope is to increase revenue by increasing fares. You are advised that the estimated price elasticity of demand for the first few months after a price change is about −0.3, but that after several years, it will be about −1.5. Select the statements that describe the results of raising the fare. Total revenue rises immediately after the fare increase, since demand over the immediate period is price inelastic.* Total revenue falls after a few years, since demand changes and becomes price elastic.* Total revenue will rise incrementally as the demand fluctuates and price moves back and forth between being elastic and inelastic. // Content Page – Reading: Elasticity and Pricing 3.5.0.2 Suppose you are in charge of sales at a pharmaceutical company, and your firm has a new drug that causes bald men to grow hair. Assume that the company wants to earn as much revenue as possible from this drug. If the elasticity of demand for your company’s product at the current price is 1.4, what would you advise the company to do? lower the price* raise the price keep the price the same // Content Page – Reading: Elasticity and Pricing October 30, 2015 3.5.0.3 If the supply curve for aspirin is perfectly elastic, then a reduction in demand will cause the equilibrium price to: § stay the same and the equilibrium quantity to fall.* § fall and the equilibrium quantity to fall. § rise and the equilibrium quantity to stay the same. // Content Page – Reading: Elasticity and Pricing 3.5.0.4 Complete the following sentence. Given that total revenue = price x quantity, a reduction in price will lead to an increase in total revenue when demand is: § elastic.* § inelastic. § unit elastic. // Content Page – Reading: Elasticity and Pricing October 30, 2015