Elasticity 1
What does the price elasticity of demand measure?
The responsiveness of quantity demanded to a change in price.
What does the cross-price elasticity of demand measure?
How the quantity demanded of one good responds to a price change in another good.
What happens to equilibrium quantity when a per-unit tax is imposed?
It decreases.
What does consumer surplus measure?
The difference between what a consumer is willing to pay and what they actually pay.
What is comparative advantage?
The ability to produce a good at a lower opportunity cost than another producer.
When supply is perfectly inelastic, what is the price elasticity of supply value?
Zero — quantity supplied does not change regardless of price changes.
If the income elasticity of demand is negative, what type of good is it?
An inferior good.
A rent ceiling causes what?
A shortage of rental housing.
What is producer surplus?
The difference between the market price and the marginal cost.
How does specialization affect world production?
It increases total output and global efficiency.
A 10% increase in price causes a 5% decrease in quantity demanded. What’s the absolute value of the price elasticity of demand?
0.5 (inelastic)
If the cross-price elasticity between coffee and tea is positive, what does that mean?
Coffee and tea are substitutes.
Who bears more of the tax burden when demand is inelastic?
Buyers.
What condition must hold in a perfectly competitive market for total surplus to be maximized?
The market must be in equilibrium, where marginal benefit equals marginal cost.
Country A can produce either 10 tons of wheat or 5 tons of steel, while Country B can produce either 6 tons of wheat or 3 tons of steel. Which country has the comparative advantage in producing wheat, and why?
Both have the same opportunity cost (A gives up 0.5 steel per wheat, B gives up 0.5 steel per wheat), so neither has a comparative advantage in wheat — their opportunity costs are equal.
When is the price elasticity of supply likely to be more elastic?
When producers have more time to adjust production or when inputs are easily available.
The cross-price elasticity of demand between printers and ink cartridges is –1.2. What does this value tell us about the relationship between the two goods, and what happens to the demand for ink cartridges if the price of printers increases?
The negative cross-price elasticity means printers and ink cartridges are complements.
When the price of printers increases, the demand for ink cartridges decreases.
When the government imposes a price control, how does the elasticity of demand and supply affect the size of the deadweight loss and the resulting total surplus in the market?
More elastic → bigger DWL → smaller total surplus (after policy).
What is deadweight loss, and when does it occur?
The loss of total surplus that happens when market output differs from the efficient quantity.
Country X can produce 1 computer or 10 shirts; Country Y can produce 1 computer or 5 shirts. If both countries specialize according to comparative advantage and trade, who should produce which good, and why do both gain?
Country X’s opportunity cost of 1 computer = 10 shirts.
Country Y’s opportunity cost of 1 computer = 5 shirts.
→ Country Y has the comparative advantage in computers, and Country X in shirts.
A store raises the price of its product by 10%, and total revenue decreases. What does this reveal about the price elasticity of demand?
Demand is elastic (elasticity > 1).
A business notices that when it increases the price of a product by 8%, the quantity demanded falls by 12%. What is the price elasticity of demand? How will this price change affect total revenue?
Elasticity = 12% ÷ 8% = 1.5, so demand is elastic.
Since demand is elastic, total revenue will decrease when the price rises.
Suppose the government sets a quota below the equilibrium quantity. Explain how this affects price, quantity, and total surplus in the market.
The quota creates a shortage since the legal quantity is below equilibrium. The price rises, consumers buy less, producers may earn higher prices but sell fewer units, and total surplus decreases -creating a deadweight loss.
Suppose the government imposes a tax on a good with perfectly inelastic demand. What is the deadweight loss?
Zero — because quantity traded does not decrease when demand is perfectly inelastic.
Country A can produce either 1 ton of steel or 3 tons of wheat with the same resources, while Country B can produce either 2 tons of steel or 4 tons of wheat. Which country should export steel?
What is Country B exports steel, because it has the lower opportunity cost of steel (2 tons of wheat vs. 3 for Country A), and both countries gain by consuming beyond their production possibilities through specialization and trade.