Price-Elasticity of Demand
Price-Elasticity of Supply
Income Elasticity of Demand
Cross-Price Elasticity of Demand
Random Elasticity Questions
100
The generic formula to calculate price-elasticity of demand is___.
%∆Qd/%∆P
100
Draw a perfectly elastic and perfectly inelastic supply curve.
100
The equation for income elasticity of demand.
%∆Qd/%∆I
100
The equation for cross-price elasticity of demand.
%∆Qdx / %∆Py
100
What values indicate inelastic, elastic, and unit elastic goods.
inelastic < 1
unit elastic = 1
elastic >1
200
Why does the price elasticity of demand contain a negative sign?
Because of Law of Demand (P rises Q falls). Notice, that for normal goods, the sign of the numerator and denominator below will go in opposite directions.
Thus (%∆Qd /%∆P) will yield a negative value.
200
Why is price elasticity of supply positive?
Law of supply as price increases quantity increases, they always move in the same direction.
200
What does a negative elasticity value indicate about a good?
It's an inferior good
200
Explain what it means for goods to be substitutes or complementary and give an example of each.
Substitutes are goods that consumers see as the same or similar. Complementary goods are goods that are used together or at the same time.
200
Which elasticity concept (or type) can help you understand the impact of a price change on revenue?
Price Elasticity of Demand
300
List three determinants of price elasticity of demand.
whether the product has several substitutes or not, whether the timeframe is referring to the short run or long run, whether the product is a luxury good or a necessity good, whether the product is narrowly defined (a particular brand's dress shirt) or broadly defined (a shirt).
300
List two determinants for the price elasticity of supply.
Ease of storage, length of production time, factor of production availability vs. scarcity, long run vs short run.
300
Frank's salary increased 10% and his quantity demanded for running shoes increased 20% what is his income elasticity of demand?
2
300
What does a positive elasticity value indicate about the good?
Substitutes
300
Do goods become more or less elastic in the long run and why?
In the long run we are able to find more substitutes for goods compared to the short run, they become more elastic in the long run.
400
Your company currently sells smartphones for $400 each. You estimate the elasticity of demand at this price is 0.25. If you want to increase the company's revenue, what should you do to the price of your smartphones?
It has inelastic demand so you should increase the price ("revenue follows price")
400
If pesticides and fertilizers are banned, what will happen to the elasticity of the supply curve for food?
If pesticides and fertilizers were banned, farmers would have fewer alternatives for raising food output. Farmers could find it difficult to maintain or increase their output without these inputs, which would lead to a less elastic supply curve.
400
Explain the difference between normal and inferior goods as your income increases and give an example of each.
As income increases demand for normal goods increases and inferior goods decreases.
Normal good = Starbucks coffee
Inferior good = coffee from home
400
The cross-price elasticity of potato chips and four other goods is given below.
Identify which good is the most complementary for chips and explain why.
Product W: -2
Product X: -0.5
Product Y: 1
Product Z: 3
Product W: A negative sign on the elasticity value indicates that these two goods are complements and it has the largest elasticity of the two complements in this list.
400
The equation for the midpoint method.
[(Q2-Q1)/(Q2+Q1)/2]/[(P2-P1)/(P2+P1)/2]
500
The price of gum increases from $1 a pack to $3 a pack and as a result the quantity demanded decreases from 200 packs to 150 packs. What is the price elasticity of demand (put your answer in absolute terms and round to two decimals). [Use mid-point formula to calculate the price elasticity of demand]
0.29
500
If you are hiring someone to work on your car give an example of something that could cause that labor to be more inelastically supplied.
The time frame for when your car needs fixed (long run vs short run)
Having a very difficult issue to fix and needing someone with particular qualifications to look at it.
500
John's income increases from $70,000 to $85,000 a year. As a result his quantity demanded of take-out increases from 100 times a year to 200 times a year. What is his income price elasticity for takeout and what type of good is it? (Round to two decimal places)
3.44, Normal Good
500
The price of hotdogs increases by 20% per pack, the quantity of hotdog buns demanded decreases by 10%. How are the goods related, what is the elasticity value?
-0.5, complements
500
We are researching consumer reactions. We have determined that when the price of hand lotion increases from $6 to $8, the quantity supplied increases from 75 units to 125 units. What kind of elasticity is being measured and what is the elasticity value?
Price-Elasticity of Supply, 1.75