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1 Page 1 of Assume the price elasticity of demand for U.S. Frisbee Co. Frisbees is 0.5. If the company increases the price of each Frisbee from $12 to $16, the number of Frisbees demanded will Decrease by 14.3 percent. Decrease by 33.3 percent. Increase by 20.0 percent. Increase by 7.0 percent. Price elasticity of demand is equal to the percentage change in quantity demanded divided by the percentage change in price. From that, one can manipulate the formula to compute the percentage change in quantity demanded by multiplying the price elasticity of demand by the percentage change in price. Therefore the percentage change in quantity is equal to % - percentage change in price using the midpoint formula ((16-12)/(( )/2)). Difficulty: 3 Hard 2. Assume the price elasticity of demand for JT Chip Co. chips is 4.0. If the company decreases the price of each bag of chips from $1.89 to $1.49, the number of bags sold will Decrease by 78 percent. Increase by 95 percent. Increase by 48 percent. Increase by 78 percent. The price elasticity of demand is equal to the percentage change in quantity demanded divided by the percentage change in price. From that, one can manipulate the formula to compute the percentage change in quantity demanded by multiplying the price elasticity of demand by the percentage change in price. Therefore the percentage change in quantity is equal to 4 24% - the percentage change in price using the midpoint formula (( )/(( )/2)). Difficulty: 3 Hard

2 Page 2 of Suppose the quantity demanded of ski boats falls from 4.0 million to 3.0 million as a result of an average price increase from $20,000 to $25,000 per boat. The absolute value of the price elasticity of demand is closest to The price elasticity of demand is equal to the percentage change in quantity demanded divided by the percentage change in price. Therefore the price elasticity of demand is equal to ((4-3)/((4+3)/2))/((25,000-20,000)/((25,000+20,000)/2)) or Difficulty: 3 Hard 4. If the price of the ipod falls by 3 percent and the price elasticity of demand for ipods is 2.0, then quantity demanded will fall by what percentage? 5 percent. 6 percent. 0.6 percent. 60 percent. The basic formula for price elasticity is the percentage change in quantity demanded divided by the percentage change in price. Substituting 2 for the price elasticity number (E), you have 2 = x/.03 =.06 or 6 percent. 5. Which of the following products will have more inelastic demand? New cars. Fresh flowers. Fast food. Medicines. Demand is more inelastic if there are fewer substitute goods; medicines are necessities and will have more inelastic

3 Page 3 of Higher prices will increase total revenue if Demand is elastic. Demand is unitary elastic. Demand is inelastic. The price elasticity of demand is zero. When demand is inelastic, this means that the quantity demanded does not fall by much when the price increases. So total revenue will increase with higher prices when demand is inelastic. A few buyers will refuse to pay the higher price, but most of them will continue to purchase the good. 7. Sam owns a taco restaurant, and he conducted a consumer survey that indicates that the price elasticity of demand for his restaurant is 3.5. You would advise Sam to Raise his price to increase revenues. Keep his price the same to maximize revenues. Lower his price to increase revenue. Offer more high-priced products. If the elasticity of demand is 3.5 (in absolute value), it indicates that demand is very elastic. Consumers have a lot of substitutes available. Therefore Sam should lower his price to increase total revenue because the quantity demanded will increase.

4 Page 4 of If the elasticity of demand for cigarettes is 0.4, a seller should Increase price to increase Decrease price to increase Reduce price to maximize profits. Increase price because the percentage change in quantity demanded will be greater than the price effect. If price elasticity of demand is 0.4, then demand is very inelastic. That means the seller can increase price and increase 9. On a demand curve, demand is more elastic At higher prices. At lower prices. When demand is unitary. At the middle price. At higher prices demand is more elastic along a linear or straight demand curve. Note that the price elasticity of demand changes along a straight-line demand curve and is more elastic at higher prices, and more inelastic at lower prices.

5 Page 5 of In Figure 20.1, total revenue is maximized at the unit price of $50. $60. $80. $100. Revenue is equal to price times quantity. Revenue is $10,000 at a price of $100.

6 Page 6 of In Figure 20.1, at what price is the elasticity of demand unitary? $40. $100. $160. $200. At a price levels less than $100, a decrease in the price causes revenue to decrease, which implies that demand is inelastic. At price levels greater than $100, a decrease in the price causes revenue to increase, which implies that demand is elastic. Therefore, demand must be unitary elastic at a price of $100.

7 Page 7 of In the $80 to $40 price range in Figure 20.1, demand is Perfectly price-elastic. Price-inelastic. Unitary elastic. Price-elastic. At price levels less than $100, a decrease in the price causes revenue to decrease, which implies that demand is inelastic.

8 Page 8 of In the $160 to $180 price range in Figure 20.1, the absolute value of the price elasticity of demand is closest to The price elasticity of demand is equal to the percentage change in quantity demanded divided by the percentage change in price. Therefore, the price elasticity of demand is equal to the absolute value of ((20-40)/((20+40)/2))/(( )/(( )/2)) or 5.7.

9 Page 9 of If the price is reduced from $100 to $80 in Figure 20.1, ceteris paribus, Total revenue will decrease. Demand will increase. Quantity demanded will decrease. Total revenue will increase. Revenue is equal to price times quantity. Revenue is $10,000 at a price of $100 and $9,600 at a price of $800.

10 Page 10 of A grocery store put salt on sale but found that total revenues fell. This can be explained by which of the following? The demand for salt is very elastic. The demand curve for salt is vertical. The demand for salt is inelastic. The demand for salt is unitary elastic. When demand is inelastic, consumers do not respond to a sale in a big way. So the quantity demanded does not increase much to a price decrease. This means that demand is inelastic for salt. 16. Assume apples and oranges are substitutes. Suppose apple growers launch a successful advertising campaign that convinces consumers apples are a better product. As a result the cross-price elasticity of apples and oranges will become Less negative (move closer to zero). More negative. Less positive (move closer to zero). More positive. If two goods are substitutes, the cross-price elasticity is positive. However, if the successful advertising campaign convinces consumers apples are a better product, a change in the price of oranges will not have much impact on the demand for apples. Learning Objective: What the cross-price elasticity of demand measures.

11 Page 11 of When the prices of postage stamps rise, the demand for Internet service increases, ceteris paribus. Postage stamps and Internet service are therefore Elastic. Inelastic. Complements. Substitutes. If the cross-price elasticity of demand is positive, an increase in the price of postage causes an increase in demand for Internet service, and the goods must be substitutes. Learning Objective: What the cross-price elasticity of demand measures. 18. If two goods are complementary goods, then The cross-price elasticity sign will be negative. The cross-price elasticity sign is not important. The cross-price elasticity sign will be positive. The cross-price elasticity will be greater than 1. If two goods are complementary goods, then the sign on the cross-price elasticity will be negative. For example, if the price of gasoline rises by 10 percent, the quantity demanded for gas-guzzling trucks may fall by 20 percent. Notice that this is a positive divided by a negative, and the cross-price elasticity is -2. Learning Objective: What the cross-price elasticity of demand measures.

12 Page 12 of If two goods are substitute goods, The percentage change in quantity demanded for good X will fall if there is a reduction in price of good Y. The percentage change in quantity demanded for good X will stay the same if there is an increase in the price of good Y. If the price of good X increases, the demand for good Y falls. The percentage change in quantity demanded for good X will rise if there is a reduction in the price of good Y. When two goods are substitutes, like Coke and Pepsi, if there is a percentage reduction in the price of Coke, the percentage change in quantity demanded of Pepsi will fall. Learning Objective: What the cross-price elasticity of demand measures. 20. If the price of Coke rises by 5 percent and the sales of Pepsi go up by 10 percent, we can conclude that The sign on the cross-price elasticity will be negative. Both goods are normal goods. Both goods are substitute goods because the cross-price elasticity is Both goods are substitute goods because the cross-price elasticity is +2. The formula for cross-price elasticity is the percentage change in the quantity demanded for Pepsi, divided by the percentage change in the price of Coke. So +10%/+5% = +2, and the two goods are substitutes. Learning Objective: What the cross-price elasticity of demand measures.

13 Page 13 of If income falls 4 percent for a year and as a result the quantity of new homes demanded falls from 23 million to 20 million units for the year, the value of the income elasticity of demand for new homes is closest to The income elasticity of demand is equal to the percentage change in quantity demanded divided by the percentage change in income. When demand falls from 23 million to 20 million or 14 percent using the midpoint formula, the income elasticity of demand is roughly 14/4 or 3.5. Learning Objective: What the income elasticity of demand tells us. 22. If incomes fall by 5 percent and the quantity demanded for new cars falls by 10 percent, New cars are a normal good, and the income elasticity is +.5. New cars are an inferior good, and the income elasticity is New cars are a normal good, and the income elasticity is New cars are an inferior good, and the income elasticity is The formula for income elasticity is the percentage change in quantity demanded for new cars divided by the percentage change in income. So 10%/5%= +2, which indicates that new cars are a normal good; the demand for them rises when incomes increase. Learning Objective: What the cross-price elasticity of demand measures. 23. If a good is normal, its Price elasticity of demand is positive. Income elasticity of demand is negative. Income elasticity of demand is positive. Cross-price elasticity is positive. For a normal good demand increases when income rises; therefore the ratio of the percentage change in quantity demanded divided by the percentage change in income will always be positive. Learning Objective: What the income elasticity of demand tells us.

14 Page 14 of If a good is inferior, its Cross-price elasticity is negative. Price elasticity of demand is negative. Income elasticity of demand is positive. Income elasticity of demand is negative. For an inferior good demand increases when income falls; therefore the ratio of the percentage change in quantity demanded divided by the percentage change in income will always be negative. Learning Objective: What the income elasticity of demand tells us. 25. If income rises by 10 percent and the quantity sold of a particular vehicle falls by 7 percent, then this particular type of vehicle is A normal good. An inferior good. An irregular good. A substandard good. If sales of a particular vehicle fall when incomes increase, the vehicle is an inferior good. Learning Objective: What the income elasticity of demand tells us. 26. Assume that store brand cereal is an inferior good. If income rises, then the price of store brand cereal will and the quantity sold of store brand cereal will. rise; rise rise; fall fall; fall fall; rise When incomes rise, people demand fewer inferior goods such spaghetti, discount clothes, and generic brand items. When demand for a good decreases, the price and equilibrium quantity will decrease. Learning Objective: What the income elasticity of demand tells us.

15 Page 15 of Elasticity of supply tells us How much sellers will increase production in response to a change in price. How much sellers will change their price as their quantity supplied changes. How much producers will increase production with changes in consumers' income. How much supply responds to a change in quantity demanded. Elasticity of supply looks at how responsive suppliers are to changes in price. If price rises, can producers increase supply easily or will it take a longer time to increase supply? Difficulty: 1 Easy Learning Objective: What the elasticity of supply measures. 28. Supply is very inelastic when The quantity supplied changes little when the price increases. The quantity supplied changes a lot when price increases. The quantity supplied does not change at all when price increases. The quantity supplied changes only when demand changes. Inelastic supply means that the quantity supplied by producers will change little when the price increases. For example, if natural gas prices rise, it may take producers a while to produce more if labor or equipment is scarce. Learning Objective: What the elasticity of supply measures. 29. In the article "After iphone Price Cut, Sales Are Up by 200 Percent," The demand for iphones is inelastic. The survey of quantity demanded after a price change for the iphones showed that iphones are an inferior good. The demand for iphones is highly elastic. There was no way to calculate the price elasticity of The quantity demanded for iphones increased 200 percent after a price cut. Demand is price-elastic when the percentage change in quantity demanded is larger than the percentage change in price.

16 Page 16 of The In The News article "Play Station 3 Sales More Than Double after Price Cut" indicated that The percentage change in price was greater than the percentage change in quantity demanded. The percentage change in quantity demanded was greater than the percentage change in price. The demand for the Play Station 3 consoles was inelastic. The percentage change in price was the same magnitude as the percentage change in quantity demanded. There was a huge sales response to the price cut for the Play Station consoles, indicating that demand was elastic. This indicates that the percentage change in quantity demanded was greater than the percentage change in price. 31. Nobel Prize-winning economist Gary Becker corrected President Clinton's elasticity estimate for cigarette smoking by Showing that cigarettes were actually price-elastic. Showing that the long-run response to a price increase in cigarettes was likely to be more elastic than the president had estimated. Showing that the demand for cigarettes in the short run was more inelastic than the president calculated. Correcting the president's math. The president's calculation for the price elasticity of demand for cigarettes ignored the longer-term impact of an increase in the price of a pack of cigarettes. Demand is more elastic over the longer term when smokers find ways to stop smoking. Dr. Becker's estimate of the longer-run elasticity was 0.8 rather than the president's calculation of 0.4. While this is still inelastic, the demand for cigarettes is less inelastic in the long run.

17 Page 17 of The article "SUV Sales Drop with Gasoline Price Rise" states That gasoline and SUV sales have a cross-price elasticity that is negative. That gasoline and SUVs are substitute goods. That the cross-price elasticity for SUVs and gasoline is positive. That a drop in the price of gasoline will have little impact on SUV sales. SUVs and gasoline are complementary goods in that they are purchased together. For complementary goods the cross-price elasticity is negative. If gasoline prices rise, the quantity demanded for SUVs will fall. Learning Objective: What the cross-price elasticity of demand measures. 33. In the article on SUV sales SUV sales are very responsive to gasoline, which is a substitute good to SUVs. SUV sales did not respond all that much to a rise in gasoline prices, indicating that demand is inelastic for SUVs. Gasoline and SUVs are complementary goods, and when the price of gasoline rose, the demand for SUVs fell. The sign on the cross-price elasticity formula will be positive for SUVs and gasoline. Gasoline and SUVs are complementary goods; they are purchased together. The sign on the cross-price elasticity for complements is negative. A rise in the price of gasoline (+) will cause a fall in the sales of SUVs (-).