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Micro Ch. 7 Quiz Answers

The price elasticity of demand is defined as the:
percentage change in quantity demanded divided by percentage change in price.
A price elasticity of demand of 0.5 means that:
quantity demanded changes 0.5% for each 1% change in price. Feedback: Price elasticity of demand is the percentage change in quantity divided by the percentage change in price.
Economist Patrick McCarthy estimated the price elasticity of demand for new cars to be 0.87. If the price of cars rose by 20%, one would expect the quantity of new cars demanded to:
fall 17.4%. Feedback: Price elasticity of demand = % change in quantity / % change in price = x/20 = 0.87. Solve for x.
Mark Blaug estimated that for every 1% increase in wages for child care workers, workers increased their supply of labor by 1.9%. This indicates that the elasticity of supply of labor to child care is:
elastic. Feedback: Elasticity = 1.9. Elastic points have elasticities greater than one.
When a supply curve is vertical, it is:
perfectly inelastic. Feedback: For a vertical curve, quantity does not change when price changes, thus it is perfectly inelastic.
Elasticity of supply is greater the longer the time period considered because the longer the time period,
the more options are available for producers to change production. Feedback: The longer the time period considered the more possible are substitutes in production and thus elasticity of supply is greater.
Economist Richard Voith has estimated elasticity of demand for commuter rail transportation to be 0.6 in the short
run and 1.6 in the long run. An increase in rail fares would:-raise revenue in the short run but lower revenue in the long run. Feedback: Since demand is inelastic in the short run, raising price will increase revenues. The opposite is true in the long run.
The fact that airlines charge business travelers more for the same airplane seat than leisure travelers is an example of:
price discrimination where the carrier charges those with greater elasticity a lower fare. Feedback: The ability of suppliers to charge higher prices to those with inelastic demand is price discrimination.
For inferior goods, income elasticity is:
less than 0. Feedback: See definition of inferior goods.
Suppose elasticity of demand is 2, elasticity of supply is 1, and demand increases by 10 percent. What will happen to price?
Price will rise by 3 and 1/3 percent. Feedback: The percent change in price is the percent change in demanded divided by the sum of the elasticity of supply and demand, in this case 10/(2+1) = 10/3 = 3 1/3 percent.
If supply is elastic:
the percentage change in quantity supplied is greater than the percentage change in price. Feedback: If supply is elastic, the percentage change in quantity supplied is greater than the percentage change in price. By using percentages to calculate the changes in price and quantity, the units of measure do not affect the outcome.
If reducing the price of a movie ticket from $9 to $7 causes average weekly sales to increase from 1,900 to 2,100 tickets then, according to the midpoint formula, the price elasticity of demand is:
0.4. Feedback: (200/2000)/(2/8) = 0.4. See the formula in the textbook.
A perfectly elastic demand curve would be:
horizontal. Feedback: A perfectly elastic demand curve would be horizontal.
At which points along the demand curve above would demand be elastic?
A and B. Feedback: Points along the upper portion of a straight-lined demand curve are elastic.
A business can reduce prices and increase its total revenue if demand for its good is:
elastic. Feedback: If demand is elastic, a business can lower prices and the revenue gained from more sales will exceed the revenue lost from lower prices. Total revenue will increase.
Generally speaking the demand for a good will be less elastic:
if the good makes up a small part of an individual’s budget. Feedback: Demand is more elastic when consumers have more flexibility and more substitutes available. The other answer choices allow for more flexibility and substitution. If a good makes up only a small part of one’s budget, then changing prices won’t matter much, and demand will be inelastic.
At State University, a 10% increase in tuition is expected to decrease enrollments by 2%. President Miser claims this means higher tuition will decrease the University’s total revenue. President Miser is:
incorrect, demand is inelastic and total revenue would rise. Feedback: President Miser needs to study his economics! Demand is inelastic and a tuition increase would increase total revenue.
Which of the following scenarios is consistent with a large increase in quantity and only a small change in price?
A shift in supply along a highly elastic demand curve. Feedback: If demand is very elastic, then consumers will respond a lot to the price change caused by a shift in supply, so that the change in quantity overall is greater in percentage terms than the change in price.
Which of the following income elasticities of demand for DVD players would be most consistent with the hypothesis that DVD players are a luxury?
2.1. Feedback: Luxuries have an income elasticity greater than one.
If beer and pretzels have a cross-price elasticity of ?1, then beer and pretzels are
complements. Feedback: Complements have negative cross-price elasticities; substitutes have positive cross-price elasticity.

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