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Exam 5: Elasticity and Its Application

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Question 21

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Suppose researchers at the University of Wisconsin discover a new vitamin that increases the milk production of dairy cows. If the demand for milk is relatively inelastic, the discovery will

A) raise both price and total revenues.
B) lower both price and total revenues.
C) raise price and lower total revenues.
D) lower price and raise total revenues.

E) A) and B)
F) A) and C)

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Question 22

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Table 5-6 Consider the following demand schedule. $\begin{array} { | l | l | } \hline \text { Price } & \text { Quantity Demanded } \\\hline \$ 0 & 1,000 \\\hline \$ 3 & 800 \\\hline \$ 6 & 600 \\\hline \$ 9 & 400 \\\hline \$ 12 & 200 \\\hline \$ 15 & 0 \\\hline\end{array}$ -Refer to Table 5-6. Using the midpoint method, between which two prices is price elasticity of demand most inelastic?

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Question 23

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You are in charge of the local city-owned aquatic center. You need to increase the revenue generated by the aquatic center to meet expenses. The mayor advises you to increase the price of a day pass. The city manager recommends reducing the price of a day pass. You realize that

Suppose that good X has few close substitutes and that good Y has many close substitutes. Which good would you expect to have more price inelastic demand?

If demand is perfectly inelastic, the demand curve is vertical, and the price elasticity of demand equals 0.

Goods with many close substitutes tend to have

Suppose the price elasticity of demand for a product is 1. If a supplier wants to increase revenue, what change should it make to price, if any?

Suppose demand is given by the equation: Q^D = 50 - 5P Using the midpoint method, what is the price elasticity of demand between $1 and $2?

Scenario 5-4 ​ Consider the markets for mobile and landline telephone service. Suppose that when the average income of residents of Plainville is $55,000 per year, the quantity demanded of landline telephone service is 12,500 and the quantity demanded of mobile service is 28,000. Suppose that when the price of mobile service rises from $100 to $120 per month, the quantity demanded of landline service decreases to 11,000. Suppose also that when the average income increases to $60,000, the quantity demanded of mobile service increases to 33,000. -Refer to Scenario 5-6. Using the midpoint method, what is the cross price elasticity of demand for landline and mobile service?

In general, demand curves for necessities tend to be price elastic.

When demand is inelastic, a decrease in price increases total revenue.

When her income increased from $10,000 to $20,000, Heather's consumption of macaroni decreased from 10 pounds to 5 pounds and her consumption of soy-burgers increased from 2 pounds to 4 pounds. Using the midpoint method, we can conclude that for Heather, macaroni

When the price of candy bars is $1.10, the quantity demanded is 340 per day. When the price falls to $0.90, the quantity demanded increases to 350. Given this information and using the midpoint method, we know that the demand for candy bars is

Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 1.45. Which of the following events is consistent with a 20 percent decrease in the quantity of the good demanded?

Suppose that good X is a luxury and that good Y is a necessity. Which good would you expect to have more price inelastic demand?

Cross-price elasticity is used to determine whether goods are substitutes or complements.

Drug interdiction, which reduces the supply of drugs, will likely be a less effective policy than educating consumers to reduce their demand for drugs because the drug interdiction policy will lower drug prices and reduce the quantity of drugs demanded.

Scenario 5-1 ​ Suppose the demand function for good X is given by: Q_dx = 15 − 0.5P_x − 0.8P_y where Q_dx is the quantity demanded of good X, P_x is the price of good X, and P_y is the price of good Y, which is related to good X. -Refer to Scenario 5-1. Using the midpoint method, if the price of good X is constant at $10 and the price of good Y decreases from $10 to $8, the cross-price elasticity of demand is about

The income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price.

Necessities tend to have inelastic demands, whereas luxuries tend to have elastic demands.