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Exam 5: Elasticity and Its Application

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Question 71

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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. Considering the cross price elasticity of demand for mobile and landline telephone service, is the cross price elasticity of demand positive or negative and do the consumers of Plainville regard these goods as substitutes or complements?

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The cross price elas...

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Question 72

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You and your college roommate eat three packages of Ramen noodles each week. After graduation last month, both of you were hired at several times your college income. You still enjoy Ramen noodles very much and buy even more, but your roommate plans to buy fewer Ramen noodles in favor of foods she prefers more. When looking at income elasticity of demand for Ramen noodles, yours would

A) be negative, and your roommate's would be positive.
B) be positive, and your roommate's would be negative.
C) be zero, and your roommate's would approach infinity.
D) approach infinity, and your roommate's would be zero.

E) A) and B)
F) All of the above

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Question 73

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A linear, downward-sloping demand curve has a constant elasticity but a changing slope.

What is the price elasticity of demand at any point on a perfectly elastic demand curve?

If the income elasticity of demand for a good is -1.40, is the good a normal or inferior good?

Suppose the price of a bag of frozen chicken nuggets decreases from $6.10 to $5.90 and, as a result, the quantity of bags demanded increases from 560 to 620. Using the midpoint method, the price elasticity of demand for frozen chicken nuggets in the given price range is

Cross-price elasticity is used to determine whether goods are inferior or normal goods.

If the demand for donuts is inelastic, then an increase in the price of donuts will

Suppose a freeze in Florida significantly reduces the supply of oranges this year. As a result, would you expect the total revenue from the sale of orange juice to rise or fall? Explain.

If a t-shirt manufacturer supplies 1,000 t-shirts per week when the price of t-shirts is $10 and supplies 1,200 t-shirts per week when the price of t-shirts is $12, the price elasticity of supply is 2.

The cross-price elasticity of garlic salt and onion salt is -2, which indicates that garlic salt and onion salt are substitutes.

Table 5-3 ​ ​ $\begin{array} { | c | c | c | } \hline \begin{array} { c } \text { Income } \\\text { (Dollars) }\end{array} & \begin{array} { c } \text { Quantity of Good X } \\\text { Purchased }\end{array} & \begin{array} { c } \text { Quantity of Good Y } \\\text { Purchased }\end{array} \\\hline 30,000 & 2 & 20 \\\hline 40,000 & 6 & 10 \\\hline\end{array}$ -Refer to Table 5-3. Using the midpoint method, the income elasticity of demand for good Y is

Consider the following pairs of goods. For which of the two goods would you expect the demand to be more price elastic? Why? a.water or diamonds b.insulin or nasal decongestant spray c.food in general or breakfast cereal d.gasoline over the course of a week or gasoline over the course of a year e.personal computers or IBM personal computers

The demand for desserts tends to be more inelastic than the demand for red velvet cake.

A decrease in supply will cause the largest increase in price when

Demand for a good is said to be inelastic if the quantity demanded increases slightly when the price falls by a large amount.

Your younger sister needs $50 to buy a new bike. She has opened a lemonade stand to make the money she needs. Your mother is paying for all of the ingredients. She currently is charging 25 cents per cup, but she wants to adjust her price to earn the $50 faster. If you know that the demand for lemonade is elastic, what is your advice to her?

Scenario 5-2 Milk has an inelastic demand, and steak has an elastic demand. Suppose that a mysterious increase in bovine infertility decreases both the population of dairy cows and the population of beef cattle by 50 percent. -Refer to Scenario 5-2. The change in equilibrium price will be

A key determinant of the price elasticity of supply is the

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, demand is unit elastic when price changes from