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Basic Concepts in Elasticity

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1. For a particular product, a demand elasticity is a quantitative measure that shows:

the absolute change in quantity demanded relative to the percentage change in any of the other variables included in the demand function for that product.
the percentage change in quantity demanded relative to the absolute change in any of the other variables included in the demand function for that product.
the absolute change in quantity demanded relative to the absolute change in any of the other variables included in the demand function for that product.
the percentage change in quantity demanded relative to the percentage change in any of the other variables included in the demand function for that product.

Question 2
Assume the demand for a good is price elastic, i.e., ed> 1 (in absolute terms). This means that if price increases by 10 percent, quantity demanded will:

increase by less than 10 percent.
decrease by more than 10 percent.
decrease by less than 10 percent.
increase by more than 10 percent.

Question 3
According to the text, the price elasticity of demand for bath tissue has been estimated to be -2.42. This implies that a 10 percent decrease in the price of bath tissue would cause the quantity demanded of bath tissue to:

increase by 2.4 percent.
decrease by 2.4 percent.
increase by 24.2 percent.
decrease by 24.2 percent.

Question 4
If the percentage change in quantity demanded is less than the percentage change in price, we would say that over this range, demand is:

inelastic.
perfectly elastic.
unit elastic.
elastic.

Question 5
If electricity demand is inelastic, and electric rates increase, which of the following is likely to occur?

Quantity demanded will rise in the short run, but fall in the long run.
Quantity demanded will fall in the short run, but rise in the long run.
Quantity demanded will fall by a relatively large amount.
Quantity demanded will fall by a relatively small amount.

Question 6
Suppose the demand for meals at a medium-priced restaurant is elastic. If the management of the restaurant is considering raising prices, it can expect a relatively:

small fall in demand.
small fall in quantity demanded.
large fall in quantity demanded.
large fall in demand.

Question 7
An increase in price will result in no change in total revenue if:

the percentage change in quantity demanded is equal to the percentage change in price.
the percentage change in price is large enough to cause quantity demanded to fall to zero.
the demand function is perfectly elastic.
the coefficient of elasticity is equal to zero.

Question 8
The last time the U.S. Post Office raised its prices for mail service critics of the rate increase argued that the Post Office's revenues would actually decline as a result of the price increase. It can be concluded that:

both groups believe demand is elastic, but for different reasons.
the Post Office believes demand for mail service is inelastic; opponents of the price increase believe demand is elastic.
the Post Office believes demand for mail service is elastic; opponents of the price increase believe demand is inelastic.
both groups believe demand is inelastic, but for different reasons.

Question 9
All else constant, as the number of available substitutes for a particular good decreases, the price elasticity of demand for that good will:

decrease.
stay the same.
increase.
cannot be determined.

Question 10
Which of the following is a plausible reason that restaurants offer "Senior Citizen Discounts"?

Senior citizens are easily fooled by "come-ons" and are therefore frequently victims of price discrimination.
Senior citizens are not very sensitive to changes in price.
Senior citizens tend to have inelastic demands for restaurant meals.
Senior citizens tend to have elastic demands for restaurant meals.

Question 11
Demand for a good will tend to be more elastic if it exhibits which of the following characteristics?

It is a non-durable (as opposed to a durable good).
The good has many available substitutes.
There is little time for the consumer to adjust to the price change.
It accounts for a small part of the consumer's total income.

Question 12
If the consumer has a great deal of time to adjust to an increase in the price of gasoline, which of the following is correct?

Quantity demanded will be relatively sensitive to the change in price.
Demand will tend to be unitary elastic as it is for most goods in the long run.
The percentage change in price will be quite large relative to the percentage change in quantity demanded.
The percentage change in quantity demanded will be quite small relative to the percentage change in price.

Question 13
Many unions attempt to raise the hourly wages received by their members by restricting the supply of workers firms can hire from. Assuming the demand for workers who belong to these unions is inelastic, this would cause:

wages of individual union members and the total (combined) income of union members to increase.
wages of individual union members to increase and the total (combined) income of union members to decrease.
wages of individual union members and the total (combined) income of union members to decrease.
wages of individual union members to decrease and the total (combined) income of union members to increase.

Question 14
Suppose the price of movies seen at a theater rises from $12 per couple to $20 per couple. The theater manager observes that the rise in price causes attendance at a given movie to fall from 300 persons to 200 persons. What is the price elasticity of demand for movies? (note: use arc price elasticity calculation)

0.5
0.8
1.0
1.2

Question 15
Suppose a department store has a sale on its silverware. If the price of a place-setting is reduced from $30 to $20 and the quantity demanded increases from 3,000 place-settings to 5,000 place-settings, what is the price elasticity of demand for silverware? (Note: use arc price elasticity calculation)

0.8
1.0
1.25
1.50

Question 16
When demand is inelastic and price is decreased, marginal revenue will be:

zero.
negative.
positive.
cannot be determined without more information.

Question 17
When total revenue is at its maximum value:

Average revenue equals marginal revenue.
average revenue equals 0.
marginal revenue equals 0.
marginal revenue equals price.

Question 18
Which of the following best describes a perfectly inelastic demand function?

When price changes by a certain percentage, quantity demanded changes by the same percentage.
Price is completely insensitive to changes in quantity demanded.
The demand function is horizontal at the given price.
The quantity demanded is completely insensitive to changes in price.

Question 19
If the purchase of a good can be moved up or postponed:

demand for the good is relatively inelastic.
the demand curve for the good is vertical.
demand for the good is perfectly inelastic.
demand for the good is relatively elastic.

Question 20
Coffee and tea would be expected to have:

Positive income elasticities of demand with respect to each other.
a negative cross-price elasticity of demand.
a positive cross-price elasticity of demand.
negative income elasticities of demand with respect to each other.

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Solution Preview

Question 1
1. For a particular product, a demand elasticity is a quantitative measure that shows:
the percentage change in quantity demanded relative to the percentage change in any of the other variables included in the demand function for that product.

Question 2
1. Assume the demand for a good is price elastic, i.e., ed> 1 (in absolute terms). This means that if price increases by 10 percent, quantity demanded will:
decrease by more than 10 percent.

Question 3
1. According to the text, the price elasticity of demand for bath tissue has been estimated to be -2.42. This implies that a 10 percent decrease in the price of bath tissue would cause the quantity demanded of bath tissue to:
Change in quantity demanded=Price elasticity of demand*Percent change in price
=-2.42*(-10%)=24.2%
Correct option is
increase by 24.2 percent.

Question 4
1. If the percentage change in quantity demanded is less than the percentage change in price, we would say that over this range, demand is:
inelastic.

Question 5
1. If electricity demand is inelastic, and electric rates increase, which of the following is likely to occur?
Inelastic demand means that percent change in quantity demanded is less ...

Solution Summary

This solution discusses inelastic and elastic demand economics through various questions. The correct answers are identified with justifications.

$2.19
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Elasticity Problems

Please refer attached file for graphs.

Problems :

1.It has been estimated that the price elasticity of demand for attending baseball games is .23. If price were the only factor to change, a rise in attendance of 10%, one could conclude that price of baseball tickets:
a.fell by 43.48%
b.rose by 43.48%
c.fell by 2.3%
d.rose by 2.3%

2.A 1997 Florida freeze reduced the quantity of vegetables sold by 20% and increased their retail price by 30%. One can conclude that:
a.demand had shifted out along a perfectly inelastic supply curve.
b.demand had shifted out along a perfectly elastic supply curve.
c.supply of vegetables had shifted in along an elastic demand curve.
d.supply of vegetables had shifted in along an inelastic demand curve.

3.Given the same price elasticity of supply, sellers would be able to pass along the largest portion of a 10% tax on which of the following items?
a.Beef, with a price elasticity of demand of |-0.62|.
b.Chicken, with a price elasticity of demand of |-0.32|.
c.Fish, with a price elasticity of demand of |-0.12|.
d.Pork, with a price elasticity of demand of |-0.73|.

4.As a manager, you have determined that the demand for your product is quite elastic. Therefore:
a.increasing the price of your good will increase revenues.
b.decreasing the price of your good will increase revenues.
c.increasing the price of your good will have no effect on revenues.
d.any change in your price will not impact revenues.

5.The more specifically or narrowly a good is defined
a.the fewer substitutes it has and therefore the more elastic the demand for that good is.
b.the fewer substitutes it has and therefore the less elastic the demand for that good is.
c.the more substitutes it has and therefore the more elastic the demand for that good is.
d.the more substitutes it has and therefore the less elastic the demand for that good is.

Use Figure 1 to answer question 6.

6.Use the following graph to answer question 3:
Which story below best describes the graph above?
a.Sock Market: The popularity of Birkenstocks makes wearing socks passé.
b.Labor market: World War II in Europe kills a large proportion of working-age men.
c.Fine jewelry market: The dramatic increase in stock market prices increases people's wealth making diamond bracelets more attractive.
d.Donut market: The popular Atkinson diet instructs people to stay away from foods high in carbohydrates such as bakery items.

7.The (inverse) supply and demand equations for Nantucket Nectar's Kiwi-berry juice are given by P = 0.8 + 0.2QS and P = 3 - (1/6)QD respectively, where price is dollars per quart and quantity is thousands of quarts. The equilibrium market price and quantity is:
a.P = $2, Q = 6 thousand quarts.
b.P = $3, Q = 6 thousand quarts.
c.P = $14, Q = 66 thousand quarts.
d.P = $22, Q = 106 thousand quarts.

8.The (inverse) supply and demand equations for Dead man's Hot Sauce are given by P = 1.0 + 0.5QS and P = 5.0 - 0.25QD respectively, where price is dollars per bottle and quantity is thousands of bottles. The equilibrium market price and quantity is:
a.P = $5.00, Q = 6 thousand bottles.
b.P = $2.50, Q = 10 thousand bottles.
c.P = $1.67, Q = 13 1/3 thousand bottles.
d.P = $1.00, Q = 16 thousand bottles.

9.From the demand equation for Dead man's Hot Sauce in question 9, the price elasticity of demand at a price of $4.00 is (use the point elasticity formula):
a.|-0.25|
b.|-1.0|
c.|-2.0|
d.|-4.0|

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