Principles of Microeconomics
|
Economics 111
|
Mr. Beck
|
SUNY College at Oneonta
|
Chapter 7 Solutions
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Review Questions for Economics
111
1. Price Elasticity of Demand = (%DQ/%DP)
= [(DQ/Average Q) / (DP/Average
P)]
The change in Q is the difference between the 2
quantity values = 22-10 = 12.
The average Q is the midpoint between the 2 quantity
values. This is computed by adding the 2 quantity values and dividing by
2. Average Q = (22+10)/2 = 32/2 = 16.
The change in P is the difference between the 2
price values = $12 - $8 = $4. (Alternatively,
we subtract $8 - $12 = -$4. However, since price elasticity of demand is
expressed as an absolute (non-negative) value, we would ignore the negative
sign and convert -$4 to $4.)
The average P is the midpoint between the 2 price
values. This is computed by adding the 2 price values and dividing by 2.
Average P = ($12 + $8)/2 = $20/2 = $10.
Substituting the above 4 values in red in the price
elasticity of demand formula yields:
(12/16)/($4/$10). 12/16 = .75
and $4/$10 = .40. (Note
that the $ signs cancel out.)
.75/.40
= 1.875 rounded
up to 1.88.
Return to Question
1
2. If demand is inelastic, price (P) and total revenue
(TR) vary in the same direction. If TR increases, then price must have
increased as well.
Since demand curves are negatively sloped, an increase
in price would cause a decrease in quantity demanded.
Inelastic demand means that quantity demanded is
relatively unresponsive to a change in price; that is, %DQ
< %DP.
Therefore, the % decrease
in quantity demanded is less than the % increase in price,
choice b.
Return to Question
2
3. If P & TR vary in opposite directions
then demand is elastic (elasticity >1) because the %DQ
> %DP.
The increased price causes a relatively large decrease
in quantity resulting in the decrease in total revenue.
If price increased by 4%, for total revenue to decrease
quantity
demanded must decrease by more than 4%.
Thus,
demand is elastic and the correct answer is
choice
b.
Return to Question
3
4. If the price elasticity of demand is greater than
1, then demand is elastic and the %DQ > %DP.
If price is decreased by 8%, then not only does
quantity increase, but the % increase in quantity is greater than 8%. This
large increase in quantity will result in an increase in total revenue.
Elastic demand causes price and total revenue to
vary in opposite directions. In this case, the decrease in price results
in an increase in total revenue and the correct choice is c.
Return to Question
4
5. If the price of good Y decreases, the quantity
demanded of good Y will increase because demand curves are negatively sloped..
If, as a result, the demand for good X also increases then Y and X are
complementary goods; you buy more X because you buy more Y.
Cross-Elasticity of Demand = (%DQ
of X / %DP of Y). Complementary goods have negative
cross elasticities. In this case the numerator is positive (there is an
increase in quantity of X) while the denominator is negative (the price
of Y decreased). A positive divided by a negative yields a negative value.
The correct answer is b.
Return to Question
5
6. Less money spent by consumers translates to a
decrease in total revenue received by producers. A decrease in price will
cause quantity demanded to increase because demand curves are negatively
sloped.
However, if total revenue decreases, it can be concluded
that the % increase in quantity was less than the % decrease in
price.
This is the definition of inelastic demand in which
the numerator (% change in quantity) is less than the denominator (% change
in price) so that the absolute value of the ratio (price elasticity of
demand) is less than 1.
The correct choice is e.
Return to Question
6
7. An increase in price will cause quantity demanded
to decrease because demand curves are negatively sloped.
If demand is elastic, then quantity demanded is
relatively responsive to a change in price; that is, the %DQ
> %DP. Thus, if price increases by 9%, quantity
demanded decreases by more than 9%. This relatively large decrease in quantity
demanded will decrease total revenue (TR) because TR = P x Q.
The correct choice is d.
Return to Question
7
8. If price elasticity is less than 1, then demand
is inelastic.
A decrease in price will cause quantity demanded to increase because
demand curves are negatively sloped.
If demand is inelastic, then quantity demanded is relatively unresponsive
to a change in price; that is, the %DQ <
%DP. Thus, if price decreases by 10%, quantity
demanded increases by less than 10%.
Since total revenue (TR) = P x Q, the relatively
small increase in quantity demanded will decrease total revenue.
The correct choice is d.
Return to Question
8
9. To sell the increased quantity, the oil countries
had to decrease price. If total revenue decreased, then it can be concluded
that the demand for oil is inelastic because P & TR vary in the same
direction if demand is inelastic (elasticity <1).
If demand is inelastic, then quantity demanded is relatively unresponsive
to a change in price; that is, the %DQ <
%DP.
The correct answer is b,
the
% decrease in price was greater than the % increase in quantity since demand
for oil is inelastic.
Return to Question
9
10. The % decrease in quantity (14%) is greater than
the % increase in price (10%). When the %DQ
> %DP, demand is elastic (elasticity
>1).
If demand is elastic, P & TR vary in opposite
directions. In this case, total revenue will decrease because TR
= P x Q and there was a relatively large decrease in quantity.
The correct answer is c.
Return to Question
10
11. An increase in price will cause quantity demanded to
decrease because demand curves are negatively sloped.
If demand is inelastic, quantity demanded is relatively
unresponsive to a change in price; that is, the %DQ
< %DP.
If price increases by 3%, then quantity
demanded will decrease by less than 3%.
Total revenue will increase
because TR = P x Q and there was a relatively small decrease in quantity
in response to the increase in price.
The correct choice is a.
Return to Question
11
12. If price elasticity is greater than 1, then demand
is elastic. The %DQ > %DP.
A decrease in price will cause quantity demanded
to increase because demand curves are negatively sloped.
If demand is elastic, P & TR vary in opposite
directions. In this case, total revenue will increase
because TR = P x Q and there is a relatively large increase
in quantity of greater than 7%.
The correct answer is c.
Return to Question
12
13. If the price of good Y decreases, the quantity demanded of
good Y will increase because demand curves are negatively sloped.
If, as a result, the demand for good X decreases,
then Y and X are substitute goods; people
are buying less X as a result of buying more Y.
Cross-Elasticity of Demand = (%DQ
of X / %DP of Y). Substitute goods have positive
cross elasticities. In this case the numerator is negative (there is a
decrease in quantity of X) and the denominator is also negative (the price
of Y decreased). A negative divided by a negative yields a positive value.
The correct answer is a.
Return to Question
13
14. Price decreases from $16 to $10. To solve for
price elasticity of demand, we need corresponding quantity values.
Total revenue (TR) = P x Q. By knowing that TR decreases
from $96 to $80 we can compute the quantity values.
When P = $16, TR = $96. TR = P x Q. $96 = $16 x
Q. $96/$16 = Q. 6 =
Q.
When P = $10, TR = $80. TR
= P x Q. $80 = $10 x Q. $80/$10 = Q. 8
= Q.
Therefore, when P = $16, Q
= 6 and when P = $10, Q = 8. We use these values to solve for price elasticity
of demand.
Price Elasticity of Demand = (%DQ/%DP)
= [(DQ/Average Q) / (DP/Average
P)]
The change in Q is the difference between the 2
quantity values = 8 - 6 = 2.
The average Q is the midpoint between the 2 quantity
values. This is computed by adding the 2 quantity values and dividing by
2. Average Q = (8+6)/2 = 14/2 = 7.
The change in P is the difference between the 2
price values = $16 - $10 = $6.
The average P is the midpoint between the 2 price
values. This is computed by adding the 2 price values and dividing by 2.
Average P = ($16 + $10)/2 = $26/2 = $13.
Substituting the above 4 values in red in the price
elasticity of demand formula yields:
(2/7)/($6/$13). 2/7 = .286
and $6/$13 = .462. (Note
that the $ signs cancel out.)
.286/.462
= 0.62.
Return to Question
14
15. If goods X and Y are complements, they are goods
which are used together. A decrease in the price of Y will result in an
increase in quantity demanded of good Y because demand curves are negatively
sloped. Since X and Y are complements, buying more Y will cause consumers
to also buy more X. This increase in demand for X will shift the entire
demand curve for X to the right.
Cross-Elasticity of
Demand = (%DQ of X / %DP
of Y). Complementary goods have negative cross
elasticities. In this case the numerator is positive (there is an increase
in quantity of X) while the denominator is negative (the price of Y decreased).
A positive divided by a negative yields a negative value. The correct answer
is c.
Return to Question
15
16. If price elasticity of demand is less than 1,
then demand is inelastic.
A decrease in price will cause quantity demanded
to increase because demand curves are negatively sloped.
If demand is inelastic, P & TR vary in the same
direction. In this case, total revenue will decrease
because TR = P x Q and there is a relatively small
increase in quantity of less than 3%.
The correct answer is d.
Return to Question
16
17. A decrease in the price of Y will result in an
increase in quantity demanded of good Y because demand curves are negatively
sloped. If, as a result, there is a decrease in demand for good X, then
X and Y are substitute
goods; less X is being bought as a consequence of consumers buying more
of the substitute good Y.
Cross-Elasticity of
Demand = (%DQ of X / %DP
of Y). Substitute goods have positive cross
elasticities. In this case the numerator is negative (there is a decrease
in quantity of X) while the denominator is negative (the price of Y decreased).
A negative divided by a negative yields a positive value. The correct answer
is choice c.
Return to Question
17
18. If price elasticity of demand is less than 1,
then demand is inelastic.
If demand is inelastic, P & TR vary in the same
direction. Since price changed and total revenue increased as a result,
it can be concluded that the price change was an increase.
An increase in
price will cause quantity demanded to decrease because demand curves are
negatively sloped.
However, if demand is inelastic, quantity demanded is relatively unresponsive
to a change in price; that is, the % decrease in
Q is less than the % increase in P.
The correct answer is choice b.
Return to Question
18
19. Total Revenue (TR) = P x Q.
If a firm can sell 100 units at $8/unit, its total revenue (TR) = $8
x 100 = $800.
If it can sell 80 units at the higher price of $10/unit, its
total revenue (TR) of $10 x 8 = $800 would stay unchanged.
This is a case of unitary elasticity
(elasticity =1). P & TR are independent of each other (TR doesn't change
as P changes) because the %DQ = %DP.
The correct answer is choice d.
Return to Question
19
20. An increase in price will cause quantity demanded
to decrease because demand curves are negatively sloped.
However, if demand is inelastic, the % decrease
in quantity is less than the 5 % increase in price.
As a result of the 5% increase
in price and the relatively small decrease in quantity, total revenue (TR)
= P x Q, will increase.
The correct answer is choice
d.
Return to Question
20
21. Price decreases from $6 to $4. To solve for price elasticity
of demand, we need corresponding quantity values.
Total revenue (TR) = P x Q. By knowing that TR increases
from $18 to $28 we can compute the quantity values.
When P = $6, TR = $18. TR = P x Q. $18 = $6 x Q.
$18/$6 = Q. 3 = Q.
When P = $4, TR = $28. TR
= P x Q. $28 = $4 x Q. $28/$4 = Q. 7
= Q.
Therefore, when P = $6, Q
= 3 and when P = $4, Q = 7. We use these values to solve for price elasticity
of demand.
Price Elasticity of Demand = (%DQ/%DP)
= [(DQ/Average Q) / (DP/Average
P)]
The change in Q is the difference between the 2
quantity values = 7 - 3 = 4.
The average Q is the midpoint between the 2 quantity
values. This is computed by adding the 2 quantity values and dividing by
2. Average Q = (3+7)/2 = 10/2 = 5.
The change in P is the difference between the 2
price values = $6 - $4 = $2.
The average P is the midpoint between the 2 price
values. This is computed by adding the 2 price values and dividing by 2.
Average P = ($6 + $4)/2 = $10/2 = $5.
Substituting the above 4 values in red in the price
elasticity of demand formula yields:
(4/5)/($2/$5). 4/5 = .80
and $2/$5 = .40. (Note
that the $ signs cancel out.)
.80/.40
= 2.00.
Return to Question
21
22. If the quantity demanded decreases by less (3%)
than the price increased (5%), demand is inelastic (price elasticity is
less
than 1).
As a result of the 5%
increase in price and the relatively small (3%) decrease in quantity, total
revenue (TR) = P x Q, will increase.
The correct answer is choice
d.
Return to Question
22
23. If the price elasticity of demand is greater
than 1, demand is elastic.
If demand is elastic, price and total revenue (TR)
will vary in opposite directions.
Since total revenue increased, price must have decreased.
The elastic demand meant that the resulting % increase
in quantity demanded was greater than the % decrease in price. This
relatively large increase in quantity contributed to the increase in total
revenue.
The correct answer is choice c.
Return to Question
23
24. If price elasticity is less than 1, then demand
is inelastic.
If price is decreased, then quantity demanded will
increase because demand curves are negatively sloped and price and quantity
demanded are inversely (oppositely) related. However, inelastic means that
quantity demanded is relatively unresponsive to the change in price. Specifically,
in response to an 8% decrease in price, quantity demanded will increase
by less than 8%.
The relatively small increase
in quantity will result in a decrease in total
revenue. This is because total revenue (TR)
= P x Q and the small increase in Q does not compensate the firm for the
larger % decrease in P.
The correct answer is choice
d.
Return to Question
24
25. If price increases and total revenue (TR) increases
as a result (P & TR varying in the same direction), then demand is
inelastic.
If price is increased,
then quantity demanded will decrease because demand curves are negatively
sloped and price and quantity demanded are inversely (oppositely) related.
However, inelastic means that quantity demanded is relatively unresponsive
to the change in price. Specifically, in response to an 8% increase in
price, quantity demanded will decrease by less than
8%.
The correct answer is choice
d.
Return to Question
25
26. Price decreases from $12 to $8. To solve for
price elasticity of demand, we need corresponding quantity values.
Total revenue (TR) = P x Q. By knowing that TR decreases
from $96 to $80 we can compute the quantity values.
When P = $12, TR = $96. TR = P x Q. $96 = $12 x
Q. $96/$12 = Q. 8 =
Q.
When P = $8, TR = $80. TR
= P x Q. $80 = $8 x Q. $80/$8 = Q. 10
= Q.
Therefore, when P = $12, Q
= 8 and when P = $8, Q = 10. We use these values to solve for price elasticity
of demand.
Price Elasticity of Demand = (%DQ/%DP)
= [(DQ/Average Q) / (DP/Average
P)]
The change in Q is the difference between the 2
quantity values = 10 - 8 = 2.
The average Q is the midpoint between the 2 quantity
values. This is computed by adding the 2 quantity values and dividing by
2. Average Q = (10+8)/2 = 18/2 = 9.
The change in P is the difference between the 2
price values = $12 - $8 = $4.
The average P is the midpoint between the 2 price
values. This is computed by adding the 2 price values and dividing by 2.
Average P = ($12 + $8)/2 = $20/2 = $10.
Substituting the above 4 values in red in the price
elasticity of demand formula yields:
(2/9)/($4/$10). 2/9 = .222
and $4/$10 = .400. (Note
that the $ signs cancel out.)
.222/.400
= 0.555 rounded
up to 0.56.
Return to Question
26
27. An increase in the price of Y will result in
a decrease in quantity demanded of good Y because demand curves are negatively
sloped and price and quantity are inversely (oppositely) related. If, as
a result, there is an increase in demand for good X, then X and Y are substitute
goods; more X is being bought as a consequence of consumers buying less
of the substitute good Y. (Think of Y as butter and X as the substitute
good margarine.)
Cross-Elasticity of
Demand = (%DQ of X / %DP
of Y). Substitute goods have positive cross
elasticities. In this case the numerator is positive (there is an increase
in quantity of X) while the denominator is also positive (the price of
Y increased). A positive divided by a positive yields a positive value.
The correct answer is choice c.
Return to Question
27
28. Total Revenue (TR) = P x Q.
When price is $5/unit, quantity demanded is 100 units. TR = $5 x 100
= $500.
When price is raised to $12/unit, quantity demanded falls to 40 units.
TR = $12 x 40 = $480.
As a result of the price increase, total revenue
decreased
(from $500 to $480).
If P & TR vary in opposite directions, then
demand is elastic (elasticity >1).
Note: It is not necessary to calculate the
exact value of elasticity to answer this question. However, using the price
and quantity values given in the question would yield an elasticity value
of 1.04, a value greater than 1, confirming that demand is indeed elastic.
The correct answer is choice b.
Return to Question
28
29.
The movement down along the demand curve for good
Y from A to B represents an increase in quantity demanded for good Y caused
by a decrease in the price of good Y.
As a result of this decrease in the price of good
Y, there is a decrease in demand for good X (the entire demand curve for
good X shifts to the left from F to G). Consumers are buying less X because
they are buying more Y. X and Y are substitute
goods.
Cross-Elasticity of
Demand = (%DQ of X / %DP
of Y). Substitute goods have positive cross
elasticities. In this case the numerator is negative (there is a decrease
in quantity of X) while the denominator is negative (the price of Y decreased).
A negative divided by a negative yields a positive value. The correct answer
is choice c.
Return to Question
29
30.
|
Point
|
Price
|
Quantity
|
| A |
$ 5
|
10
|
|
B
|
$ 3
|
70
|
Price Elasticity of Demand = (%DQ/%DP)
= [(DQ/Average Q) / (DP/Average
P)]
The change in Q is the difference between the 2
quantity values = 70-10 = 60.
The average Q is the midpoint between the 2 quantity
values. This is computed by adding the 2 quantity values and dividing by
2. Average Q = (10+70)/2 = 80/2 = 40.
The change in P is the difference between the 2
price values = $5 - $3 = $2. (Alternatively,
we subtract $3 - $5 = -$2. However, since price elasticity of demand is
expressed as an absolute (non-negative) value, we would ignore the negative
sign and convert -$2 to $2.)
The average P is the midpoint between the 2 price
values. This is computed by adding the 2 price values and dividing by 2.
Average P = ($5 + $3)/2 = $8/2 = $4.
Substituting the above 4 values in red in the price
elasticity of demand formula yields:
(60/40)/($2/$4). 60/40 = 1.50
and $2/$4 = .50. (Note
that the $ signs cancel out.)
1.50/.50
= 3.00
Return to Question
30
31. The amount of $ consumers spend on good X is equivalent to the
total revenue (TR) received by the producers of good X.
A decrease in price will cause quantity demanded to increase because
demand curves are negatively sloped.
However, if total revenue decreases, it can be concluded
that the % increase in quantity was less than the % decrease in
price.
This is the definition of inelastic demand in which
the numerator (% change in quantity) is less than the denominator (% change
in price).
The correct choice is c, the
percentage
(%) increase in quantity demanded is less than the percentage (%) decrease
in price and thus demand is inelastic.
Return to Question
31
32. If a good represents a small share of consumers' budgets and there
are no close substitutes for it, then demand for the good tends to be inelastic.
If demand is inelastic, then price and total revenue (TR) would change
in the same direction. In this case, if the price of good X were
increased, total revenue would also increase.
An increase in price will cause quantity demanded
to decrease because demand curves are negatively sloped.
However, if demand is inelastic, the % decrease
in quantity demanded is less than the 40 % increase in price.
The correct choice is d,
total
revenue (TR) would increase because quantity demanded would decrease by
less than 40%.
Return to Question
32
33. If demand is elastic, then price and total revenue (TR) will vary
in opposite directions. Since total revenue decreases, then price must
have increased.
An increase in price will cause quantity demanded to decrease because
demand curves are negatively sloped.
Elastic demand means that price elasticity of demand is greater than
1 because the %DQ > %DP.
The correct choice is a, the
price was increased and the percentage (%) decrease in quantity demanded
is greater than the percentage (%) increase in price.
Return to Question
33
34. Price decreases from $12 to $8. To solve for price elasticity of
demand, we need corresponding quantity values.
Total revenue (TR) = P x Q. By knowing that TR increases
from $36 to $136 we can compute the quantity values.
When P = $12, TR = $36. TR = P x Q. $36 = $12 x
Q. $36/$12 = Q. 3 =
Q.
When P = $8, TR = $136. TR
= P x Q. $136 = $8 x Q. $136/$8 = Q. 17
= Q.
Therefore, when P = $12, Q
= 3 and when P = $8, Q = 17. We use these values to solve for price elasticity
of demand.
Price Elasticity of Demand = (%DQ/%DP)
= [(DQ/Average Q) / (DP/Average
P)]
The change in Q is the difference between the 2
quantity values = 17 - 3 = 14.
The average Q is the midpoint between the 2 quantity
values. This is computed by adding the 2 quantity values and dividing by
2. Average Q = (17+3)/2 = 20/2 = 10.
The change in P is the difference between the 2
price values = $12 - $8 = $4.
The average P is the midpoint between the 2 price
values. This is computed by adding the 2 price values and dividing by 2.
Average P = ($12 + $8)/2 = $20/2 = $10.
Substituting the above 4 values in red in the price
elasticity of demand formula yields:
(14/10)/($4/$10). 14/10 = 1.40
and $4/$10 = .40. (Note
that the $ signs cancel out.)
1.40/.40
= 3.50
Return to Question
34
35. If the price elasticity of demand is greater than 1, then
demand is elastic.
If demand is elastic, price and total revenue (TR) very in opposite
directions. Since price decreased, TR will increase.
Since price decreased, quantity demanded will increase because demand
curves are negatively sloped.
Elastic demand means that the %DQ
> %DP. Since price decreased by 10%, then quantity
demanded will increase by more than 10%.
The correct choice is c, total
revenue (TR) will increase because the increase in quantity demanded will
be greater than 10%.
Return to Question
35
36. Since the % change in quantity is less than the %
change in price, demand is inelastic.
If demand is inelastic, then price and total revenue (TR) will vary
in the same direction.
Since price decreased, then total revenue (TR) will also decrease.
The correct choice is c, total
revenue (TR) will decrease and demand is inelastic.
Return to Question
36
37. If the price of good Y increases, the quantity demanded of
good Y will decrease because demand curves are negatively sloped.. If,
as a result, the demand for good X also decreases then Y and X are complementary
goods; you buy less X because you buy less Y.
Cross-Elasticity of Demand = (%DQ
of X / %DP of Y). Complementary goods have negative
cross elasticities. In this case the numerator is negative (there is a
decrease in quantity of X) while the denominator is positive (the price
of Y increased). A negative divided by a positive yields a negative value.
The correct answer is b.
Return to Question
37
38. Since price will be decreased, quantity demanded will increase
because demand curves are negatively sloped.
If demand is elastic, price and total revenue (TR) will vary in opposite
directions.
Decreasing the price of those goods whose demand is elastic will thus
result in increasing total revenue. This is because goods with an elastic
demand have a price elasticity of demand greater than 1. This means that
the % increase in quantity demanded will be greater than the % decrease
in price.
The correct choice is e. The firm would
decrease the price of those products for which demand
is elastic and the percentage (%) increase in quantity demanded is greater
than the percentage (%) decrease in price.
Return to Question
38
39. An increase in the price of good Y will cause quantity demanded
of good Y to decrease because demand curves are negatively sloped.
This is shown by a movement up and to the left along the given demand
curve for good Y. If the cross elasticity of demand is negative between
goods X and Y, then the demand for good X will decrease. People purchase
less of good X because they buy less of good Y and goods X and Y are complementary
goods. Since people are purchasing less of good X for some reason other
than an increase in the price of good X itself, it must be shown by a shift
in the entire demand curve for good X to the left.
The correct choice is a, there
is a movement up and to the left along the given demand curve for good
Y and a shift in the entire demand curve for good X to the left.
Return to Question
39
40. Total dollars spent by consumers is equivalent to total revenue
(TR) received by producers of gasoline.
Since both price and total revenue varied in the same direction
(they both increased), demand for gasoline must be inelastic.
If demand is inelastic, the absolute value of elasticity of demand
is <1.
The correct choice is a, the
absolute value of the elasticity of demand for gasoline is less than 1
and demand is inelastic.
Return to Question
40
41. If the price is doubled (from $10 to $20) and quantity demanded
is cut exactly in half as a result, then total revenue (which is price
times quantity) will remain constant.
For example, if quantity demanded were cut in half from 8 units to
4 units, then total revenue will remain constant at $80:
$10 x 8 = $80 and $20 x 4 also = $80.
From the formula sheet: If demand is of unitary elasticity (elasticity
=1), Price & TR are independent of each other (TR doesn't change as
Price changes).
The correct choice is e, total
revenue (TR) will remain constant because demand is of unitary elasticity
(elasticity value = 1).
Return to Question
41
42.
The movement up along the demand curve for good Y from A to B represents
a decrease in quantity demanded for good Y caused by an increase in the
price of good Y.
As a result of this increase in the price of good
Y, there is a decrease in demand for good X (the entire demand curve for
good X shifts to the left from F to G). Consumers are buying less X because
they are buying less Y. Therefore, X and Y are complementary
goods.
Cross-Elasticity of
Demand = (%DQ of X / %DP
of Y). Complementary goods have negative cross
elasticities. In this case the numerator is negative (there is a decrease
in quantity of X) while the denominator is positive (the price of Y increased).
A negative divided by a positive yields a negative value. The correct answer
is choice b.
Return to Question
42
43. Cross-Elasticity of Demand = (%DQ of
X / %DP of Y). A value of 0 means that there
is no response of X to the 10% increase in the price of Y. The value of
the numerator is 0. 0 divided by 10 will yield a ratio of 0.
The correct choice is c, the
demand for good X would not change.
Return to Question
43
44. Price Elasticity of Demand = (%DQ/%DP)
= [(DQ/Average Q) / (DP/Average
P)]
The change in P is the difference between the 2 price values = $10
- $6 = $4.
The average P is the midpoint between the 2 price
values. This is computed by adding the 2 price values and dividing by 2.
Average P = ($10 + $6)/2 = $16/2 = $8.
At first glance, it might seem that there is insufficient
information provided because you are not given specific numerical values
for quantity. However, since elasticity depends on % changes, the phrase
"quantity demanded would exactly triple" provides enough information
to calculate elasticity. It makes no difference if quantity tripled from
1 to 3 units or if it tripled from 250 to 750 units. For mathematical convenience,
let's use quantity increases from 1 to 3 units to complete our calculation
of elasticity.
The change in Q is the difference between the 2
quantity values = 3-1 = 2.
The average Q is the midpoint between the 2 quantity
values. This is computed by adding the 2 quantity values and dividing by
2. Average Q = (3+1)/2 = 4/2 = 2.
Now, substituting the
above 4 values in red in the price elasticity of demand formula
[(DQ/Average Q) / (DP/Average
P)] yields:
(2/2)/($4/$8). 2/2 = 1.00
and $4/$8 = .50. (Note
that the $ signs cancel out.)
1.00/.50
= 2.00. The correct
choice is c.
Return to Question
44
45. Since demand curves are negatively sloped, fewer units of
quantity can be sold at higher prices. However, if demand is inelastic,
then price and total revenue (TR) will vary in the same direction. An increase
in price (with the accompanying decrease in quantity) will result in an
increase in total revenue. If demand is inelastic, the %DQ
< %DP.
The correct choice is a, demand
for oil is inelastic and the percentage (%) increase in price will be greater
than the percentage (%) decrease in quantity.
Return to Question
45
46. Since there are many close substitutes available for Exxon
gasoline (other brands of gasoline), the demand for Exxon gasoline is elastic.
If demand is elastic, price and total revenue (TR) will vary in opposite
directions.
Thus, if Exxon alone were to lower its price, its total revenue would
increase because it would take many customers away from its competitors.
However, if Exxon alone were to raise its price, then its total revenue
would decrease because it would lose most of its customers who would buy
other gasoline brands.
The correct choice is b, total
revenue (TR) would decrease if Exxon increased its price, but Exxon’s total
revenue (TR) would increase if Exxon decreased its price.
Return to Question
46
47. Complementary goods have negative cross elasticities. The
larger the negative value, the stronger the complementary relationship
between goods X and Y.
For example, assume the price of Y increased by 10%. This will decrease
the quantity demanded of good Y because demand curves are negatively sloped.
If X and Y are complements, than people will buy less X because they are
buying less Y.
If the demand for X decreased by 5%, then the cross elasticity value
would be -0.5:
Cross-Elasticity of Demand = (%DQ of X /
%DP of Y)
-5%/+10% = -0.5
However, if the demand for X decreased by much more (20%) because sales
of X were more greatly affected by the decrease in the quantity demanded
of good Y, then the cross elasticity value would be -2.0:
Cross-Elasticity of Demand = (%DQ of X /
%DP of Y)
-20%/+10% = -2.0
The correct choice is c, since -2
is the largest negative value of the choices provided.
Return to Question
47
48. Total revenue (TR) = Price (P) x Quantity (Q).
Initially, TR = $20 x 10 = $200.
After the firm raises its price to $32, total revenue (TR) falls to
$32 x 4 = $128.
Thus, price increased and total revenue decreased. If price and total
revenue vary in opposite directions, then demand is elastic.
The correct choice is b, total
revenue (TR) would decrease and demand is elastic.
Return to Question
48
49. The slope of a demand curve is DP/DQ.
An increase in price from $40 to $60 represents a change in price of +$20.
Slope = +$20/DQ
-10 = +$20/DQ. To solve for DQ,
we first cross multiply:
-10 x DQ = +20. Dividing by -10, yields
the value for DQ:
DQ = +20/10 = -2
Thus, as the firm increases the price of its product from $40 to $60,
its quantity demanded decreases by 2 units from 12 to 10 units.
We now have enough information to calculate price elasticity of demand:
Price Elasticity of Demand = (%DQ/%DP)
= [(DQ/Average Q) / (DP/Average
P)]
The change in Q is the difference between the 2
quantity values = 12 - 10 = 2.
The average Q is the midpoint between the 2 quantity
values. This is computed by adding the 2 quantity values and dividing by
2. Average Q = (12+10)/2 = 22/2 = 11.
The change in P is the difference between the 2
price values = $60 - $40 = $20.
The average P is the midpoint between the 2 price
values. This is computed by adding the 2 price values and dividing by 2.
Average P = ($40 + $60)/2 = $100/2 = $50.
Substituting the above 4 values in red in the price
elasticity of demand formula yields:
(2/11)/($20/$50). 2/11 = 0.182
and $20/$50 = 0.400.
(Note that the $ signs cancel out.)
0.182/0.400
= 0.45 or 0.46
depending
on one's rounding. (The actual answer is 0.454545
...)
Return to Question
49
50. If price is decreased, then quantity demanded will increase because
demand curves are negatively sloped and price and quantity demanded are
inversely (oppositely) related. However, since demand is inelastic, quantity
demanded is relatively unresponsive to the change in price. Specifically,
in response to a 10% decrease in price, quantity
demanded will increase by less than 10%.
The relatively small increase
in quantity will result in a decrease in total
revenue. This is because total revenue (TR)
= P x Q and the small increase in quantity (Q) does not compensate the
firm for the larger % decrease in price (P). If demand is inelastic,
P & TR vary in the same direction.
The correct answer is choice
d.
Return to Question
50
51.
|
Point
|
Price
|
Quantity
|
| A |
$ 36
|
4
|
|
B
|
$ 28
|
16
|
Price Elasticity of Demand = (%DQ/%DP)
= [(DQ/Average Q) / (DP/Average
P)]
The change in Q is the difference between the 2
quantity values = 16 - 4 = 12.
The average Q is the midpoint between the 2 quantity
values. This is computed by adding the 2 quantity values and dividing by
2. Average Q = (16 + 4)/2 = 20/2 = 10.
The change in P is the difference between the 2
price values = $36 - $28 = $8.
The average P is the midpoint between the 2 price
values. This is computed by adding the 2 price values and dividing by 2.
Average P = ($36 + $28)/2 = $64/2 = $32.
Substituting the above 4 values in red in the price
elasticity of demand formula yields:
(12/10)/($8/$32). 12/10 = 1.20
and $8/$32 = .25. (Note
that the $ signs cancel out.)
1.20/.25
= 4.80
Return to Question
51
52. Cross-Elasticity of Demand = (%DQ of
X / %DP of Y). If the cross elasticity is positive,
then the signs of both the numerator and denominator must be the same.
A positive cross elasticity means that goods X and Y are substitute goods.
An increase in the price of Y will lead to an increase in the demand for
X.
An increase in the price of Y is shown by a movement
up and to the left along the given demand curve for good Y.
This increase in the price of a substitute good
will result in the entire demand curve for good X
shifting to the right. There is an increased demand for good X at
the existing price of good X.
The correct choice is e.
Return to Question
52
53. If the price elasticity of demand is greater than 1, demand is
elastic. The increased price causes a relatively large decrease in quantity.
This results in a decrease in total revenue. If demand is elastic (elasticity
>1), price (P) & total revenue (TR) vary in opposite direction
If price increased by 7%,
total revenue (TR) will decrease
because the decrease in quantity demanded
will be greater than 7%, choice d.
Return to Question
53
54. Price decreases from $44 to $36. To solve for price elasticity
of demand, we need corresponding quantity values.
Total revenue (TR) = P x Q. By knowing that TR increases
from $220 to $396 we can compute the quantity values.
When P = $44, TR = $220. TR = P x Q. $220 = $44
x Q. $220/$44 = Q. 5
= Q.
When P = $36, TR = $396. TR
= P x Q. $396 = $36 x Q. $396/$36 = Q. 11
= Q.
Therefore, when P = $44, Q
= 5 and when P = $36, Q = 11. We use these values to solve for price elasticity
of demand.
Price Elasticity of Demand = (%DQ/%DP)
= [(DQ/Average Q) / (DP/Average
P)]
The change in Q is the difference between the 2
quantity values = 11 - 5 = 6.
The average Q is the midpoint between the 2 quantity
values. This is computed by adding the 2 quantity values and dividing by
2. Average Q = (5 + 11)/2 = 16/2 = 8.
The change in P is the difference between the 2
price values = $44 - $36 = $8.
The average P is the midpoint between the 2 price
values. This is computed by adding the 2 price values and dividing by 2.
Average P = ($44 + $36)/2 = $80/2 = $40.
Substituting the above 4 values in red in the price
elasticity of demand formula yields:
(6/8)/($8/$40). 6/8 = 0.75
and $8/$40 = 0.20. (Note
that the $ signs cancel out.)
0.75/0.20
= 3.75
Return to Question
54
55. Decreasing quantity sold would cause a movement up and to the left
along a given demand curve. Consumers are willing to pay a higher price
per unit if there are fewer units available to purchase. The increased
price would succeed in increasing total revenue (TR) only if demand for
oil were inelastic. If demand is inelastic
(elasticity <1), P & TR vary in the same direction.
Inelastic demand means that the %DQ
< %DP. Therefore, a decrease in quantity
of 4% would cause a resulting percentage increase
in price greater than 4%.
The correct choice is c.
Return to Question
55
56. Since demand curves are negatively sloped, an increase in price
will cause a resultant decrease in quantity demanded. However, if demand
for cigarettes is inelastic, then the percentage decrease in quantity demanded
is less than the percentage increase in price. Since quantity demanded
is relatively unresponsive to the increase in price, the total $
spent by consumers on the higher-priced cigarettes would increase.
The correct choice is d.
Return to Question
56
57. If quantity demanded is exactly cut in half, then if price were
to double, total revenue would remain constant. In this example, price
was less than doubled (from $15 to $25), so total
revenue must have decreased. For example, assume quantity were cut
in half from 4 units to 2 units. (Note that the actual numbers make no
difference. Any numbers illustrating cutting quantity exactly in half would
yield the same result.)
Total revenue (TR) = Price (P) x Quantity (Q).
TR = $15 x 4 = $60
TR = $25 x 2 = $50. Price has increased and total revenue has
decreased.
If P & TR vary in opposite directions, demand
is elastic.
The correct choice is b.
Return to Question
57
58. Cross-Elasticity of Demand = (%DQ of
X / %DP of Y). It measures how the demand for
good X responds to a change in the price of a related good, Y.
If goods X and Y are totally unrelated, then there
will be no change in the demand for good X to a change in the price of
good Y. (For example, think of good Y as computers and good X as peanut
butter.) No change in the demand for good X means that the numerator, the
%DQ of X, will have a value of 0. 0 divided
by any value, positive or negative, will yield a ratio of 0.
Therefore, a cross elasticity value of 0,
choice a, represents
a situation in which goods X and Y are totally unrelated.
Return to Question
58
59. The slope of a demand curve = DP/DQ.
The slope in this example is -5.
Increasing the price from $20 to $35 represents
a DP of +$15. We can compute the corresponding
DQ.
DP/DQ
= -5
15/DQ = -5
DQ = -3
Therefore, increasing price by $15 (from $20 to
$35) results in quantity demanded decreasing by 3 units (from 6 units to
3 units).
Total revenue (TR) = Price (P) x Quantity (Q).
TR = $20 x 6 = $120
TR = $35 x 3 = $105. Price has increased and total
revenue has decreased.
If P & TR vary in opposite directions, demand
is elastic.
The correct choice is a.
Return to Question
59
60.
The movement up along the demand curve for good Y from A to B represents
a decrease in quantity demanded for good Y caused by an increase in the
price of good Y.
As a result of this increase in the price of good
Y, there is an increase in demand for good X (the entire demand curve for
good X shifts to the right from F to G). Consumers are buying more X because
they are buying less Y. Therefore, X and Y are substitute
goods.
Cross-Elasticity of
Demand = (%DQ of X / %DP
of Y). Substitute goods have positive cross
elasticities. In this case the numerator is positive (there is an increase
in quantity of X) while the denominator is also positive (the price of
Y increased). A positive divided by a positive yields a positive value.
The correct answer is choice c.
Return to Question
60
61. If demand is inelastic, price (P) and total revenue (TR) vary in
the same direction. If TR decreases, then price must
have decreased as well.
Since demand curves are negatively sloped, a decrease
in price would cause an increase in quantity demanded.
Inelastic demand means that quantity demanded is
relatively unresponsive to a change in price; that is, %DQ
< %DP.
Therefore, the % increase in quantity demanded
is less than the % decrease in price, choice
d.
Return to Question
61
62. Inelastic demand means that quantity demanded is relatively unresponsive
to a change in price. If a product is viewed as a necessity
by consumers, they will attempt to purchase a certain amount of
the product regardless of price. And if the product represents a small
percent of the typical consumer's budget,
consumers will be better able to maintain the quantity purchased
regardless of the percentage change in price.
The correct choice is a.
Return to Question
62
63. If demand is elastic (elasticity >1), P & TR vary in opposite
directions because the %DQ > %DP.
Thus, if price increases and total revenue decreases as a result, then
demand must be elastic.
If price is increased,
then quantity demanded will decrease because demand curves are negatively
sloped and price and quantity demanded are inversely (oppositely) related.
Since elastic demand indicates that the %DQ
> %DP, an 8% increase in price will result in
quantity demanded decreasing by more than 8%.
The correct choice is b.
Return to Question
63
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