# Ch 6 Elasticity

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 The price elasticity of demand coefficient measures buyer responsiveness to price changes The basic formulate for the price elasticity of demand coefficient is percentage change in quantity demanded/ percentage change in price The demand for a product is inelastic with respect to price if consumers are largely unresponsive to a per unit price change Which of the following is not a characteristic of the demand for a commodity that is elastic? D. The elasticity coefficient is less than one. The larger the coefficient of price elasticity of demand for a product, the D. smaller the resulting price change for an increase in supply. Most demand curves are relatively elastic in the upper left portion because the original price D. from which the percentage price change is calculated is large and the original quantity from which the percentage change in quantity is calculated is small. The price elasticity of demand of a straight line demand curve is A. elastic in high-price ranges and inelastic in low-price ranges A leftward shift in the supply curve of a product X will increase equilibrium price to a greater extent the D. more inelastic the demand for the product. The price elasticity of demand is generally A. negative, but the minus sign is ignored. For a linear demand curve D. demand is elastic at high prices the price of product X is reduced from \$100 to \$90 and, as a result, the quantity demanded increases from 50 to 60 units. Therefore demand for X in this price range D. is elastic If a demand for a product is elastic, the value of the price elasticity coefficient is B. greater than one A perfectly inelastic demand curve C. graphs as a line parallel to the vertical axis If quantity demanded is completely unresponsive to price changes, demand is A. perfectly inelastic A firm can sell as much as it wants at a constant price. Demand is thus B. perfectly elastic A demand curve which is parallel to the horizontal axis is B. perfectly elastic (price lower by one, quantity demanded increase by one) Refer to the above data. If this demand schedule were graphed, we would find that C. Its slope is constant throughout Refer to the above data. The price elasticity of demand is relatively elastic: A. in the \$6-\$4 range Refer to the above data. The price elasticity of demand is relatively inelastic: C. in the \$3-\$1 price range Refer to the above data. The price elasticity of demand is unity: B. in the \$4-\$3 price range only. Refer to the above data. Which of the following is correct? A. Although the slope of the demand curve is constant, price elasticity declines as we move from high to low price ranges. n which price range of the accompanying demand schedule is demand elastic? A. \$4-\$3 When the percentage change in price is greater than the resulting percentage change in quantity demanded C. an increase in price will increase total revenue Suppose the price elasticity coefficients of demand are 1.43, 0.67, 1.11, and 0.29 for products W, X, Y, and Z respectively. A 1 percent decrease in price will increase total revenue in the cases of A. W and Y. Suppose that the above total revenue curve is derived from a particular linear demand curve. That demand curve must be: A. inelastic for price declines that increase quantity demanded from 6 units to 7 units Suppose the above total revenue curve is derived from a particular linear demand curve. That demand curve must be: D. elastic for price increases that reduce quantity demanded from 4 units to 3 units. Suppose the above total revenue curve is derived from a particular linear demand curve. That demand curve must be: C. unit elastic for price increases that reduce quantity demanded from 5 units to 4 units. Which of the following statements is not correct? B. In the range of prices in which demand is elastic, total revenue will diminish as price decreases. In which of the following instances will total revenue decline? D. price rises and demand is elastic. If a firm’s demand for labor is elastic, a union-negotiated wage increase will: C. cause the firm’s total payroll to decline. If a firm finds that it can sell \$13,000 worth of a product when its price is \$5 per unit and \$11,000 worth of it when its price is \$6, then: A. the demand for the product is elastic in the \$6-\$5 price range Suppose the price elasticity of demand from bread is 0.20. If the price of bread falls by 10 percent, the quantity demanded will increase by B. 2 percent and total expenditures on bread will fall. Gigantic State University raises tuition for the purpose of increasing its revenue so that more faculty can be hired. GSU is assuming that the demand for education at GSU is: D. relatively inelastic. If the demand for farm products is price inelastic, a good harvest will cause farm revenues to: B. decrease. Other things the same, if a price change causes total revenue to change in the opposite direction, demand is B. relatively elastic. If the price elasticity of demand for a product is unity, a decrease in price will D. increase the quantity demanded, but total revenue will be unchanged. in which of the following cases will total revenue increase? C. price rises and demand is inelastic. A manufacturer of frozen pizzas found that total revenue decreased when price was lowered from \$5 to \$4. It was also found that total revenue decreased when price was raised from \$5 to \$6. Thus, A. the demand for pizza is elastic above \$5 and inelastic below \$5. (Straight-line demand curve) Refer to the above diagram. In the P1P2 price range demand is: C. relatively elastic Refer to the above diagram. In the P3P4 price range demand is: B. relatively inelastic The total-revenue test for elasticity C. does not apply to supply because price and quantity are directly related. If the University Chamber Music Society decides to raise ticket prices to provide more funds to finance concerts, the Society is assuming that the demand for tickets is: C. inelastic The state legislature has cut Gigantic State University’s appropriations. GSU’s Board of Regents decides to increase tuition fees to compensate for the loss of revenue. The board is assuming that the: B. demand for education at GSU is inelastic. Which of the following is correct? C. If demand is elastic, a decrease in price will increase total revenue Suppose that the price of peanuts falls from \$3 to \$2 per bushel and that, as a result, the total revenue received by peanut farmers changes from \$16 to \$14 billion. Thus: B. the demand for peanuts is inelastic. Which of the following is correct? B. If the demand for a product is inelastic, a change in price will cause total revenue to change in the same direction. Refer to the above diagram. Total revenue at price P1 is indicated by area(s): B. A+B. Refer to the above diagram. If price falls from P1 to P2, total revenue will become area(s): A. B+D. Refer to the above diagram. The decline in price from P1 to P2 will: D. increase total revenue by D-A. Refer to the above diagram. In the P1 to P2 price range, we can say: D. that demand is elastic with respect to price. The demand schedules for such products as eggs, bread, and electricity tend to be C. relatively price inelastic. The elasticity of demand for a product is likely to be greater: B. the greater the amount of time over which buyers adjust to price changes. The narrower the definition of a product: A. the larger the number of substitutes and the greater the price elasticity of demand. The more time consumers have to adjust to a change in price: B. the greater will be the price elasticity of demand. Price elasticity of demand is generally A. greater in the long run than in the short run Which of the following generalizations is not correct? B. The price elasticity of demand is greater for necessities than it is for luxuries. (false) If price and total revenue vary in opposite directions, demand is D. relatively elastic. The demand for a luxury good whose purchase would exhaust a big portion of one’s income is: D. relatively price elastic. The demand for a necessity whose cost is a small portion of one’s total income is: C. relatively price inelastic. The price elasticity of supply measures how B. responsive the quantity supplied of X is to the changes in the price of X. The main determinant of elasticity of supply is the B. amount of time the producer has to adjust inputs in response to a price change. Suppost the supply of product X is perfectly inelastic. If there is an increase in the demand for this product, equilibrium price: D. will increase, but equilibrium quantity will be unchanged. Refer to the above table. Over the \$6-\$4 price range, supply is D. inelastic. Refer to the above table. Over the \$8-\$6 price range, supply is: A. inelastic Refer to the above table. Over the \$10-\$8 price range, the elasticity coefficient of supply is: C. less than 1. Suppose that the price of product X rises by 20 percent and the quantity supplied of X increases by 15 percent. The coefficient of price elasticity of supply for good X is: C. less than 1 and therefore supply is inelastic. The above diagram concerns supply adjustments to an increase in demand (D1 to D2) in the immediate market period, the short run, and the long run. Supply curves S1, S2, and S3 apply to the: C. long run, short run, and immediate market period respectively. The above diagram concerns supply adjustments to an increase in demand (D1 to D2) in the immediate market period, the short run, and the long run. In the immediate market period the increase in demand will: B. increase equilibrium price, but not equilibrium quantity. The above diagram concerns supply adjustments to an increase in demand (D1 to D2) in the immediate market period, the short run, and the long run. In the long run the increase in demand will: D. increase both equilibrium price and quantity The above diagram concerns supply adjustments to an increase in demand (D1 to D2) in the immediate market period, the short run, and the long run. On the basis of this illustration we can conclude that: C. supply is more elastic the greater the amount of time producers have to adjust to a change in demand. If the supply of product X is perfectly elastic, an increase in the demand for it will increase: B. equilibrium quantity but equilibrium price will be unchanged. Suppose the price of a product rises and the total revenue of sellers increases. D. No conclusion can be reached with respect to the elasticity of supply. Supply curves tend to be: B. more elastic in the long-run because there is time for firms to enter or leave the industry. For an increase in demand, the price effect is smallest and the quantity effect is largest: B. in the long-run. A supply curve that is vertical straight line indicates that: C. a change in price will have no effect on quantity supplied. A supply curve that is parallel to the horizontal axis suggests that: D. a change in demand will change the equilibrium quantity but not price. An increase in demand will increase equilibrium price to a greater extent C. the less elastic the supply curve. The supply of know Monet paintings is: B. perfectly inelastic. Refer to the above information and assume the stadium capacity is 5,000. If the Mudhens’ management charges \$7 per ticket: C. there will be 1,000 empty seats. Refer to the above information and assume the stadium capacity is 5,000. The supply of seats for the game: C. is perfectly inelastic. Refer to the above information and assume the stadium capacity is 5,000. If the Mudhens’ management wanted a full house for the game, it would: C. set ticket prices at \$5. Refer to the above information. Over the \$11-\$9 price range, demand is: C. elastic Refer to the above information. Over the \$9-\$7 price range, demand is: C. elastic Refer to the above information. Over the \$7-\$5 price range, demand is D. inelastic The supply curve of a one-of-a-kind original painting is C. perfectly inelastic. The supply curve of antique reproduction is A. relatively elastic If the income elasticity of demand for lard is -3.00, this means that: C. lard is an inferior good. The formula for cross elasticity of demand is percentage change in quantity demanded of X/percentage change in price of Y. Cross elasticity of demand measures how sensitive purchases of a specific product are to changes in: A. the price of some other product. The larger the positive cross elasticity coefficient of demand between products X and Y, the B. greater their substitutability. We would expect the cross elasticity of demand between pepsi and Coke to be positive, indicating substitute goods. We would expect the cross elasticity of demand between dress shirts and ties to be: D. negative, indicating complementary goods. (Vertical line; price of X, quantity demanded of Y) The above diagram suggests that: D. X and Y are independent goods. Compared to coffee, we would expect the cross elasticity of demand for B. tea to be positive, but negative for cream. We would expect the cross elasticity of demand for Pepsi to be greater in relation to other soft drinks than that for soft drinks in general because: C. there are fewer good substitutes for soft drinks as a whole than for Pepsi specifically. Refer to the above diagrams. The case of substitute goods is represented by figure: D (Price of C and Quantity of E Demanded; increase) Assume that a 6 percent increase in income in the economy produces a 3 percent increase in the quantity demanded of good X. The coefficient of income elasticity of demand is: D. positive and therefore X is a normal good. Assume that a 3 percent increase in income across the economy produces a 1 percent decline in the quantity demanded of good X. The coefficient of income elasticity of demand for good X is: A. negative and therefore X is an inferior good. Which type of goods is most adversely affected by recessions? B. Goods for which the income elasticity coefficient is relatively high and positive.

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