# Microeconomics chapter 6

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### Calculate the Price

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275 words
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 The price elasticity of supply is equal to the percentage change in quantity supplied divided by the percentage change in price. If demand is perfectly inelastic, the absolute value of the price elasticity of demand is Zero Cross-price elasticity of demand is calculated as the percentage change in quantity demanded of one good divided by percentage change in price of a different good Price elasticity of supply is used to gauge how responsive suppliers are to price changes. Suppose the value of the price elasticity of demand is -3. What does this mean? 1 percent increase in the price of the good causes quantity demanded to increase by 3 percent If demand is inelastic, the absolute value of the price elasticity of demand is less than one A perfectly elastic demand curve is shown By a straight horizontal demand line (left to right) A perfectly inelastic demand curve is shown By a straight vertical demand line (top to bottom) Suppose the California Nurses Union successfully secured a 12 percent increase in the wages of registered nurses. If a hospital responds by reducing the quantity of registered nurses hired and increasing the quantity of physician’s assistants hired, what conclusion can you draw The cross-price elasticity of demand between registered nurses and physician’s assistants is positive For people who live near a bus route, a subway station, or a commuter rail line, public transportation provides a substitute to driving their own cars. So, for these people, the cross-price elasticity of demand between gasoline and public transportation is positive Suppose the value of the price elasticity of supply is 4. What does this mean A 1 percent increase in the price of the good causes quantity supplied to increase by 4 percent Suppose the cross-price elasticity of demand between grapefruit juice and orange juice is approximately 6. What does this mean (WRONG! A 6 percent increase in the price of grapefruit juice leads to a 1 percent increase in orange juice consumption.) A 1 percent decrease in the price of grapefruit juice leads to a 6 percent increase in orange juice consumption The absolute value of the price elasticity of demand for Stork ice cream is 4. Suppose you’re told that following a price increase, quantity demanded fell by 10 percent. What was the percentage change in price that brought about this change in quantity demanded 2.5 If, for a given percentage increase in price, quantity supplied increases by a proportionately larger percentage, then supply is elastic If, for a given percentage decrease in price, quantity supplied decreases by a proportionately smaller percentage, then supply is relatively inelastic If the demand for a life-saving drug was perfectly inelastic and the price doubled, the quantity demanded would remain constant A service station owner in Staten Island, New York, was worried that raising the price of gasoline would cause the quantity demanded to fall by so much that he would be in a worse situation than if he did not raise the price. If raising the price of gasoline would cause the owner to receive less total revenue from the sale of gasoline, the demand for gasoline is elastic If 50 units are sold at a price of \$20 and 80 units are sold at a price of \$15, what is the absolute value of the price elasticity of demand? Use the midpoint formula. 1.62 For consumers who opt to pay a \$10 monthly fee to have unlimited texting on their cell phones, but choose not to pay a \$5 monthly fee to have unlimited call minutes, the unlimited texting option has a ________ than the unlimited minutes option. lower price elasticity of demand If the cross-price elasticity of demand for computers and software is negative, this means the two goods are complements Refer to Figure 6-4. Which of the following statements is true about the price elasticity of demand? The elastic portion of a straight-line downward sloping demand curve corresponds to the segment above the midpoint. Based on the information above, the demand for Hendrix College education is relatively inelastic (P+, D+) At a price of \$100, Beach side Canoe Rentals rented 11 canoes. When it increased its rental price to \$125, 9 canoes were rented. Calculate the absolute value of the price elasticity of demand for canoe rentals, using the midpoint formula. 0.9 Refer to Figure 6-3. Using the midpoint formula, calculate the absolute value of the price elasticity of demand between e and f. 3.125 When demand is elastic, a fall in price causes total revenue to rise because the increase in quantity sold is large enough to offset the lower price. Jaycee Jeans sold 40 pairs of jeans at a price of \$40. When it lowered its price to \$20, the quantity sold increased to 60 pairs. Calculate the absolute value of the price elasticity of demand. Use the midpoint formula. 0.6 Suppose the demand for milk is relatively inelastic. What happens to sales revenue if the government imposes a price floor above the free market equilibrium price in the market for milk? Sale revenue rises Refer to Figure 6-4 At the midpoint of the demand curve, in absolute value, the price elasticity coefficient is one If a 35 percent increase in price of golf balls led to an 42 percent decrease in quantity demanded, then the demand for golf balls is relatively elastic (P+, D-) Refer to Figure 6-7. Use the midpoint formula to calculate the value of the price elasticity of supply between g and h? 2 Suppose a hurricane decreased the supply of oranges so that the price of oranges rose from \$120 a ton to \$180 a ton and quantity sold decreased from 800 tons to 240 tons. What is the absolute value of the price elasticity of demand? Use the midpoint formula. 2.69 Which of the following statements is true about the price elasticity of demand along a downward sloping linear demand curve It is elastic at high prices and inelastic at low prices If the price elasticity of demand for canned soup is estimated at 1.62. What happens to sales revenue if the price of canned soup rises? It falls Jenna runs a small boutique in Capitola. She tells one of her suppliers that she is willing to pay \$6 for a pair of wool hand warmers and not a dime more. On the basis of this information, what can you conclude about her price elasticity of demand for wool hand warmers? it is perfectly elastic Price elasticity of demand measures how responsive quantity demanded is to a change in price. Refer to Figure 6-4. The inelastic segment of the demand curve lies below the midpoint of the curve Economists estimated that the price elasticity of beer is 0.23 and the income elasticity of beer is -0.09. This means that an increase in the price of beer will lead to an increase in revenue for beer sellers and beer is an inferior good. Last year, Sefton purchased 60 pounds of potatoes to feed his family of five when his household income was \$30,000. This year, his household income fell to \$20,000 and Sefton purchased 80 pounds of potatoes. All else constant, Sefton’s income elasticity of demand for potatoes is negative, so Sefton considers potatoes to be an inferior good. Total revenue equals price times quantity sold

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