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Exam 5: Elasticity and Its Application

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Question 1

Multiple Choice

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In general, elasticity is:

A) the friction that develops between buyer and seller in a market
B) a measure of how much government intervention is prevalent in a market
C) a measure of how much buyers and sellers respond to changes in market conditions
D) a measure of the competitive nature of a market

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

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Question 2

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The price of a hamburger increases by 25 per cent and the quantity of hamburgers demanded per week falls by 50 per cent. The price elasticity of demand is two.

A) True
B) False

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Question 3

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What is the definition of the income elasticity of demand. What does it measure? How can it be used to determine whether a good is normal or inferior. What happens to the demand for an inferior good is income decreases?

A good experiences a shift of the demand curve so that it is now flatter than before. Suppose that the market price and quantity demanded does not change. This means that the good has now become inelastic.

A government program that reduces land under cultivation hurts farmers but helps consumers.

If the cross-price elasticity of demand between goods X and Y is 2.4 this means:

Define cross-price elasticity of demand. What does it measure? What does it mean if the cross-price elasticity is negative or positive?

Toasted muesli would tend to have very elastic demand because:

The concept of the slope is the best way to measure the responsiveness of demand to changes in its determinants.

Draw a linear, downward-sloping demand curve on a graph. Identify the part of the demand curve that is elastic, the part that is inelastic and the part that is unit elastic. At what price on a linear demand curve will total revenue be highest?

If the price of forest-products rises, the price elasticity of supply will be more responsive in the long run than in the short run.

Suppose there is a 10 per cent increase in the price of fish and a resulting five per cent decrease in the quantity of fish demanded. The price elasticity of demand for fish is:

Graph 5-1 -In Graph 5-1, the point on the demand curve labelled B represents the:

Luxuries tend to have small income elasticities and necessities tend to have higher, negative income inelasticities.

The cross-price elasticity of demand measures how the quantity demanded of a good changes:

Supply is said to be inelastic if the quantity supplied responds substantially to changes in the price and elastic if the quantity supplied responds only slightly to price.

If two demand curves with different slopes pass through the same point, which demand curve will have the greater price elasticity of demand if the price falls from that point?

If for a given price, the supply curve becomes flatter, the elasticity of supply at this point will:

Using the midpoint method, compute the elasticity of demand between points A and B. Is this portion of the curve elastic or inelastic? Interpret your answer with regard to price and quantity demanded. Now compute the elasticity of demand between points B and C. Is this portion of the curve elastic or inelastic?

A linear demand curve always has the same elasticity over its entire length.