DISC: Elasticity
United States – BPROG: Reflective Thinking – BPROG: Analysis
Elasticity as a General Concept
174. After a number of acquisitions, Air American controls 75 percent of the U.S. market. It has been charged with
“monopolizing” the U.S. air markets by the Justice Department. In its defense, the airline would want to introduce
evidence that
a.
cross elasticities for air and rail travel were very high.
b.
income elasticities for air and rail travel were very high.
c.
price elasticity for air, rail, and auto travel were negative.
d.
management always considered the public interest when setting prices.
DISC: Elasticity
United States – BPROG: Reflective Thinking – BPROG: Analysis
Elasticity as a General Concept
BLOOMS: Application
175. A rightward shift in the demand curve for a product will ordinarily result from
a.
a decrease in the advertising budget.
b.
a decrease in the price of a competing product.
c.
an increase in consumer income.
d.
an increase in the price of a complementary good.
DISC: Elasticity
United States – BPROG: Analytic
Supply and demand
Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure
BLOOMS: Application
176. Scientific evidence suggests that consumption of foods rich in fiber lowers cholesterol. As a result, the demand for
bran increases at every price by 5,000 bushels and the supply curve for bran is perfectly price elastic. The quantity of bran
consumed will
a.
not change.
b.
change unless the demand curve is perfectly inelastic.
c.
rise by exactly 5,000 bushels.
d.
not rise by exactly 5,000 bushels unless the demand curve is perfectly inelastic.
DISC: Elasticity
United States – BPROG: Reflective Thinking – BPROG: Analysis
Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure
177. If the demand for gasoline becomes more elastic over time,
a.
b.
c.
d.
DISC: Elasticity
United States – BPROG: Reflective Thinking – BPROG: Analysis
178. Which of the following will lead to a movement along the same demand curve?
a.
Changes in income.
b.
Changes in the price of substitute goods.
c.
Changes in the price of the product.
d.
Changes in the preference of the consumer.
DISC: Supply and demand
United States – BPROG: Reflective Thinking – BPROG: Analysis
Supply and demand
Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure
179. As a result of a decline in interest rates and a rise in household income, the demand curve for housing has shifted to
the right, but has retained the same slope. Consequently, the elasticity of demand for housing
a.
has declined.
b.
has increased.
c.
has remained unchanged.
d.
cannot be compared.
DISC: Elasticity
United States – BPROG: Reflective Thinking – BPROG: Analysis
Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure
180. Historical data on prices and quantities sold do not provide the basis for drawing an accurate demand curve because
a.
reporters who gather these data are often wrong.
b.
factors other than price may change over time.
c.
they do not include measures of price close to the quantity axis.
d.
they sometimes tend to be clustered around one point.
DISC: Supply and demand
United States – BPROG: Reflective Thinking – BPROG: Analysis
Supply and demand
Appendix: How Can We Find a Legitimate Demand Curve from Historical Statistics?
181. Regarding the price elasticities of demand, which of the following statements is true?
a.
Price elasticities vary considerably from product to product
b.
Luxurious goods are generally less price elastic.
c.
Necessities are generally more price elastic.
d.
All of these statements are true.
DISC: Elasticity
United States – BPROG: Analytic
Elasticity: The Measure of Responsiveness
182. The relationships between elasticity and total revenue hold because:
a.
total revenue equals price divided by quantity demanded
b.
total revenue equals price times quantity demanded
c.
a drop in price has two opposing effects on the two components of the formula
d.
both b and c
DISC: Elasticity
United States – BPROG: Analytic
Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure
183. If the price of potatoes is reduced, consumers likely:
a.
significantly more potatoes
b.
significantly fewer potatoes
c.
roughly the same quantity of potatoes
d.
an unknown quantity of potatoes; in this situation, consumers’ actions cannot be predicted
c
Moderate
DISC: Elasticity
United States – BPROG: Analytic
Elasticity
What Determines Demand Elasticity?
Essay
184. Define the following terms and explain their importance to the study of economics.
a.
price elasticity
b.
complements
c.
substitutes
d.
cross elasticity
e.
supply elasticity
used in antitrust analysis in determining the boundary of a market.
term is used extensively in economic predictions.
Easy
United States – BPROG: Analytic
The study of economics, and defi – The study of economics, and definitions of economics
185. Explain what happens to the magnitude of price elasticity of demand as price increases along a straight-line demand
curve.
186. The Sandy Deli operates near a college campus. It has been selling 325 sandwiches a day at $1.75 each and is
considering a price cut. It estimates 450 sandwiches would sell per day at $1.50 each. Calculate the marginal revenue of
such a price cut and the elasticity between the two points.
187. The current price of concert t-shirts is $20 each, and the company has been selling 400 per week. If price elasticity is
2.5 and the price changes to $21, how many t-shirts will be sold per week?
188. Suppose that elasticity has been reliably measured as 1.55 and the unit price decreases from $20 to $17.50. How
much will quantity demanded increase?
189. The following table contains information regarding price and output for a firm. For each point except the first,
calculate the elasticity between it and the point above.
Price
Quantity
Elasticity
$7
10
_____
6
20
_____
5
30
_____
4
40
_____
3
50
_____
2
60
_____
1
70
_____
Price
Quantity
Elasticity
$7
10
(None)
6
20
5
30
4
40
1.286
3
50
.7778
2
60
.4545
1
70
1
Moderate
Elasticity
190. In a past fare war, U.S. Air reduced the price of its Charlotte, North Carolina, to New York City round-trip fare from
$198 to $138 to match American Airlines. U.S. Air did so reluctantly, saying it would cost the company millions of
dollars in revenue. American, on the other hand, believed the fare cut would increase its revenue. What different
assumptions about the underlying price elasticity of demand did each airline believe true?
1
Moderate
Elasticity
191. What is an optimal decision?
192. For each pair of goods, explain which is more elastic: toothpicks vs. cars; electricity vs. yachts; IBM computers vs.
Apple computers.
193. Arrange the following goods from least to most elastic, explaining your ordering: gasoline, Exxon gas, Exxon gas at
a particular gas station.
194. A unit-elastic demand curve never touches or crosses either of the axes. Why?
195. Along a straight-line demand curve, why does the price elasticity of demand grow steadily smaller as we move from
left to right?
196. What is the shape of a perfectly elastic demand curve? Explain its significance for a seller.
197. Why is it customary to report price elasticity of demand in absolute value terms, while cross elasticities and income
elasticities are reported with their sign attached?
198. Using the general concept of elasticity, would you expect the elasticity of demand for advertising to be positive or
negative? Explain.
199. Sun City’s public bus line has been operating at a deficit. The city decides to raise the fare from 50 cents to 75 cents,
anticipating enough additional revenue to cover the deficit. What assumption is the city making about price elasticity?
200. What are the main determinants of demand elasticity? Explain their importance.
201. How might a court use cross elasticity in an antitrust case?
202. How might a market research analyst use measures of elasticity-price, cross, and income-in her work? Explain.
203. How can one tell from cross elasticity what kind of relationship exists between any two goods?
204. The cross elasticity between two goods has been measured at −1.2. How are the goods related? Explain. Give an
example of goods for which this might be a reasonable measure of cross elasticity.
205. What does cross elasticity of demand between goods reveal about the nature of relationship between them?
206. If the income of buyers increases and a company maintains the same price, what is the most likely impact on quantity
sold? Explain. Draw a graphical display of the result.
207. Specifically, what might cause the quantity demanded of a particular good to double at a particular price?
208. In the DuPont cellophane case, rivals accused DuPont of monopolizing cellophane. DuPont claimed that the relevant
market was flexible wrapping material, such as wax paper and aluminum foil, rather than just cellophane. DuPont won the
case. What type of evidence constituted DuPont’s defense?
209. If Polaroid wanted damages against Kodak for infringing on its instant development film process, and the courts
found a high positive cross elasticity between purchases of Polaroid instant film and 35mm regular film, would that have
strengthened or weakened Polaroid’s claim against Kodak?
210. Why are time series data unlikely to give an accurate estimate of demand?
211. The sales manager of a retail outlet suggests that the best way to increase customers is to have a sale. If a 10 percent
price cut doesn’t bring in enough customers, then he’ll cut prices 20 percent. Increased cash flow should take care of
profits. Do you agree? Explain.
212. Would a profit-maximizing firm sell at a price where demand is inelastic? Explain.
213. How would an increase in cigarette taxes succeed according to the following criteria: collecting a large amount of tax
revenue; distorting demand as little as possible; discouraging consumption of harmful commodities?
214. Why do economists measure responsiveness of demand to price in percentage changes rather than in absolute
changes?