Exam 4: Subtleties of the Supply and Demand Model: Price Floors, Price Ceilings, and Elasticity

When demand shifts, knowing supply elasticity can help us anticipate how big the changes in price and quantity might be.

If the price elasticity of demand is 5.3, demand is said to be

The income elasticity of demand

Last year, Keith purchased 20 pounds of beef when his income was $30,000. This year his income is $40,000 and he purchased 40 pounds of beef. Which of the following statements is true?

Suppose the government decides to impose a binding price ceiling on milk below the equilibrium price. (A)What happens to quantity supplied and quantity demanded? (B)Draw this situation in a diagram, labeling the surplus or shortage that results. (C)How does the total amount spent on milk differ from the situation without the price ceiling?

If supply is perfectly elastic, then the supply curve must

Income elasticity of demand is the percentage change in

Given the following income elasticities of demand, would you classify the good as a luxury, necessity, or inferior good? (A)Salt: elasticity = .3. (B)Potatoes: elasticity = -.1. (C)Frozen dinners: elasticity = .9. (D)Restaurant meals: elasticity = 1.4

Price elasticity of supply is 1 minus the price elasticity of demand.

Explain why a 10 percent tax would be more destructive in an industry where the demand for the product is highly price elastic as opposed to another industry where product demand is price inelastic.

The price elasticity of demand is a more precise measure of the slope of a demand curve.

Which of the following statements about price ceilings is false?

Because there are few substitutes for insulin, we expect the price elasticity of demand for insulin to be fairly elastic.

When price rises, total revenue

(A)If the demand curve shifted to the right, along which of the two curves would the equilibrium price increase the most? (B)If the demand curve shifted to the left, along which of the two supply curves would the equilibrium quantity decrease the most? (C)Which of the two supply curves would better represent supply in the short run? (D)Of the two supply curves, which one would be considered the less elastic?

The measurement of the price elasticity of demand is unit free.

Exhibit 4-1 -Refer to Exhibit 4-1. The price elasticity of demand is most likely to be inelastic

Explain, in words, the difference between a low price elasticity of demand and a high price elasticity of demand for a 15 percent increase in price.

When a given percentage change in the price leads to a larger percentage change in the quantity supplied, supply is said to be

The size of the price elasticity of demand is important to determine how much market price will change in response to a shift in the supply.