Exam 3: Demand Elasticities

A consumer is in equilibrium, that is, a consumer is maximizing her utility when marginal utility and price are equal for each of the goods the consumer purchases.

When a consumer moves from a lower to a higher indifference curve, the marginal rate of substitution automatically increases.

Assume the cross price elasticity of demand between peanut butter and grape jelly is negative. a. Does the cross price elasticity coefficient indicate that peanut butter and grape jelly are substitutes or complements? Why? b. Describe the effect associated with an increase in the price of peanut butter on the the demand for both peanut butter and grape jelly.

Consider two goods, X and Y, where X is measured on the horizontal axis and Y is measured on the vertical axis. All else constant, a decrease in the price of X will cause the consumer's budget constraint to:

For a particular product, a demand elasticity is a quantitative measure that shows:

Assuming the demand curve in question is downward sloping, the calculated price elasticity of demand will always be negative.

When the government decides to impose a tax on sellers of a good or service, sellers try to pass the tax on to consumers by raising the price of the good being sold. Assume the government decides to place a $1 tax on each unit of a good sold, e.g., tires. Using the simple model of supply and demand, illustrate what would happen to the price and quantity of tires sold. Would the amount of tax paid by the consumer as opposed to the producer) be greater when demand is elastic or inelastic? Why?

The results of studies of the tobacco industry suggests that college and secondary school students who smoke are much more likely to respond to a change in price than adults who smoke.

Consider the market for gasoline in a moderately large city. All else constant, it would be reasonable to conclude that the price elasticity demand for any individual gas station would be higher than the price elasticity of demand for gas in general.

Assume the income elasticity of a good has been calculated to be +0.83. Based on this information, we can infer that the good is:

Suppose the demand for meals at a medium-priced restaurant is elastic. If the management of the restaurant is considering raising prices, it can expect a relatively:

Assume a consumer is currently purchasing a combination of goods, X and Y, that maximizes her utility given her budget constraint, i.e., MRS_X,Y = P_X/P_Y. Now assume that there is a decrease in the price of Y. In this case, to once again maximize her utility, the consumer will want to adjust her purchases of X and Y such that:

According to the text, the price elasticity of demand for bath tissue has been estimated to be -2.42. This implies that a 10 percent decrease in the price of bath tissue would cause the quantity demanded of bath tissue to:

The slope of the budget constraint:

Calculate the arc price elasticity of demand for wheat in the two situations below: The Wheat Market Farmer Brown's Wheat Old price; $3.40/bu Old price; $3.40/bu Old quantity; 2.5 billion bu Old quantity; 28,000 bu New price; $3.20/bu New price; $3.20/bu New quantity; 2.525 billion bu New quantity; 35,000 bu Can you account for the difference in elasticities?

If the cross-price elasticity of demand between two goods is positive, we can assume that the two goods in question are:

Assume that, over time, engineers develop new residential furnaces that can run on different types of fuels, e.g., natural gas, electricity, propane, and fuel oil, simply by flipping a switch on the furnace. How would this technological change affect the price elasticity of demand for natural gas? Why?

If the percentage change in quantity demanded is greater than the percentage change in price, we would say that over this range, demand is:

For a linear demand function, slope and the price elasticity of demand are equal.

Observations of consumer behavior suggest that when the price of gasoline rose above $3.50 per gallon, consumer demand for gas became considerably more price elastic.