Exam 5: Elasticity and Its Application

In the case of a downward linear demand curve, total revenue is always maximised at:

Last year, Amy bought two lenses for her SLR camera. Her income was $30 000. This year her income is $40 000. She has bought four new lenses for her camera. All else being constant it is obvious:

A demand curve that is horizontal is perfectly inelastic. This means the elasticity is equal to one.

Graph 5-2 -Refer to Graph 5-2. If there is a four per cent decrease in the price of a good and this leads to a 12 per cent increase in the quantity demanded then the price elasticity is:

If you enjoy buying luxury goods more than buying groceries, your income elasticity of demand for luxury goods will be less elastic than for groceries.

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:

The local pizza restaurant makes such great bread sticks that consumers do not respond much to a change in the price. If the owner is only interested in increasing revenue, he should:

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

Economists use the concept of price elasticity of demand to measure how much:

The discovery of a new hybrid wheat would tend to increase the supply of wheat. Under what conditions would wheat farmers realise an increase in revenue?

Use the graphs below to answer the following questions. a. Determine equilibrium price and quantity for each graph. b. Given demand and supply, what would total revenue be for each graph? c. Assume that supply shifts to the left on both graphs by 100, raising price. Given the new equilibrium price and equilibrium quantity, what would total revenue be for each graph? d. What do your answers to part c tell you about the relationship between elasticity of demand and total revenue?

The demand curve for a market may be different depending on how widely the market is defined.

A perfectly inelastic demand implies that:

If the price of one good goes up, and this causes the quantity demanded of another good to go down, the cross-price elasticity of demand will be negative.

If a supply curve is horizontal, it is said to be perfectly elastic, and the price elasticity of supply approaches infinity.

Andy has discovered a new way to make clothes pegs more cheaply than his competitors. He believes that since he can now sell his clothes pegs at a lower price than other clothes-peg providers on the market, he will be able to increase his revenue by attracting more customers. He estimates the price elasticity of demand for clothes pegs to be 0.7. What will happen to his total revenue if he decreases the price of his clothes pegs? What should Andy do?

Economists compute the price elasticity of demand as the:

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

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

The president of the university is concerned about increasing operating costs and decides to raise tuition fees in an attempt to increase university revenue. Do you think the rise in tuition fees will accomplish the president's goal?