Exam 5: Elasticity and Its Application

Suppose that after a five per cent increase in the price of timber, a forestry company increases its supply of timber by 10 per cent in the next three months, and 15 per cent by 12 months. This means that the elasticity of supply is _____.

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?

If the demand for illegal drugs is inelastic, drug education campaigns should:

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

The price of product X is reduced from $45 to $20 and, as a result, the quantity demanded increases from 20 to 25 units. From this we can conclude that the demand for X in this price range:

Graph 5-3 -In Graph 5-3, as price falls from P_A to P_B, which demand curve is most elastic?

If price changes and total revenue changes in the opposite direction, we can conclude that demand is relatively elastic.

Price elasticity of supply measures how much the quantity supplied responds to changes in demand.

Consider the following pairs of goods. Which would you expect to have the more elastic demand? Why? a. water or diamonds b. insulin or nasal decongestant spray c. food in general or breakfast cereal d. gasoline over the course of a week or gasoline over the course of a year e. personal computers or IBM personal computers

Graph 5-4 -Refer to Graph 5-4. The total revenue at P₁ is represented by area(s):

As price elasticity of demand increases, the demand curve gets steeper and steeper.

If sellers do NOT respond at all to a change in price:

Cross-price elasticity of demand is calculated as:

Table 5-2 Quantities purchased -Refer to Table 5-2. Good Y is:

The income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in income.

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

Suppose a producer is able to separate customers into two groups, one having a price inelastic demand and the other having a price elastic demand. If the producer's objective is to increase total revenue, she should:

The demand for basic foodstuffs such as rice or flour is usually elastic.

Graph 5-1 -In Graph 5-1, the section of the demand curve labelled A represents the:

Graph 5-5 -In Graph 5-5, which supply curve is most likely the long-run supply curve?