Exam 5: Elasticity and Its Application

Table 5-1 Suppose a coffee shop faces the following demand schedule for coffee. $\begin{array}{|c|c|}\hline \text { Price per coffee (\$) } & \text { Quantity demanded } \\\hline 4.00 & 200 \\\hline 3.00 & 600 \\\hline 2.50 & 800 \\\hline 2.00 & 1000 \\\hline 1.50 & 1200 \\\hline 1.00 & 1400 \\\hline\end{array}$ -Refer to Table 5-1.Notice that if the price is lowered from $2.00 to $1.50, total revenue falls from $2000 to $1800.This means that over this price range, the demand for coffee must be:

A good experiences a shift of the demand curve so that it is now flatter than before.Suppose that the market price and quantity demanded does not change.This means that the good has now become inelastic.

Drug interdiction, which reduces the supply of drugs, may increase drug-related crime because the demand for drugs is inelastic.

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

If a person has very little concern for her health, her demand for healthcare would tend to be:

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

At the midpoint of a downward-sloping linear demand curve, elasticity would be:

If the price elasticity of demand is elastic, reduced demand for a good will create a greater fall in revenue than the increase in revenue created by the increase in price.

Demand is perfectly inelastic if elasticity is:

Price elasticity over any range of a demand curve is measured by the slope of the demand curve over that range.

Suppose that the slope of the demand curve becomes flatter at a given price.This means that the price elasticity of demand at this point will:

The demand for basic foodstuffs such as wheat is usually elastic.

The demand for rare butterflies tends to be income:

Table 5-2 Quantities urchased $\begin{array}{|c|c|c|}\hline \text { Income(\$) } & \text { Good X } & \text { Good Y } \\\hline 30000 & 2 & 20 \\\hline 50000 & 5 & 10 \\\hline\end{array}$ -Refer to Table 5-2.Good X is:

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

The demand for a good is inelastic if the quantity demanded decreases only a small amount after a small increase in the price.

A perfectly inelastic demand implies that buyers:

When demand is inelastic, a decrease in price will cause:

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

In general, a firm will be able to generate the greatest response to a price increase: