Exam 6: Elasticity: the Responsiveness of Demand and Supply

The U.S.government's focus on supply reduction efforts in its "war on drugs" has been relatively unsuccessful at addressing illegal drug use.Some economists believe that a successful anti-drug program must concentrate on reducing demand; for example, through drug education and voluntary treatment programs for addicts. a.What will happen to the equilibrium price, quantity, and total revenue from cocaine sales if the government succeeds in its efforts to reduce demand? What is likely to happen to the incentive to sell cocaine? b.Suppose the government continues to concentrate its efforts on supply reduction and is able to reduce the supply of cocaine.As a result of the reduction in supply the price of cocaine increases by 25 percent.If the price elasticity of demand is -0.5, what is likely to happen to the incentive to sell cocaine? c.Based on your answers, explain why one approach might be preferred over the other.

We should never assume that an inelastic demand curve is a perfectly inelastic demand curve because

Table 6-7 -Refer to Table 6-7. a.Using the information in the table, calculate the income elasticity of demand for good X and characterize the good.Use the midpoint formula. b.Can you calculate the income elasticity of demand for good Y? If you can, show your calculation and characterize the good.If you cannot, explain why.

A recent study indicated that "Stricter college alcohol policies such as raising the price of alcohol, or banning alcohol on campus, decrease the number of students who use marijuana." This indicates that the cross-price elasticity between alcohol and marijuana is positive.

According to an article in the Wall Street Journal, unlike airlines, even elite hotels don't have sophisticated systems that can react quickly to changes in demand.Even if they could, many hoteliers say people don't respond that much to lower rates."We've tested this, cutting our rates by $50 [per night], and we didn't see an appreciable response in occupancy," says Jim Schultenover, a vice president for Ritz-Carlton. Source: Jesse Drucker, "In Times of Belt-Tightening, We Seek Reasonable Rates," Wall Street Journal, April 6, 2001. Based on the information above, the demand for hotel rooms is

There are a limited number of original Picasso paintings.This means that the supply of original Picasso paintings is perfectly elastic.

If tolls on a toll road can be raised significantly before commuters will consider using a free alternative, demand for using the toll road must be

Suppose a hurricane decreased the supply of oranges so that the price of oranges rose from $120 a ton to $180 a ton and quantity sold decreased from 800 tons to 240 tons.What is the absolute value of the price elasticity of demand?

Which of the following products comes closest to having a perfectly inelastic demand?

A linear downward-sloping demand curve has price elasticities (in absolute values)that

Figure 6-8 -Refer to Figure 6-8.Identify the two goods which are complements.

To calculate the price elasticity of supply, we divide

Suppose the demand for milk is relatively inelastic.What happens to sales revenue if the government imposes a price floor above the free-market equilibrium price in the market for milk?

The market demand for The Federalist Papers is likely to be more elastic than the market demand for a best-selling mystery novel.

Suppose the supply curve for digital cameras shifts to the right.This will cause a relatively large decrease in the price of digital cameras if both demand and supply are inelastic.

Which of the following items is likely to have the highest income elasticity of demand?

The midpoint formula is used to measure the elasticity of demand between two points on a demand curve

At a price of $8 per dozen, Chuy sells 40 dozen homemade tamales per week.When he raised his price to $12 per dozen, he still sold 40 dozen per week.Based on this information, the demand for his tamales is

Suppose the governor of California has proposed increasing toll rates on California's toll roads, and has presented two possible scenarios to implement these increases.Following are projected data for the two scenarios for the California toll roads: Scenario 1: Toll rate in 2015: $10.00.Toll rate in 2019: $22.50 For every 100 cars using the toll roads in 2015, only 81.6 cars will use the toll roads in 2019. Scenario 2: Toll rate in 2015: $10.00.Toll rate in 2019: $17.50 For every 100 cars using the toll roads in 2015, only 96.2 cars will use the toll roads in 2019. a.Using the midpoint formula, calculate the price elasticity of demand for Scenario 1 and Scenario 2. b.Assume 10,000 cars use California toll roads every day in 2015.What would be the daily total revenue received for each scenario in 2015 and in 2019? c.Is demand under Scenario 1 and under Scenario 2 price elastic, inelastic, or unit elastic.Briefly explain. (For above questions, assume that nothing other than the toll change occurs during the time frame listed that would affect consumer demand.)

Suppose the value of the price elasticity of supply is 4.What does this mean?