Exam 6: Elasticity: the Responsiveness of Demand and Supply

For each pair of items below, determine which product would have the higher price elasticity of demand (in absolute value). a. Blood pressure medicine for someone who has high blood pressure and the purchase of Clairol hair coloring product. b. A new Ford Fusion or a tank of gas for your current car. c. A Seiko watch or watches in general.

When there are few substitutes available for a good, demand tends to be relatively inelastic.

Calculate the income elasticity if an 8 percent increase in income leads to a 4 percent increase in quantity demanded for organic produce.

If the absolute value of the price elasticity of demand for aspirin equals 0.8, then

A demand curve which is ________ represents perfectly inelastic demand, and a demand curve which is ________ represents inelastic demand.

If a supply curve is a horizontal line, supply is said to be

Necessities tend to have more inelastic demands than luxuries.

The price elasticity of supply measures

If the demand for a product is elastic, the quantity demanded changes by a smaller percentage than the percentage change in price.

Assume that you own a small boutique hotel. In an attempt to raise revenue you reduce your rates by 20 percent. However, your revenue falls. What does this indicate about the demand for your boutique hotel rooms?

Which of the following statements is true?

Figure 6-1 -Refer to Figure 6-1. The demand curve on which elasticity changes at every point is given in

Which of the following would result in a higher absolute value of the price elasticity of demand for a product?

A newspaper story on the effect of higher milk prices on the market for ice cream contained the following: "As a result [of the increase in milk prices], retail prices for ice cream are up 4 percent from last year. . . . And ice cream consumption is down 3 percent." Source: John Curran, "Ice Cream, They Scream: Milk Fat Costs Drive Up Ice Cream Prices," Associated Press, July 23, 2001. Based on the information given, what is the price elasticity of demand for ice cream?

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