Exam 6: Elasticity: the Responsiveness of Demand and Supply

Suppose the price of gasoline in July 2004 averaged $1.35 a gallon and 15 million gallons a day were sold. In October 2004, the price averaged $2.15 a gallon and 14 million gallons were sold. If the demand for gasoline did not shift between these two months, use the midpoint formula to calculate the price elasticity of demand. Indicate whether demand was elastic or inelastic.

Which of the following is not a determinant of a good's price elasticity of demand?

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

If demand is inelastic, the absolute value of the price elasticity coefficient is greater than one.

If a firm raised its price and discovered that its total revenue fell, then the demand for its product is

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?

What factors would make you more sensitive or less sensitive to price when purchasing gasoline?

Suppose when the price of jean-jackets increased by 10 percent, the quantity supplied increased by 16 percent. Based on this information the price elasticity of supply of jean-jackets is

Seth is a competitive body builder. He says he has to have his 12-oz package of protein powder to "feed his muscles" every day. On the basis of this information, what can you conclude about his price elasticity of demand for protein powder?

If the income elasticity for canned food is 0.8, then canned food is an inferior good.

Last year, Sefton purchased 60 pounds of potatoes to feed his family of five when his household income was $30,000. This year, his household income fell to $20,000 and Sefton purchased 80 pounds of potatoes. All else constant, Sefton's income elasticity of demand for potatoes is

Which of the following statements is true?

Over longer periods of time, increases in oil prices provide firms with incentives to explore and recover oil. What does this indicate about the long-run price elasticity of supply for oil?

If 50 units are sold at a price of $20 and 80 units are sold at a price of $15, what is the absolute value of the price elasticity of demand? Use the midpoint formula.

In September 2006, the Food and Drug Administration recommended that Americans avoid eating bagged raw spinach in the wake of an outbreak of E. coli bacteria. Following this recommendation, the food industry looked at alternatives and many turned to arugula. One Chicago distributor claimed, "The sale of the stuff has gone through the roof." Based on this information,

Figure 6-4 -Refer to Figure 6-4. Which of the following statements is true about the price elasticity of demand?

Studies show that the income elasticity of demand for wine is approximately five. What does this mean?

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. Suppose the price elasticity of demand for cocaine is -0.5. 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.

Table 6-6 -Refer to Table 6-6. 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.

Bringing oil to the market is a relatively long and costly process. The whole process from exploration to pumping significant amounts of oil can take years. What does this indicate about the price elasticity of supply for oil?