Exam 5: Elasticity and Its Application

The production of methamphetamine (meth) is a social problem in the Midwest. Iowa is considering two potential programs: Operation Methbust would increase the number of sheriffs' deputies to search out and destroy methamphetamine labs. Operation Say No to Meth would increase the training required of public school teachers so that they could better educate students about the health risks of using meth. Assuming that each program were successful, which of the following statements is correct?

If the price elasticity of demand for aluminum foil is 1.45, then a 2.4% decrease in the price of aluminum foil will increase the quantity demanded of aluminum foil by

If the quantity supplied responds only slightly to changes in price, then

Table 5-3 Consider the following demand schedule. -Refer to Table 5-3. Using the midpoint method, in which range is demand most elastic?

Consider the following pairs of goods. For which of the two goods would you expect the demand to be more price elastic? 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

If the demand for textbooks is inelastic, then an increase in the price of textbooks will

Suppose that gasoline prices increase dramatically this month. Lola commutes 100 miles to work each weekday. Over the next few months, Lola drives less on the weekends to try to save money. Within the year, she sells her home and purchases one only 10 miles from her place of employment. These examples illustrate the importance of

If the price elasticity of supply is 0.4, and a price increase led to a 5% increase in quantity supplied, then the price increase is about

If sellers respond to very small changes in price by adjusting their quantity supplied by extremely large amounts, the price elasticity of supply approaches

Scenario 5-6 Suppose the government is concerned about firms in the United States importing illegal caviar. As a result, the government increases border patrols to catch illegal shipments. U.S. Customs agents perform DNA testing on the caviar to determine if it comes from endangered species of fish. If so, the government destroys the caviar. -Refer to Scenario 5-6. What would we expect to observe in the caviar market?

For a good that is a necessity, demand

If the price elasticity of demand for a good is 5, then a 10 percent increase in price results in a

Scenario 5-1 Suppose that when the average college student's income is $10,000 per year, the annual quantity demanded of Patty's Pizza is 50 and the annual quantity demanded of Sue's Subs is 80. Suppose that when the price of Patty's Pizza increases from $8 to $10 per pie, the quantity demanded of Sue's Subs increases from 80 to 100. Suppose also that when the average student's income increases to $12,000 per year, the annual quantity demanded of Patty's Pizza increases from 50 to 60. -Refer to Scenario 5-1. Using the midpoint method, the cross price elasticity of demand is

For a good that is a luxury, demand

The demand for desserts tends to be more inelastic than the demand for red velvet cake.

If the price elasticity of supply is 0.8, and price increased by 5%, quantity supplied would

If a firm is facing elastic demand, then the firm should decrease price to increase revenue.

For which pairs of goods is the cross-price elasticity most likely to be negative?

Suppose the price elasticity of demand for good A is 1.25. If the price of good A increases by 20%, what will be the resulting percentage change in quantity demanded for good A?

Suppose that when the price of good X falls from $6 to $4, the quantity demanded of good Y rises from 30 units to 40 units. Using the midpoint method, the cross-price elasticity of demand is