Karen's income elasticity of demand for bottles of her favorite
wine is 1.5. Currently her income is equal to $50,000 and she
normally buys 500 bottles per year (Unless Karen entertains a
lot she has a problem). If her income increases to $55,000 how
many bottles of her favorite wine will she buy per year?
A firm learns that the own price elasticity of a product it manufactures
is 3.5. What would be the correct action for this firm to take
if it wishes to raise its total revenue?
Raise the price because demand for the product is inelastic.
We need information on the firm's cost structure in order to answer
this question.
Raise the price because demand is elastic.
Lower the price because demand is inelastic.
A monopolist learns that the own price elasticity of a product
it manufactures is 0.5. What would be the correct action for this
firm to take if it wishes to increase its profits?
Lower the price because demand for the good is elastic.
We need information on the firm's cost structure in order to answer
this question.
Raise the price because demand is elastic.
Lower the price because demand is inelastic.
Cheryl's income elasticity for good A is -2.5. Her current income
is $100,000 and she normally buys 100 units of good A per year.
If her income increases to $110,000 how many units of good A will
she buy?
After paying an economist to estimate the price elasticity of
demand for socks, sock manufacturers, expecting to increase revenues,
decide to reduce the price of socks. The estimate of demand elasticity
could have been:
An improvement in the manufacturing technology for Z.
More firms begin producing product Z.
A change in consumer tastes that causes consumers to feel that
consuming Z is an important enhancement to their image.
Candice currently spends $200 per month on long distance telephone
calls. If the telephone company decides to reduce the rate from
10 cents a minute to 5 cents a minute then:
whether she spends more or less than $200 per month depends on
whether long distance telephone calls are a normal good or an
inferior good.
the fact that demand curves are downward-sloping implies she will
spend more than $200 per month on long distance telephone calls.
she will spend less than $200 per month on long distance telephone
calls because the new price is an effective price floor.
she will spend more than $200 per month on long distance telephone
calls because her demand shifted out.
On the front page of the September 27, 1996 New York Times is an article with the headline ``U.S. Census Finds First Income
Rise in Past Six Years.'' The text reports that ``much of the
rise in household incomes was in the Midwest.'' Based on this
information alone, what would you expect has been happening to
equilibrium prices and quantities sold of new cars in the Midwest
during this period of increasing incomes.
Equilibrium prices have probably been rising and quantities falling
since supply of new cars is probably inelastic.
Equilibrium prices have probably been rising and quantities falling
since demand for new cars is probably price and income inelastic.
Equilibrium prices have probably been falling and quantities increasing
since income elasticity of demand for new cars is probably negative.
Equilibrium prices have probably been falling and quantities falling
since cross price elasticity of demand for new cars with respect
to income is probably negative.
Jane considers tofu a normal good and peanut butter an inferior
good. We can predict that with an increase in her income she will
consume:
more of both goods.
less of both goods.
she will not change her consumption of peanut butter
The government is considering an increase in the tax on gasoline.
They know that the own-price elasticity of demand for gas is .25.
The current price is $1.00 per gallon. They are willing to allow
the quantity of gas sold to fall by 10%. What tax increase (in
cents per gallon) would lead to a 10% reduction in quantity demanded?
(we assume that the entire tax shows up in the price at the pump)
The post office charges $1 to mail an iguana overseas. At this
price 1,000 iguana are mailed each week. To increase revenue,
the post office is considering an increase in the price of overseas
iguana delivery to $2. Post office researchers have determined
that the own price elasticity of demand for its iguana delivery
service is 1/5. If the post office increases its price to $2:
If college enrollments drop by 10% when textbook prices double;
textbooks and enrollments are __________ goods and their cross
price elasticity is __________.
Kevin's income elasticity for good A is equal to -1.5. His current
income is $40,000 per year and he buys 200 units of good A annually.
If his income falls to $36,000 how many units of good A will he
purchase?