Economics Chapter 5: Elasticity of Demand

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Questions and Answers

To maximize total revenue, what should Small Town Motel do within the price range of €20 to €60?

Keep prices constant

Lower its prices

Offer discounts on certain days

Raise its prices (correct)

In the price range of €60 to €80, how does a change in price affect the total revenue for Small Town Motel?

Total revenue fluctuates greatly with price changes

Total revenue remains unchanged with price changes (correct)

Total revenue increases with a price increase

Total revenue decreases with a price decrease

What is the income elasticity of demand for motel rooms when they rent for €40?

4.2

3.0

2.2 (correct)

1.5

Are motel rooms considered normal or inferior goods based on their elasticity?

Normal goods Signup and view all the answers

Why are motel rooms categorized as luxuries rather than necessities?

The income elasticity of demand is high Signup and view all the answers

Which good is expected to have a more elastic supply?

Televisions Signup and view all the answers

Which scenario describes a good with more elastic supply?

Crude oil availability over the next year Signup and view all the answers

When comparing a van Gogh painting and a print of the same painting, which has more elastic supply?

A print of the painting Signup and view all the answers

Which good is expected to have more elastic demand, and why?

A trip to Florida because it is a luxury. Signup and view all the answers

Over a longer time period, why is the demand for an AIDS vaccine expected to be more elastic?

More substitutes may be developed. Signup and view all the answers

Which good has more elastic demand among beer and Budweiser, and why?

Budweiser because it's a narrowly defined market. Signup and view all the answers

Why does aspirin demonstrate more elastic demand than insulin?

There are many substitutes for aspirin but few for insulin. Signup and view all the answers

What is the price elasticity of demand for the Daily Newspaper when calculated using the midpoint method?

0.56 Signup and view all the answers

What is an advantage of using the midpoint method for calculating elasticity?

It yields the same elasticity regardless of the starting price. Signup and view all the answers

If the Daily News wants to maximize total revenue, what should it do regarding its pricing?

Raise the price from €1.00 to €1.50. Signup and view all the answers

Over what price range is the demand for motel rooms considered elastic?

€80 to €120 Signup and view all the answers

Study Notes

Chapter 5: Elasticity of Demand and Supply

Elasticity of Demand: Measures the responsiveness of quantity demanded to a change in price.
Midpoint Method: Calculates elasticity by averaging the initial and new values for both price and quantity. This method is preferred because it yields the same answer regardless of which price/quantity pair is used.
Elastic Demand: Percentage change in quantity demanded is greater than the percentage change in price. Indicates consumers are sensitive to price changes.
Inelastic Demand: Percentage change in quantity demanded is less than the percentage change in price. Consumers are not very responsive to price changes.
Unit Elastic Demand: Percentage change in quantity demanded is equal to the percentage change in price.
Factors that Influence Demand Elasticity: Number of substitutes, proportion of income spent on the good, time horizon.
Elasticity and Total Revenue: If demand is elastic, a price increase reduces total revenue; if demand is inelastic, a price increase increases total revenue.
Elasticity of Supply: Measures the responsiveness of quantity supplied to a change in price.
Elastic Supply: Percentage change in quantity supplied is greater than the percentage change in price. Producers can easily increase quantity supplied in response to price changes.
Inelastic Supply: Percentage change in quantity supplied is less than the percentage change in price. Producers cannot easily increase quantity supplied in response to price changes.
Unit Elastic Supply: Percentage change in quantity supplied is equal to the percentage change in price.

Income Elasticity

Income Elasticity of Demand: Measures the percentage change in quantity demanded for a good/service in response to a percentage change in consumer income. Indicates whether a good/service is normal or inferior.
Normal Goods: Income elasticity is positive (higher income leads to higher demand).
Inferior Goods: Income elasticity is negative (higher income leads to lower demand).
Luxuries: Income elasticity is greater than 1, indicating demand changes proportionally more than income changes.
Necessities: Income elasticity is between 0 and 1, indicating demand changes proportionally less than income changes.

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Description

Discover the key concepts of Elasticity of Demand and Supply in this quiz. Learn about the different types of elasticity, including elastic, inelastic, and unit elastic demand, along with the factors that influence these measures. Test your understanding of how elasticity affects total revenue and market responsiveness.