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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?
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?
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?
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?
Are motel rooms considered normal or inferior goods based on their elasticity?
Why are motel rooms categorized as luxuries rather than necessities?
Why are motel rooms categorized as luxuries rather than necessities?
Which good is expected to have a more elastic supply?
Which good is expected to have a more elastic supply?
Which scenario describes a good with more elastic supply?
Which scenario describes a good with more elastic supply?
When comparing a van Gogh painting and a print of the same painting, which has more elastic supply?
When comparing a van Gogh painting and a print of the same painting, which has more elastic supply?
Which good is expected to have more elastic demand, and why?
Which good is expected to have more elastic demand, and why?
Over a longer time period, why is the demand for an AIDS vaccine expected to be more elastic?
Over a longer time period, why is the demand for an AIDS vaccine expected to be more elastic?
Which good has more elastic demand among beer and Budweiser, and why?
Which good has more elastic demand among beer and Budweiser, and why?
Why does aspirin demonstrate more elastic demand than insulin?
Why does aspirin demonstrate more elastic demand than insulin?
What is the price elasticity of demand for the Daily Newspaper when calculated using the midpoint method?
What is the price elasticity of demand for the Daily Newspaper when calculated using the midpoint method?
What is an advantage of using the midpoint method for calculating elasticity?
What is an advantage of using the midpoint method for calculating elasticity?
If the Daily News wants to maximize total revenue, what should it do regarding its pricing?
If the Daily News wants to maximize total revenue, what should it do regarding its pricing?
Over what price range is the demand for motel rooms considered elastic?
Over what price range is the demand for motel rooms considered elastic?
Flashcards
Price Elasticity of Demand
Price Elasticity of Demand
A measure of how responsive the quantity demanded of a good is to changes in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
Elastic Demand
Elastic Demand
Means that the quantity demanded is relatively sensitive to changes in price. A 1% change in price will lead to a greater than 1% change in quantity demanded.
Inelastic Demand
Inelastic Demand
Means that the quantity demanded is relatively insensitive to changes in price. A 1% change in price will lead to a smaller than 1% change in quantity demanded.
Midpoint Method
Midpoint Method
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Elastic Good
Elastic Good
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Inelastic Good
Inelastic Good
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Total Revenue Maximization
Total Revenue Maximization
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Necessity
Necessity
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Unit Elastic Demand
Unit Elastic Demand
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Normal Goods
Normal Goods
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Inferior Goods
Inferior Goods
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Luxury Goods
Luxury Goods
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Price Elasticity of Supply
Price Elasticity of Supply
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Elastic Supply
Elastic Supply
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Inelastic Supply
Inelastic Supply
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Cross-Price Elasticity of Demand
Cross-Price Elasticity of Demand
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Study Notes
Chapter 5: Elasticity of Demand and Supply
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Elasticity of Demand: Measures the responsiveness of quantity demanded to a change in price.
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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.
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Elastic Demand: Percentage change in quantity demanded is greater than the percentage change in price. Indicates consumers are sensitive to price changes.
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Inelastic Demand: Percentage change in quantity demanded is less than the percentage change in price. Consumers are not very responsive to price changes.
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Unit Elastic Demand: Percentage change in quantity demanded is equal to the percentage change in price.
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Factors that Influence Demand Elasticity: Number of substitutes, proportion of income spent on the good, time horizon.
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Elasticity and Total Revenue: If demand is elastic, a price increase reduces total revenue; if demand is inelastic, a price increase increases total revenue.
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Elasticity of Supply: Measures the responsiveness of quantity supplied to a change in price.
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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.
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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.
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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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