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Questions and Answers
The elasticity of demand is always positive.
The elasticity of demand is always positive.
False (B)
If the absolute value of the elasticity of demand is less than 1, then demand is considered elastic.
If the absolute value of the elasticity of demand is less than 1, then demand is considered elastic.
False (B)
The own-price elasticity of demand measures the responsiveness of quantity demanded to changes in the price of a substitute good.
The own-price elasticity of demand measures the responsiveness of quantity demanded to changes in the price of a substitute good.
False (B)
If the own-price elasticity of demand is equal to -1, then demand is considered unitary elastic.
If the own-price elasticity of demand is equal to -1, then demand is considered unitary elastic.
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The formula for the own-price elasticity of demand is given by: $E_{Qx,Px} = rac{% \Delta Qx}{% \Delta Px} = rac{ rac{\partial Qx }{\partial Px}}{ rac{\partial Px}{\partial Qx}} imes rac{Px}{Qx}$
The formula for the own-price elasticity of demand is given by: $E_{Qx,Px} = rac{% \Delta Qx}{% \Delta Px} = rac{ rac{\partial Qx }{\partial Px}}{ rac{\partial Px}{\partial Qx}} imes rac{Px}{Qx}$
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If the own-price elasticity of demand is greater than 1, then an increase in price will lead to an increase in total revenue.
If the own-price elasticity of demand is greater than 1, then an increase in price will lead to an increase in total revenue.
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The total revenue test can be used to determine the own-price elasticity of demand for a good.
The total revenue test can be used to determine the own-price elasticity of demand for a good.
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The slope of a linear demand function is always the same, but its elasticity varies along the demand curve.
The slope of a linear demand function is always the same, but its elasticity varies along the demand curve.
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If the cross-price elasticity of demand between two goods is negative, then the goods are complements.
If the cross-price elasticity of demand between two goods is negative, then the goods are complements.
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The own-price elasticity of demand for a good is always negative.
The own-price elasticity of demand for a good is always negative.
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If the price elasticity of demand for a good is -2, then a 5% increase in price will result in a 10% decrease in quantity demanded.
If the price elasticity of demand for a good is -2, then a 5% increase in price will result in a 10% decrease in quantity demanded.
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If the own-price elasticity of demand is greater than 1, then demand is said to be inelastic.
If the own-price elasticity of demand is greater than 1, then demand is said to be inelastic.
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Marginal revenue (MR) is zero when the price elasticity of demand is unitary elastic.
Marginal revenue (MR) is zero when the price elasticity of demand is unitary elastic.
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Given the Formula: $\Delta R = [R_x(1+ E_{Qx,Px}) + R_y E_{Qy,Px}] imes % \Delta P_x$, if $ E_{Qx,Px}< 0$, $E_{Qy,Px} < 0 $ , and $R_x > R_y$, then total revenue will decrease if $P_x$ decreases.
Given the Formula: $\Delta R = [R_x(1+ E_{Qx,Px}) + R_y E_{Qy,Px}] imes % \Delta P_x$, if $ E_{Qx,Px}< 0$, $E_{Qy,Px} < 0 $ , and $R_x > R_y$, then total revenue will decrease if $P_x$ decreases.
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If the price elasticity of demand is greater than 1, and the firm raises prices, then total revenue will increase.
If the price elasticity of demand is greater than 1, and the firm raises prices, then total revenue will increase.
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For a good with perfectly elastic demand, marginal revenue is always equal to price.
For a good with perfectly elastic demand, marginal revenue is always equal to price.
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A 4 percent decrease in the price of paper books will lead to an increase in overall revenues from both paper books and e-books sales.
A 4 percent decrease in the price of paper books will lead to an increase in overall revenues from both paper books and e-books sales.
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The income elasticity for organic potatoes is less than that for meat.
The income elasticity for organic potatoes is less than that for meat.
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Cross-price elasticity of demand between two goods is negative if they are considered substitutes.
Cross-price elasticity of demand between two goods is negative if they are considered substitutes.
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An inferior good has an income elasticity of demand that is less than zero.
An inferior good has an income elasticity of demand that is less than zero.
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The own advertising elasticity measures the change in demand of a product when the amount of advertising is decreased.
The own advertising elasticity measures the change in demand of a product when the amount of advertising is decreased.
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If the own price elasticity of demand is -2, then a 1% increase in price will lead to a 2% decrease in quantity demanded.
If the own price elasticity of demand is -2, then a 1% increase in price will lead to a 2% decrease in quantity demanded.
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The formula for the own price elasticity of demand is $E_{Qx,Px} = rac{ rac{ ext{%} ext{ } ext{Δ} Qx}{ ext{%} ext{ } ext{Δ} Px}}$.
The formula for the own price elasticity of demand is $E_{Qx,Px} = rac{ rac{ ext{%} ext{ } ext{Δ} Qx}{ ext{%} ext{ } ext{Δ} Px}}$.
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A normal good experiences an increase in demand when consumer income increases.
A normal good experiences an increase in demand when consumer income increases.
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Study Notes
Quantitative Demand Analysis
- Elasticity measures the responsiveness of one variable to changes in another variable
- Elasticity shows how much one variable will change if another variable changes
- Examples include: how much your grade will change if you study more hours
- Elasticity is calculated as the percentage change in one variable divided by the percentage change in another variable.
- EG,S = %AG / %ΔS
- EG,S = (ΔG/G) / (ΔS/S)
Own Price Elasticity of Demand
- Measures responsiveness of quantity demanded when price changes
- Formula:
- EQx,Px = (%ΔQx / %ΔPx) or (ΔQx/Qx) / (ΔPx/Px)
Elasticity and Total Revenue
- When |EQx,Px| > 1: Increasing price will decrease total revenue
- When |EQx,Px| < 1: Increasing price will increase total revenue
- When |EQx,Px| = 1: Total revenue is maximized
Extreme Cases
- Perfectly Elastic Demand: |EQx,Px| = ∞ "any price change will lead to a change in consumption."
- Perfectly Inelastic Demand: |EQx,Px| = 0 "no impact of a price change on consumption."
Factors Affecting Own Price Elasticity
- Available substitutes
- Time
- Expenditure share
Cross-Price Elasticity
- Measures responsiveness of demand for one good to changes in the price of a related good
- Positive sign for substitutes (increased price of one good leads to increased demand for another).
- Negative sign for complements (increased price of one leads to reduced demand for the other).
- Formula:
- EQx,Py = (%∆Qx / %ΔPy)
Income Elasticity
- Measures the responsiveness of consumer demand to changes in income
- Positive sign indicates a normal good (demand increases with income).
- Negative sign indicates an inferior good (demand decreases with income).
- Formula:
- EQx,M = (%ΔQx / %ΔM)
Own Advertising Elasticity
- Measures the responsiveness of demand to changes in advertising expenditure
- Formula:
- EQx,Ax = (%ΔQ/ %ΔΑ)
Linear Demand Function
- Q = a₀ + a₁Px + a₂Py + a₃M + a₄h
- H represents other relevant factors
Nonlinear Demand Functions
- Equation: Q = cpbx Pyβy Mβm ḥβн
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Description
Test your understanding of elasticity in demand with this quiz on quantitative demand analysis. Explore key concepts such as own price elasticity and its impact on total revenue through various examples and calculations. Assess how changes in one variable affect another in market scenarios.
