chapter 4

Question 1

types of elasticity

Answer 1

• price elasticity of demand
• price elasticity of supply
• income elasticity
• cross price elasticity

Question 2

price elasticity of demand

Answer 2

• measure of how much the quantity demanded of a good responds to a change in price
• elastic when Qd responds strongly to a change in price and inelastic when Qd responds weakly to a change in price

Question 3

determinants of the price elasticity of demand

Answer 3

• substitution possibilities: elasticity high if its easy to sub between products
• importance of product in consumer’s budget: items that take up a larger share have higher elasticity
• time (short and long run): substitution takes time so elasticity higher in the long run

Question 4

price elasticity coefficient

Answer 4

• uses percentages so it’s a unit free measure, compares responsiveness cross products
• eliminate negative so its easier to compare

Question 5

possible elasticity cases

Answer 5

• elastic: >1
• perfectly inelastic when n=infinity
• inelastic: <1
• perfectly elastic when n=0
• unitary elastic: 1

Question 6

elasticity along a linear curve

Answer 6

• negatively sloped linear demand curve has a constant slope but not constant elasticity

Question 7

elasticity and the effect of a price change on total expenditure

Answer 7

• n>1: price increase causes a reduction in TE, reduction causes an increase
• n=1: price change causes no changes in TE
• n<1: price increase causes an increase in TE, reduction cases a reduction in TE

Question 8

price elasticity of supply (Ns)

Answer 8

• measure of the responsiveness of quantity supplied to a change in the product’s price

Question 9

determinants of supply elasticity

Answer 9

• amount of time producers have to respond to a change in price
• with time ease of substitution increases - increase in elasticity
• how much more can be produced profitably depends on how easily producers can shift from the production to the one whose price has risen

Question 10

excise tax

Answer 10

• a tax on the sale of a particular product

Question 11

excise tax and elasticity

Answer 11

• when demand is inelastic burden is on consumers

- when supply is elastic the burden is on sellers

Question 12

income elasticity

Answer 12

• if Ny > 0 the good is normal

- if the Ny < 0 the good is inferior

Question 13

normal goods w income elasticity

Answer 13

• if income elasticity is positive but less than 1 demand is inelastic bc necessities
• if the income elasticity is positive and greater than one demand income is elastic bc luxuries

Question 14

cross elasticity

Answer 14

• if Nxy > 0 then X and Y are subs

- if Nxy < 0 then X and Y are complements