Homework | Economics

Chapter 5 Elasticity and Its Application

Please submit to: zuweima@hotmail.com before Sunday, Oct.16, 2022

Date: 10/16 .

Student Name (English & Chinese): Ryan 叶睿阳

.

Score: .

Multiple Choice Questions

1. A good tends to have a small price elasticity of demand if
a. the good is a necessity.
b. there are many close substitutes.
c. the market is narrowly defined.
d. the long-run response is being measured.

Answer: b .

2. An increase in a good’s price reduces the total amount consumers spend

on the good if the _________ elasticity of demand is _________ than one.
a. income; less
b. income; greater
c. price; less
d. price; greater

Answer: c .

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3. A linear, downward-sloping demand curve is
a. inelastic.
b. unit elastic.
c. elastic.
d. inelastic at some points, and elastic at others.

Answer: d .

4. The citizens of Lilliput spend a higher fraction of their income on food than
do the citizens of Brobdingnag. The reason could be that
a. Lilliput has lower food prices, and the price elasticity of demand is
zero.
b. Lilliput has lower food prices, and the price elasticity of demand is 0.5.
c. Lilliput has lower income, and the income elasticity of demand is 0.5.
d. Lilliput has lower income, and the income elasticity of demand is 1.5.

Answer: c .

5. The price of a good rises from $16 to $24, and the quantity supplied rises
from 90 to 110 units. Calculated with the midpoint method, the price elasticity
of supply is
a. 1/5.
b. 1/2.
c. 2.
d. 5.

Answer: c .

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6. If the price elasticity of supply is zero, the supply curve is
a. upward sloping.
b. horizontal.
c. vertical.
d. fairly flat at low quantities but steeper at larger quantities.

Answer: c .

7. The ability of firms to enter and exit a market over time means that, in the
long run,
a. the demand curve is more elastic.
b. the demand curve is less elastic.
c. the supply curve is more elastic.
d. the supply curve is less elastic.

Answer: c .

8. An increase in the supply of grain will reduce the total revenue grain
producers receive if
a. the supply curve is inelastic.
b. the supply curve is elastic.
c. the demand curve is inelastic.
d. the demand curve is elastic.

Answer: c .

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9. In competitive markets, farmers adopt new technologies that will eventually
reduce their revenue because
a. each farmer is a price taker.
b. farmers are short-sighted.
c. regulation requires the use of best practices.
d. consumers pressure farmers to lower prices.

Answer: a .

10. Because the demand curve for oil is _________ elastic in the long run,
OPEC’s reduction in the supply of oil had a _________ impact on the price in
the long run than it did in the short run.
a. less; smaller
b. less; larger
c. more; smaller
d. more; larger

Answer: c .

11. Over time, technological advances increase consumers’ incomes and

reduce the price of smartphones. Each of these forces increases the amount
consumers spend on smartphones if the income elasticity of demand is
greater than_________ and the price elasticity of demand is greater than
_________.
a. zero; zero
b. zero; one
c. one; zero
d. one; one

Answer: c .

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Problems and Applications
1. The table below provides the demand schedule for motel rooms at Small
Town Motel. Use the information provided to complete the table. Answer the
following questions based on your responses in the table. Use the midpoint
method to calculate the percentage changes used to generate the elasticities.

Quantity Total % Change % Change

Price Demanded Revenue in Price in Quantity Elasticity
$20 24 $480 .
66.67% . 18.2% . 0.273 .
$40 20 $800 .
40% . 22.2% . 0.55 .
$60 16 $960 .
28.6% . 28.6% . 1 .
$80 12 $960 .
22.2% . 40% . 1.8 .
$100 8 $800 .
18.2% . 66.67% . 3.66 .
$120 4 $480 .

a. Over what range of prices is the demand for motel rooms elastic? To
maximize total revenue, should Small Town Motel raise or lower the price
within this range?
$20~$69 Motel should raise the price to stay on $70 for max revenue.

b. Over what range of prices is the demand for motel rooms inelastic? To
maximize total revenue, should Small Town Motel raise or lower the price
within this range?
$71~$120 Motel should lower the price to stay on $70 for max revenue.

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c. Over what range of prices is the demand for motel rooms unit elastic? To
maximize total revenue, should Small Town Motel raise or lower the price
within this range?
$70 Motel should stay on $70 for max revenue.

2. The demand schedule from question 1 above is reproduced below along

with another demand schedule when consumer incomes have risen to
$60,000 from $50,000. Use this information to answer the following questions.
Use the midpoint method to calculate the percentage changes used to
generate the elasticities.
Quantity Demanded When Quantity Demanded When
Price Income is $50,000 Income is $60,000 .
$20 24 34
$40 20 30
$60 16 26
$80 12 22
$100 8 18
$120 4 14

a. What is the income elasticity of demand when motel rooms rent for $40?
2.2

b. What is the income elasticity of demand when motel rooms rent for $100?
4.23

c. Are motel rooms normal or inferior goods? Why?

Normal, because it has positive income elasticity.

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d. Are motel rooms likely to be necessities or luxuries? Why?
Luxuries, because the income elasticity is pretty high and it is not necessary
for life.

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