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Macroeconomics For Today 9th Edition Tucker Solutions Manual 1
Macroeconomics For Today 9th Edition Tucker Solutions Manual 1
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Solution Manual for Macroeconomics for Today 9th
Edition Tucker 1305926390 9781305926394
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Chapter 5
Price Elasticity of Demand and Supply
CHAPTER IN A NUTSHELL
This chapter introduces the concept of price elasticity of demand. Elasticity can be thought of as
"sensitivity." The price elasticity of demand measures how sensitive the quantity demanded is to
a change in price. Based on the calculation of an elasticity coefficient, demand can be classified
as: elastic, inelastic, unitary elastic, perfectly elastic, or perfectly inelastic. Applications in the
chapter demonstrate the relationship between price elasticity of demand and changes in total
revenue in response to price changes. For example, if the price increases along an elastic segment
of a demand curve, total revenue decreases. Next, the determinants of price elasticity of demand
are discussed. These factors include: availability of substitutes, share of budget, and adjustment to
price over time. The chapter concludes by relating the concept of price elasticity to supply and the
burden of taxation.
KEY CONCEPTS
Cross-elasticity of demand Price elasticity of demand
Elastic demand Price elasticity of supply
Income elasticity of demand Tax incidence
Inelastic demand Total revenue
Perfectly elastic demand Unitary elastic demand
Perfectly inelastic demand
LEARNING OBJECTIVES
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hapter 5 PRICE ELASTICITY OF DEMAND AND
SUPPLY
After completing this chapter, you should be able to:
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hapter 5 PRICE ELASTICITY OF DEMAND AND
SUPPLY
S2
S After tax
Tax per unit S1
Before tax
Price
per P* Price
unit per P* E1
unit
D
D
Q* Q*
Quantity of good Quantity of good
Step three: Note that the impact of the tax increases the Step four: Determine that the consumers' tax burden
equilibrium price and decreases the equilibrium quantity. equals the new equilibrium price less the original
equilibrium price. The sellers' burden is the vertical
amount of the tax per unit less the consumer's burden.
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hapter 5 PRICE ELASTICITY OF DEMAND AND
SUPPLY
S2 S2
After tax After tax
S1 S1
Before tax Before tax
E2 E2
P 2* P 2*
Price Price Buyer’s Burden
per P1* E1 per P1* E1
unit unit Seller’s Burden
D D
***
4
hapter 5 PRICE ELASTICITY OF DEMAND AND
SUPPLY
R
e
v
e
n
u
e
"
***
COMPLETION QUESTIONS
1. The ratio of the percentage change in quantity demanded to the percentage change in price
is called .
5. An extreme case in which the demand curve is horizontal and the elasticity coefficient
equals infinity is called .
6. An extreme case in which the demand curve is vertical and the elasticity coefficient equals
zero is called .
7. The total number of dollars a firm earns from the sale of a good or service, which is equal
to its price multiplied by the quantity demanded is called .
10. The share of a tax ultimately paid by consumers and sellers is called .
11. The ratio of the percentage change in the quantity demanded of a good or service to a given
percentage change in the price of another good or service is called a (an)
.
5
hapter 5 PRICE ELASTICITY OF DEMAND AND
SUPPLY
MULTIPLE CHOICE
1. If a decrease in the price of football tickets increases the total revenue of the athletic
department, this is evidence that demand is:
a. price elastic.
b. price inelastic.
c. unit elastic with respect to price.
d. perfectly inelastic.
2. If the percentage change in the quantity demanded of a good is greater than the percentage
change in price, price elasticity of demand is:
a. elastic.
b. inelastic.
c. perfectly inelastic.
d. perfectly elastic.
3. Suppose the president of a textbook publisher argues that a 10 percent increase in the price
of textbooks will raise total revenue for the publisher. It can be concluded that the company
president thinks that demand for textbooks is:
a. unitary elastic.
b. inelastic.
c. elastic.
d. perfectly inelastic.
4. If the quantity of tickets to the fair sold decreases by 10 percent when the price increases by
5 percent, the price elasticity of demand over this range of the demand curve is:
a. price elastic.
b. price inelastic.
c. perfectly inelastic.
d. unitary elastic.
5. There is no change in total revenue when the demand curve for a good is:
a. unitary elastic.
b. perfectly inelastic.
c. elastic.
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hapter 5 PRICE ELASTICITY OF DEMAND AND
SUPPLY
d. inelastic.
e. perfectly elastic.
6. Which of the following is true for a lower price elasticity of demand coefficient?
a. The quantity demanded is less responsive.
b. Few substitutes exist.
c. Many substitutes exist.
d. All of the answers above are correct.
8. The number of computers bought increased by 20 percent when the price of on-line
services declined by 10 percent. Assuming other factors are held constant,
computers and on-line services are classified as:
a. complements.
b. unrelated goods.
c. substitutes.
d. social goods.
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hapter 5 PRICE ELASTICITY OF DEMAND AND
SUPPLY
Exhibit 1 Supply and demand curves for good X
800 S
W X
600
Price E
per unit 400
(dollars) Y Z
200
D
0 100 200 300 400 500
Quantity of output
(units per time period)
11. As shown in Exhibit 1, the price elasticity of demand for good X between points E and Z
is:
a. 3/13 = 0.23.
b. 3/3 = 4.33.
c. 1/3 = 0.33.
d. 1.
12. As shown in Exhibit 1, the price elasticity of supply for good X between points E and X is:
a. 1/5 = 0.20.
b. 7/5 = 1.40.
c. 1/2 = 0.50.
d. 5/7 = 0.71.
13. As shown in Exhibit 1, assuming good X is a normal good, a decrease in consumer income,
other factors held constant, will move the equilibrium from point E to point:
a. X.
b. Z.
c. Y.
d. W.
14. As shown in Exhibit 1, assuming good X is an inferior good, a decrease in consumer income,
8
hapter 5 PRICE ELASTICITY OF DEMAND AND
SUPPLY
other factors held constant, will move the equilibrium from point E to point:
a. X.
b. W.
c. Z.
d. Y.
15. As shown in Exhibit 1, assuming goods X and Y are substitutes, a decrease in the price of
Y, other factors held constant, will move the equilibrium from point E to point:
a. W.
b. X.
c. Y.
d. Z.
16. In Exhibit 1, the price elasticity of supply for good X between points Y and E is:
a. 1/5 = 0.20.
b. 5/3 = 1.66.
c. 3/5 = 0.60.
d. 1.
17. In Exhibit 1, the price elasticity of supply for good X between points E and X is:
a. 7/5 = 1.40.
b. 1/5 = 0.20.
c. 5/7 = 0.71.
d. 1.
18. If the government wants to raise tax revenue and shift most of the tax burden to the sellers,
it would impose a tax on a good with a:
a. steep (inelastic) demand curve and steep (inelastic) demand curve.
b. steep (inelastic) demand curve and a flat (elastic) supply curve.
c. flat (elastic) demand curve and a steep (inelastic) supply curve.
d. flat (elastic) demand curve and a flat (elastic) supply curve.
19. Suppose that when price is $10, quantity supplied is 20. When price is $6, quantity supplied
is 12. The price elasticity of supply is:
a. 0.5.
b. 0.8.
c. 1.0.
d. 1.5.
e. 2.0.
20. The Smith family buys much more macaroni when someone in the family is laid off. This
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hapter 5 PRICE ELASTICITY OF DEMAND AND
SUPPLY
means that the Smiths' ___________ is negative.
a. demand curve for macaroni
b. income elasticity for macaroni
c. Engel's law
d. income
e. price elasticity of demand for macaroni
21. The cross elasticity of demand between two goods is 2.5. These goods are:
a. perfect complements.
b. imperfect complements.
c. unrelated.
d. substitutes.
e. inferior.
TRUE OR FALSE
1. T F If a 10 percent price increase causes the quantity demanded for a good to
decrease by 20 percent, demand is elastic.
4. T F If the demand curve for a good is elastic, consumers will spend more on
that good when its price increases.
5. T F Suppose an economist found that total revenues increased for the bus
system when fares were raised. The conclusion is that the price elasticity
demand for subway services over the range of fare increase is inelastic.
8. T F Other factors held constant, if there are few close substitutes for a good,
demand is more elastic for it.
11. T F If a supply curve has a constant slope throughout its length, it must have a
constant price elasticity throughout its length.
12. T F Applying supply and demand analysis, other factors held constant, the
steeper the supply curve (less elastic), the larger the burden of a sales tax
that is borne by the sellers.
CROSSWORD PUZZLE
Fill in the crossword puzzle from the list of key concepts. Not all of the concepts are used.
ACROSS DOWN
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hapter 5 PRICE ELASTICITY OF DEMAND AND
SUPPLY
2. The percentage change in quantity demanded 1. The percentage change in price causes
is less than the percentage change in price. an equal percentage change in quantity
3. The price multiplied by the quantity demanded. demanded.
4. The percentage change in quantity demanded 6. A perfectly ______ demand is a condition
divided by the percentage change in price. in which a small percentage change in
5. The percentage change in quantity demanded price brings about an infinite percentage
exceeds the percentage change in price. change in quantity demanded.
ANSWERS
Completion Questions
1. price elasticity of demand 7. total revenue
2. elastic demand 8. income elasticity of demand
3. inelastic demand 9. price elasticity of supply
4. unitary elastic demand 10. tax incidence
5. perfectly elastic demand 11. cross elasticity of demand
6. perfectly inelastic demand
Multiple Choice
1. a. 2. a 3. b 4. a 5. a 6. b 7. b 8. a 9. c 10. e 11. a 12. d 13. c 14. a 15. c 16. c 17. c 18. c 19. c 20.
b 21. d 22. e
True or False
1. True 2. False 3. True 4. False 5. True 6. True 7. False 8. False 9. False 10. False 11. False
12. False
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hapter 5 PRICE ELASTICITY OF DEMAND AND
SUPPLY
Crossword Puzzle
13