Elasticity: Supply & Demand

Chapter 20
Elasticity:
Demand and Supply
_________________are goods that have a

negative cross-price elasticity of
demand.
Copyright Houghton Mifflin Company. All rights reserved.
20 | 2
_Complements_____are goods that have a

negative cross-price elasticity of
demand.
20 | 3
Boyes/Melvin Economics
Chapter 20
If the demand for corn is elastic then,
a) there are many substitutes for the consumption
of corn.
b) the price elasticity of demand for corn is greater
than one.
c) an increase in price will reduce total revenue for
corn producers.
d) a decrease in price will increase total revenue for
corn producers.
e) All of the above.
20 | 4
Chapter 20
If the demand for corn is elastic then,
a) there are many substitutes for the consumption
of corn.
b) the price elasticity of demand for corn is greater
than one.
c) an increase in price will reduce total revenue for
corn producers.
d) a decrease in price will increase total revenue for
corn producers.
e) All of the above. (correct)
20 | 5
When the price of X increases by 4%, the

quantity demanded of Y decreases 2%.
The cross price elasticity is________and
the goods are___________.
20 | 6
When the price of X increases by 4%, the

quantity demanded of Y decreases 2%.
The cross price elasticity is -.5____and
the goods are complements.
20 | 7
_______________are goods that have a

positive cross-price elasticity of demand.
20 | 8
Substitutes are goods that have a positive

cross-price elasticity of demand.
20 | 9
Chapter 20
Suppose 200 videotapes are rented when the
price is $4. If the price drops by $0.80, the
number of videotapes rented increases to
220. Which of the following statements about
the price elasticity of demand is true?
a) The elasticity of demand is equal to 5.
b) The elasticity of demand is equal to .5.
c) The elasticity of demand is equal to .2.
d) Demand is unit-elastic.
e) The elasticity of demand is equal to 2.
20 | 10
Chapter 20
Suppose 200 videotapes are rented when the
price is $4. If the price drops by $0.80, the
number of videotapes rented increases to
220. Which of the following statements about
the price elasticity of demand is true?
a) The elasticity of demand is equal to 5.
b) The elasticity of demand is equal to .5. (correct)
c) The elasticity of demand is equal to .2.
d) Demand is unit-elastic.
e) The elasticity of demand is equal to 2.
20 | 11
If demand is unit elastic, a 20% increase in

the price of good X will result in what?
20 | 12
A 20% decrease in the QD of good X.
20 | 13
Chapter 20
For a downward-sloping straightline demand
curve, the top portion of the curve is generally
a) perfectly elastic.
b) elastic.
c) unit-elastic.
d) inelastic.
e) perfectly inelastic.
20 | 14
Chapter 20
For a downward-sloping straightline demand
curve, the top portion of the curve is generally
a) perfectly elastic.
b) elastic. (correct)
c) unit-elastic.
d) inelastic.
e) perfectly inelastic.
20 | 15
Chapter 20
A reason that economists use percentage
changes to measure elasticity, rather than
the slope of the demand curve, is that
a) the slope doesnt tell us whether a change is
relatively large or small.
b) the slope is sensitive to the units used for
measurement.
c) by looking at percentage changes we can compare
the effects of price changes on different goods.
d) All of the above.
e) None of the above.
20 | 16
Chapter 20
A reason that economists use percentage
changes to measure elasticity, rather than
the slope of the demand curve, is that
a) the slope doesnt tell us whether a change is
relatively large or small.
b) the slope is sensitive to the units used for
measurement.
c) by looking at percentage changes we can compare
the effects of price changes on different goods.
d) All of the above. (correct)
e) None of the above.
20 | 17
Chapter 20
Suppose the price of a product is reduced
from $10 to $6 and the quantity demanded
increases from 40 to 60 units. From this we
can conclude that the price elasticity of
demand over this price range is equal to
a) 1.2.
b) 1.25.
c) 0.80.
d) 0.20.
e) Cannot be determined from the information given.
20 | 18
Chapter 20
Suppose the price of a product is reduced
from $10 to $6 and the quantity demanded
increases from 40 to 60 units. From this we
can conclude that the price elasticity of
demand over this price range is equal to
a) 1.2.
b) 1.25.
c) 0.80. (correct)
d) 0.20.
e) Cannot be determined from the information given.
20 | 19
Chapter 20
Along a straight-line demand curve, total
revenue reaches a maximum in the
range where
a) demand is elastic.
b) demand is inelastic.
c) demand is unitary elastic.
d) supply is elastic.
e) supply is inelastic.
20 | 20
Chapter 20
Along a straight-line demand curve, total
revenue reaches a maximum in the
range where
a) demand is elastic.
b) demand is inelastic.
c) demand is unitary elastic. (correct)
d) supply is elastic.
e) supply is inelastic.
20 | 21
How does the availability of substitutes

affect the elasticity of demand?
20 | 22
More subs available, more elastic.
20 | 23
Chapter 20
Suppose a producer is able to recognize two
different groups of customers, one having an
elastic demand and the other having an inelastic
demand. Price discrimination by the producer
would most likely
a) involve decreasing the price for the inelastic
group only.
b) involve decreasing the price for the elastic
group only.
c) not occur because it is illegal.
d) involve increasing the price for both groups.
e) involve increasing the price for the elastic
group only.
20 | 24
Chapter 20
Suppose a producer is able to recognize two
different groups of customers, one having an
elastic demand and the other having an inelastic
demand. Price discrimination by the producer
would most likely
a) involve decreasing the price for the inelastic
group only.
b) involve decreasing the price for the elastic
group only. (correct)
c) not occur because it is illegal.
d) involve increasing the price for both groups.
e) involve increasing the price for the elastic
group only.
20 | 25
Chapter 20
Demand is more inelastic when
a) the demand curve is steeper.
b) the time period becomes shorter.
c) a good makes up a smaller percentage of a
consumers budget.
d) the number of available substitutes declines.
e) All of the above.
20 | 26
Chapter 20
Demand is more inelastic when
a) the demand curve is steeper.
b) the time period becomes shorter.
c) a good makes up a smaller percentage of a
consumers budget.
d) the number of available substitutes declines.
e) All of the above. (correct)
20 | 27
Chapter 20
If a 10 percent increase in income results in a
50 percent decline in the quantity of potatoes
purchased, other things being equal, then
potatoes are a(n)
a) complement good.
b) substitute good.
c) inferior good.
d) normal good.
e) luxury good.
20 | 28
Chapter 20
If a 10 percent increase in income results in a
50 percent decline in the quantity of potatoes
purchased, other things being equal, then
potatoes are a(n)
a) complement good.
b) substitute good.
c) inferior good. (correct)
d) normal good.
e) luxury good.
20 | 29
If the price of good X increases by 10% and

the QS of good X increases by 2%, what
can we say about the elasticity of
supply?
20 | 30
If the price of good X increases by 10% and

the QS of good X increases by 2%, what
can we say about the elasticity of
supply?
Supply is inelastic
20 | 31
ACTIVE LEARNING
Elasticity and expenditure/revenue

A.
Pharmacies raise the price of insulin by

10%. Does total expenditure on insulin
rise or fall?
20 | 32
32
ACTIVE LEARNING
Answers
A. Pharmacies raise the price of insulin by 10%.
Does total expenditure on insulin rise or fall?

Expenditure = P x Q
Since demand is inelastic, Q will fall less

than 10%, so expenditure rises.
20 | 33
33
ACTIVE LEARNING
Elasticity and expenditure/revenue

B.
As a result of a fare war, the price of a

luxury cruise falls 20%.
Does luxury cruise companies total
revenue
rise or fall?
20 | 34
34
ACTIVE LEARNING
Answers
B. As a result of a fare war, the price of a luxury
cruise falls 20%.

Does luxury cruise companies total revenue
rise or fall?
Revenue = P x Q
The fall in P reduces revenue,
but Q increases, which increases revenue.
Which effect is bigger?
Since demand is elastic, Q will increase more
than 20%, so revenue rises.
20 | 35
35
Last year, Valerie purchased 20 pounds of

chicken wings when her salary was
$20,000. This year she purchased 25
pounds of wings and her salary was
$30,000. What can we say about the
type of good that wings are to Valerie?
20 | 36
Last year, Valerie purchased 20 pounds of

chicken wings when her salary was
$20,000. This year she purchased 25
pounds of wings and her salary was
$30,000. What can we say about the
type of good that wings are to Valerie?
Normal Good
20 | 37
How does time impact elasticity of demand ?
20 | 38
The more time, the more elastic the

demand.
20 | 39
If the manager lowers the price of a movie

ticket by 10% and the price elasticity of
demand is 4, what will be the percentage
change in movie tickets demanded?
20 | 40
40% increase
4=Q/10
Q=40
20 | 41

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Chapter 20

_________________are goods that have a

Copyright Houghton Mifflin Company. All rights reserved.

_Complements_____are goods that have a

Copyright Houghton Mifflin Company. All rights reserved.

Copyright Houghton Mifflin Company. All rights reserved.

Copyright Houghton Mifflin Company. All rights reserved.

When the price of X increases by 4%, the

Copyright Houghton Mifflin Company. All rights reserved.

When the price of X increases by 4%, the

Copyright Houghton Mifflin Company. All rights reserved.

_______________are goods that have a

Copyright Houghton Mifflin Company. All rights reserved.

Substitutes are goods that have a positive

Copyright Houghton Mifflin Company. All rights reserved.

Copyright Houghton Mifflin Company. All rights reserved.

Copyright Houghton Mifflin Company. All rights reserved.

If demand is unit elastic, a 20% increase in

Copyright Houghton Mifflin Company. All rights reserved.

A 20% decrease in the QD of good X.

Copyright Houghton Mifflin Company. All rights reserved.

Copyright Houghton Mifflin Company. All rights reserved.

Copyright Houghton Mifflin Company. All rights reserved.

Copyright Houghton Mifflin Company. All rights reserved.

Copyright Houghton Mifflin Company. All rights reserved.

Copyright Houghton Mifflin Company. All rights reserved.

Copyright Houghton Mifflin Company. All rights reserved.

How does the availability of substitutes

Copyright Houghton Mifflin Company. All rights reserved.

More subs available, more elastic.

Copyright Houghton Mifflin Company. All rights reserved.

Copyright Houghton Mifflin Company. All rights reserved.

Copyright Houghton Mifflin Company. All rights reserved.

Copyright Houghton Mifflin Company. All rights reserved.

Copyright Houghton Mifflin Company. All rights reserved.

If the price of good X increases by 10% and

Copyright Houghton Mifflin Company. All rights reserved.

If the price of good X increases by 10% and

Copyright Houghton Mifflin Company. All rights reserved.

Elasticity and expenditure/revenue

Pharmacies raise the price of insulin by

Copyright Houghton Mifflin Company. All rights reserved.

Does total expenditure on insulin rise or fall?

Since demand is inelastic, Q will fall less

Copyright Houghton Mifflin Company. All rights reserved.

Elasticity and expenditure/revenue

As a result of a fare war, the price of a

Copyright Houghton Mifflin Company. All rights reserved.

cruise falls 20%.

Last year, Valerie purchased 20 pounds of

Copyright Houghton Mifflin Company. All rights reserved.

Last year, Valerie purchased 20 pounds of

How does time impact elasticity of demand ?

Copyright Houghton Mifflin Company. All rights reserved.

The more time, the more elastic the

Copyright Houghton Mifflin Company. All rights reserved.

If the manager lowers the price of a movie

Copyright Houghton Mifflin Company. All rights reserved.

Copyright Houghton Mifflin Company. All rights reserved.

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Elasticity: Supply & Demand

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