Question

elasticity, market structures, and market failure

1. price elasticity of demand measures

a. how much producers costs change
b. how much quantity demanded changes when income changes
c. how much quantity demanded changes when price changes
d. how much price changes when supply changes
e. the slope of the demand curve only

1. the formula for price elasticity of demand is

a. %δprice ÷ %δquantity demanded
b. %δsupply ÷ %δprice
c. %δquantity demanded ÷ %δprice
d. price ÷ quantity
e. %δrevenue ÷ %δcost

1. when demand is elastic, a price increase will

a. increase total revenue
b. have no effect on total revenue
c. decrease total revenue
d. leave total revenue unchanged
e. double total cost

1. if the price of a product increases by 10% and quantity demanded falls by 30%, the demand is

a. inelastic
b. unit elastic
c. perfectly inelastic
d. elastic
e. perfectly elastic

1. which of the following goods is likely to have the most inelastic demand?

a. vacation travel
b. designer shoes
c. coffee shop lattes
d. gasoline
e. movie tickets

1. which factor tends to make demand more elastic?

a. the good is a necessity
b. few substitutes exist
c. short time frame
d. small share of income
e. many close substitutes

1. if a business finds its demand is inelastic, it can increase total revenue by

a. lowering prices
b. offering discounts
c. cutting supply
d. raising prices
e. doubling output

1. demand for luxury items like vacations tends to be

a. perfectly inelastic
b. elastic
c. unit elastic
d. perfectly elastic
e. independent of price

1. unit elastic demand means

a. a small change in price causes no change in qd
b. %δq = %δp
c. tr always rises when price rises
d. price has no effect on buyers
e. price elasticity = 0

1. which market structure has many sellers, identical products, and no control over price?

a. monopoly
b. oligopoly
c. monopolistic competition
d. perfect competition
e. duopoly

1. which market structure features many sellers of similar but differentiated?

a. monopoly
b. monopolistic competition
c. oligopoly
d. perfect competition
e. command market

Explanation:

1. Price elasticity of demand: It focuses on the relationship between quantity demanded and price change.
2. Formula for price elasticity of demand: The standard formula is the percentage change in quantity demanded divided by the percentage change in price.
3. Elastic demand and price increase: When demand is elastic, a price increase leads to a relatively large decrease in quantity demanded, thus reducing total revenue.
4. Calculating elasticity: Elasticity = % change in quantity demanded / % change in price. Here, 30% / 10% = 3 > 1, so demand is elastic.
5. Inelastic demand goods: Gasoline is a necessity with fewer substitutes in the short - run compared to the other options.
6. Factor for more elastic demand: More substitutes make demand more elastic as consumers can easily switch.
7. Inelastic demand and revenue: With inelastic demand, a price increase leads to a relatively smaller decrease in quantity demanded, increasing total revenue.
8. Luxury items demand: Luxury items like vacations are not necessities, and consumers can more easily adjust their consumption, so demand is elastic.
9. Unit elastic demand: By definition, % change in quantity demanded equals % change in price.
10. Market structure with many sellers, identical products, no price control: Perfect competition has these characteristics.
11. Market structure with many sellers of similar but differentiated products: Monopolistic competition has many firms selling differentiated products.

Answer:

1. B. how much quantity demanded changes when price changes
2. C. %ΔQuantity Demanded ÷ %ΔPrice
3. C. decrease total revenue
4. D. elastic
5. D. gasoline
6. E. many close substitutes
7. D. raising prices
8. B. elastic
9. B. %ΔQ = %ΔP
10. D. Perfect competition
11. B. Monopolistic competition