ECON-101 Lecture Notes - Lecture 5: Midpoint Method, West Bank Areas In The Oslo Ii Accord, Time Horizon

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2 Mar 2016

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Econ 101 - elasticity and its application . Measure of sensitivity of one variable to another quantitative impact of 1 variable on another. Certain times variables are more changeable than others. Percentage change in one variable in response to an one percent change in another %change/ Measure of how much buyers and sellers respond to changes in market conditions. Allows to analyze supply and demand with greater precision. When variable (supply demand) change it is often difficult how much/ what direction they change in. using elasticity helps us analyze close w/a value. A measure of how much buyers and sellers respond to changes in market conditions. When studying how some event or policy affects a market not only the direction of the effects but also the magnitude. Useful in many applications see toward the end of the chapter. Measure of how much consumers respond to changes in variables price, income, etc.

Related Questions

Answer the following 24 questions.

1. The elasticity that measures how sensitive the buyers of a good are to a change in the price of another good is called:

a. price-elasticity of demand

b. income-elasticity of demand

c. cross-price-elasticity of demand

d. price-elasticity of supply

2. If the price of walnuts rises, many people would switch from consuming walnuts to consuming pecans. But if the price of salt rises, people would have difficulty purchasing something to use in its place. These examples illustrate the importance of

a. the availability of close substitutes in determining the price elasticity of demand.

b. a necessity versus a luxury in determining the price elasticity of demand.

c. the definition of a market in determining the price elasticity of demand.

d. the time horizon in determining the price elasticity of demand.

3. Suppose that Juan Carlos is filling out a survey that he received in the mail. The survey asks him what he would do if the price of his favorite toothpaste increased. Juan Carlos reports that he would switch to a different brand. The survey asks what he would do if the price of all kinds of toothpaste increased. Juan Carlos reports that he must use toothpaste, so he would have to adjust his spending elsewhere. These examples illustrate the importance of

a. changes in total revenue in determining the price elasticity of demand.

b. a necessity versus a luxury in determining the price elasticity of demand.

c. the definition (broad vs narrow) of a market in determining the price elasticity of demand.

d. the time horizon in determining the price elasticity of demand.

4. Suppose that gasoline prices increase dramatically this month. Lola commutes 100 miles to work each weekday. Over the next few months, Lola drives less on the weekends to try to save money. Within the year, she sells her home and purchases one only 10 miles from her place of employment. These examples illustrate the importance of

a. the availability of substitutes in determining the price elasticity of demand.

b. a necessity versus a luxury in determining the price elasticity of demand.

c. the definition of a market in determining the price elasticity of demand.

d. the time horizon in determining the price elasticity of demand.

5. When a smartphone manufacturer introduces a phone with new features (like a more powerful camera, more storage, a screen with better definition, or being waterproof) and advertises them, it is

a. trying to decrease buyers' price-elasticity of demand by differentiating the goods relative to the competition so that consumers perceive it as having no close substitutes in the market.

b. trying to decrease buyers' price-elasticity of demand by differentiating the goods relative to the competition so that consumers perceive it as having more substitutes in the market.

c. trying to increase buyers' price-elasticity of demand by differentiating the goods relative to the competition so that consumers perceive it as having more substitutes in the market.

d. trying to increase buyers' price-elasticity of demand by differentiating the goods relative to the competition so that consumers perceive it as having no close substitutes in the market.

6. Consider the following two alternative scenarios.

1) In scenario 1, the price of all smartphones increases by 10%.

2) In scenario 2, the price of Samsung smartphones increases by 10% while the price of all other smartphones stays the same as before.

Which of the following is true?

a. The quantity demanded of Samsung phones in scenario 2 falls by more, in percentage terms, than the quantity demanded of all phones in scenario 1.

b. The quantity demanded of Samsung phones in scenario 2 falls by less, in percentage terms, than the quantity demanded of all phones in scenario 1.

7. As more electric car models appear in the market, the price elasticity of demand for the models already in the market should

a. Stay the same. In other words, buyers' sensitivity to changes in the price of the existing cars does not change.

b. Increase. In other words, buyers' sensitivity to changes in the price of the existing cars increases.

c. Decrease. In other words, buyers' sensitivity to changes in the price of the product of the car decreases.

8. Demand for a good is likely to be flatter if

a. the good has many substitutes

b. the good is narrowly defined

c. we are considering the long run rather than the short run

d. the good is a luxury.

e. All of the above.

9. If the price elasticity of the demand for ice-cream is equal to 1.5, then

a. a 1% increase in price will lead to a 1.5% increase in quantity demanded.

b. a 1% increase in price will lead to a 150% fall in quantity demanded.

c. a 1% increase in price will lead to a 15% fall in quantity demanded.

d. a 1% increase in price will lead to a 1.5% fall in quantity demanded.

10. If the price elasticity of demand for oil is 0.7, then

a. Demand is elastic, buyers are relatively sensitive to price, and the demand curve is relatively flat.

b. Demand is elastic, buyers are relatively insensitive to price, and the demand curve is relatively flat.

c. Demand is inelastic, buyers are relatively insensitive to price, and the demand curve is relatively steep.

d. Demand is inelastic, buyers are relatively sensitive to price, and the demand curve is relatively flat.

11. Note: this question is not about calculating elasticity, but about showing that you know how to calculate a % change using the midpoint method in any circumstance.

A biology class at Q State University initially had 205 students. After the first test, enrollment dropped to 195 students. Using the midpoint method, the % change in the number of students is equal to

a. 10%

b. approximately 5.12%

c. approximately 4.88%

d. 5%

12. When the price of a good is $5, the quantity demanded is 100 units per month; when the price is $7, the quantity demanded is 80 units per month. Using the midpoint method, the price elasticity of demand is approximately

a. 0.22.

b. 0.67.

c. 1.33.

d. 1.50.

13. If the price elasticity of demand for hamburgers is 0.4, then a 20% increase in the price of hamburgers will lead to

a. an 8% fall in quantity demanded.

b. a 20% fall in quantity demanded.

c. a 0.4% fall in quantity demanded.

d. a 4% fall in quantity demanded.

14. If the price elasticity of demand for cruises is 1.4, a 1% decrease in the price of cruises will lead to a

a. A 1.4% increase in quantity demanded.

b. A 1% increase in quantity demanded.

c. A 1.4% decrease in quantity demanded.

d. A 1% decrease in quantity demanded.

15. A city wants to raise revenues to build a new municipal swimming pool next year. The mayor suggests that the city raise the price of admission to the existing municipal pools this year to raise revenues. The city manager suggests that the city lower the price of admission to raise revenues. Who is correct?

a. the mayor

b. the city manager

c. The answer depends on the price elasticity of demand.

d. The answer depends on the costs of construction of the new municipal swimming pool.

16. When demand is elastic, an increase in price will cause

a. an increase in total revenue.

b. a decrease in total revenue.

c. no change in total revenue.

d. not enough information.

17. Consider luxury weekend hotel packages in Las Vegas. When the price is $250, the quantity demanded is 2,000 packages per week. When the price is $280, the quantity demanded is 1,700 packages per week. Using the midpoint method, the price elasticity of demand is about

a. 1.43, and an increase in the price will cause hotels' total revenue to decrease.

b. 1.43, and an increase in the price will cause hotels' total revenue to increase.

c. 0.70, and an increase in the price will cause hotels' total revenue to decrease.

d. 0.70, and an increase in the price will cause hotels' total revenue to increase.

18. Suppose researchers at the University of Wisconsin discovered a new vitamin that increases the milk production of dairy cows. If the demand for milk is relatively inelastic, the discovery will

a. raise both price and total revenues.

b. lower both price and total revenues.

c. raise the price and lower total revenues.

d. lower price and raise total revenues.

19. When we calculate elasticities, whether the percent changes have a plus or a minus sign matters if we are calculating

a. Price elasticity of demand, because the signs give us information about whether the good is normal or inferior.

b. Income elasticity of demand, because the signs give us information about whether the good is normal or inferior.

c. Cross-price-elasticity of demand, because the signs give us information about whether the goods are substitutes or complements.

d. b and c are both correct.

20. Income elasticity of demand measures how

a. the quantity demanded changes as consumer income changes.

b. consumer purchasing power is affected by a change in the price of a good.

c. the price of a good is affected when there is a change in consumer income.

d. many units of a good a consumer can buy given a certain income level.

21. Last year, Carolyn bought 6 pairs of earrings when her income was $40,000. This year, her income is $52,000, and she purchased 7 pairs of earrings. Holding other factors constant, it follows that Carolyn's income elasticity of demand is about

a. 0.59, and Carolyn regards earrings as an inferior good.

b. 0.59, and Carolyn regards earrings as a normal good.

c. 1.7, and Carolyn regards earrings as an inferior good.

d. 1.7, and Carolyn regards earrings as a normal good.

22. Sandra purchases 5 pounds of coffee and 10 gallons of milk per month when the price of coffee is $10 per pound. She purchases 6 pounds of coffee and 12 gallons of milk per month when the price of coffee is $8 per pound. Sandra's cross-price elasticity of demand for milk with respect to the price of coffee

a. 0.82, and the goods are substitutes.

b. -0.82, and the goods are complements.

c. 1.22, and the goods are substitutes.

d. -1.22, and the goods are complements.

23. Supply of good is likely to be steeper (that is, more inelastic)

a. if sellers can cheaply make more units of the good on short notice.

b. in the long run.

c. in the short run.

d. if sellers have a large degree of flexibility to expand factory size.

24. When the price of a barrel of oil is $35, an oil fracking company is willing to produce 500 gallons per minute. If the price increased to $45, the company would be willing to produce 2500 gallons per minute. Using the midpoint method, calculate the company's price elasticity of supply.

a. approximately 1.33

b. 0.25

c. approximately 5.33

d. approximately 0.188

puceduck857

1. Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers?

		$0.60
		$0.40
		$0.75
		$0.67

2. In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:

		a tax of $5 in Market X and a subsidy of $10 in Market Y.
		subsidizing both markets.
		taxing Market Y and subsidizing Market X.
		taxing both markets.

3.Economic theory suggests that a natural monopoly should be:

		eliminated whenever it arises.
		regulated to take advantage of economies of scale.
		left alone to operate with excess capacity.
		taken over by the government.

4.When the size of the production is the most efficient:

		total cost is at the minimum.
		average cost is at the minimum.
		marginal cost is at the minimum.
		fixed cost is at the minimum.

5.A firm should exit the industry if which of the following conditions apply?

		TR > TC
		P < AC
		Lifetime expected profit is positive.
		Prices are low now but expected to rise.

6.Figure: Costs

Reference: Ref 11-6

(Figure: Costs) Use the figure. At a price of $20, the firm earns profit of:

		$75.
		$300.
		$225.
		$0, because P = MC at P = $20.

7.When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.

		too low; too high
		equal to the efficient price; too low
		too high; too low
		equal to the efficient price; too high

8.Which of the following statements is TRUE?

I. The EPA's tradeable allowances program for sulfur dioxide establishes property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions.

II. One criticism of tradeable allowances is that they prohibit non-businesses and environmental groups from purchasing the allowances.

III. The tradeable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.

		I only
		II and III only
		I, II, and III
		III only

9.Price floors make it illegal to compete for more customers by lowering prices, so firms compete by offering customers:

		various options.
		more quantity.
		more discount.
		higher quality.

10.Figure: Government Price Controls

Reference: Ref 8-3

(Figure: Government Price Controls) Refer to the figure. If the government sets the price ceiling at $31, there will be:

		a shortage of 15 units.
		a surplus of 15 units.
		a supply of 20 units.
		no effect on the market.

11.In which of these instances does price function as a signal in the market?

		Suppliers invest more in exploration when the price of oil increases.
		Consumers complain of price gouging as the price of oil skyrockets.
		Government imposes price controls on the skyrocketing price of oil.
		All of the answers are correct.

12.Ethanol and sugar are both made from sugar cane, and ethanol can be used as substitute fuel for oil. Increasing oil prices cause the demand for ethanol to increase. This will cause the ______ sugar to ______ and its price to ______.

		demand for; decrease; decrease
		supply of; increase; increase
		supply of; decrease; increase
		demand for; increase; increase

13.Why do cotton growers spend billions of dollars to dam rivers and transport water hundreds of miles to grow cotton in California deserts?

		Cotton growers in California don't pay payroll taxes.
		The water used to grow California cotton is highly subsidized by the government.
		Cotton growers in California are mostly operated as nonprofit enterprises.
		The water used to grow California cotton is high in mineral contents, making for a bigger cotton yield.

14.Suppose that the equilibrium price in the market is $10. If the current market price is $7.50:

		the equilibrium price will fall to $7.50.
		competition among buyers will increase the current price.
		the current price will fall below $7.50 as sellers compete for market share.
		There is not enough information provided to answer the question.

15.Which of the following would increase the demand for beef?

		lower pork prices
		higher consumer income
		higher prices of feed grains used to feed beef cattle
		an increase in the price of beef

16.A change in quantity supplied is reflected by a movement along the same supply curve while a change in supply refers to a shift in the entire supply curve.

True

False

17.Table: Production in the United States and Germany

Labor units required to produce:

One Clock

One Sofa

United States		2	5
Germany		3	9

Reference: Ref 2-8

(Table: Production in the United States and Germany) According to the table, the opportunity cost of producing one sofa in the United States is _________, and the opportunity cost of producing one sofa in Germany is _______.

		two clocks; three clocks
		10 clocks; 27 clocks
		0.4 clocks; 0.33 clocks
		2.5 clocks; three clocks

18.Mark values his drum set at $800 and Ella values her guitar at $1,000. Suppose that Mark trades his drum set for Ella's guitar.

		This trade makes Ella worse off by $200.
		This trade makes Mark better off by $200.
		Mark must value Ella's guitar for at least $1,000, and Ella must value Mark's drum set for at least $800.
		This trade creates value by moving the guitar and drum set to people who value them more.

1. Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers?

		$0.60
		$0.40
		$0.75
		$0.67

2. In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:

		a tax of $5 in Market X and a subsidy of $10 in Market Y.
		subsidizing both markets.
		taxing Market Y and subsidizing Market X.
		taxing both markets.

3.Economic theory suggests that a natural monopoly should be:

		eliminated whenever it arises.
		regulated to take advantage of economies of scale.
		left alone to operate with excess capacity.
		taken over by the government.

4.When the size of the production is the most efficient:

		total cost is at the minimum.
		average cost is at the minimum.
		marginal cost is at the minimum.
		fixed cost is at the minimum.

5.A firm should exit the industry if which of the following conditions apply?

		TR > TC
		P < AC
		Lifetime expected profit is positive.
		Prices are low now but expected to rise.

6.Figure: Costs

Reference: Ref 11-6

(Figure: Costs) Use the figure. At a price of $20, the firm earns profit of:

		$75.
		$300.
		$225.
		$0, because P = MC at P = $20.

7.When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.

		too low; too high
		equal to the efficient price; too low
		too high; too low
		equal to the efficient price; too high

8.Which of the following statements is TRUE?

II. One criticism of tradeable allowances is that they prohibit non-businesses and environmental groups from purchasing the allowances.

III. The tradeable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.

		I only
		II and III only
		I, II, and III
		III only

9.Price floors make it illegal to compete for more customers by lowering prices, so firms compete by offering customers:

		various options.
		more quantity.
		more discount.
		higher quality.

10.Figure: Government Price Controls

Reference: Ref 8-3

(Figure: Government Price Controls) Refer to the figure. If the government sets the price ceiling at $31, there will be:

		a shortage of 15 units.
		a surplus of 15 units.
		a supply of 20 units.
		no effect on the market.

11.In which of these instances does price function as a signal in the market?

		Suppliers invest more in exploration when the price of oil increases.
		Consumers complain of price gouging as the price of oil skyrockets.
		Government imposes price controls on the skyrocketing price of oil.
		All of the answers are correct.

		demand for; decrease; decrease
		supply of; increase; increase
		supply of; decrease; increase
		demand for; increase; increase

13.Why do cotton growers spend billions of dollars to dam rivers and transport water hundreds of miles to grow cotton in California deserts?

		Cotton growers in California don't pay payroll taxes.
		The water used to grow California cotton is highly subsidized by the government.
		Cotton growers in California are mostly operated as nonprofit enterprises.
		The water used to grow California cotton is high in mineral contents, making for a bigger cotton yield.

14.Suppose that the equilibrium price in the market is $10. If the current market price is $7.50:

		the equilibrium price will fall to $7.50.
		competition among buyers will increase the current price.
		the current price will fall below $7.50 as sellers compete for market share.
		There is not enough information provided to answer the question.

15.Which of the following would increase the demand for beef?

		lower pork prices
		higher consumer income
		higher prices of feed grains used to feed beef cattle
		an increase in the price of beef

16.A change in quantity supplied is reflected by a movement along the same supply curve while a change in supply refers to a shift in the entire supply curve.

True

False

17.Table: Production in the United States and Germany

Labor units required to produce:

One Clock

One Sofa

United States		2	5
Germany		3	9

Reference: Ref 2-8

		two clocks; three clocks
		10 clocks; 27 clocks
		0.4 clocks; 0.33 clocks
		2.5 clocks; three clocks

18.Mark values his drum set at $800 and Ella values her guitar at $1,000. Suppose that Mark trades his drum set for Ella's guitar.

		This trade makes Ella worse off by $200.
		This trade makes Mark better off by $200.
		Mark must value Ella's guitar for at least $1,000, and Ella must value Mark's drum set for at least $800.
		This trade creates value by moving the guitar and drum set to people who value them more.

ECON-101 Lecture Notes - Lecture 5: Midpoint Method, West Bank Areas In The Oslo Ii Accord, Time Horizon

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