question
Elasticity
answer
a measure of the responsiveness of one variable to changes in another variable; the percentage change in one variable that arises due to a given percentage change in another variable
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Own price elasticity
answer
a measure of the responsiveness of the quantity demanded of a good to change in the price of that good; the percentage change in quantity demanded divided by the percentage change in the price of the good
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If the absolute value of the own price elasticity is greater than 1, then
answer
the demand is elastic
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If the absolute value of the own price elasticity is less than 1, then
answer
the demand is inelastic
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If the absolute value of the own price elasticity is equal to 1, then
answer
the demand is unitary elastic
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If demand is elastic, a ______ in price will lead to a ______ in total revenue.
answer
increase, decrease
or
decrease, increase
or
decrease, increase
question
If demand is inelastic, a ______ in price will lead to a _____ in total revenue.
answer
increase, increase
or
decrease, decrease
or
decrease, decrease
question
When is total revenue is maximized?
answer
at the point where demand is unitary elastic (E = -1) and MR = 0
question
By the law of demand, there is an inverse relation between price and quantity demanded; thus, the own price elasticity of demand is what kind of number?
answer
a negative number
question
Absolute value of the own price elasticity gets larger as
answer
price increases
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When the absolute value of the own price elasticity is less than 1,
answer
an increase in price increase total revenue
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When the absolute value of the own price elasticity is greater than 1,
answer
an increase in price leads to a reductio in total revenue
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Total revenue test
answer
is the relationship among the changes in price, elasticity, and total revenue
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Perfectly elastic demand
answer
if the own price elasticity is infinite in absolute value.
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If demand is perfectly elastic, then the demand curve is
answer
horizontal
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Perfectly inelastic demand
answer
if the own price elasticity is zero.
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If demand is perfectly inelastic, then the demand curve is
answer
vertical
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When demand is perfectly elastic, a manager who raises prices even slightly will find:
answer
that none of the good is purchased due to competing versions of the product being sold at cheaper price
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What are 3 factors that affect the magnitude of the own price elasticity of a good?
answer
available substitutes, time, and expenditure share
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If there are more substitutes available for the good, the more _____ the demand for it is.
answer
elastic
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When there are few close substitutes for a good, demand tends to be relatively _____. This is because consumers can't readily switch to a close substitute when the price increases.
answer
inelastic
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If demand is elastic, a price increase leads to consumers to
answer
substitute toward another product, then reducing the quantity demanded for the good.
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If demand is inelastic, a price increase causes consumers to
answer
not able to readily switch to a close substitute .
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Demand for food (a broad commodity) is ________ than the demand for beef (a specific commodity).
answer
more inelastic
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Does demand tend to be more inelastic in the short term or the long term?
answer
in the short term
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Marginal revenue (MR)
answer
is the change in total revenue due to a change in output
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How to maximize profits a firm should produce?
answer
set marginal revenue to equal marginal cost (MR=MC)
question
Cross-price elasticity
answer
a measure of the responsiveness of the demand for a good to changes in the price of a related good; the percentage change in the quantity demanded for one good divided by the percentage change in the price of a related good
question
An increase in the price of good Y leads to an increase in demand for good X means
answer
goods X and Y are substitutes
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An increase in the price of good Y leads to a decrease in demand for good X means
answer
goods X and Y are complements
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Income elasticity
answer
a measure of the responsiveness of the demand for a good to changes in consumer income; the percentage change in quantity demanded divided by the percentage change in income
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Own adversing elasticity of demand for good X is
answer
the ratio of the percentage change in the consumption of X to the percentage change in advertising spent on X
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Cross-advertising elasticity between goods X and Y would
answer
measure the percentage change in the consumption of X that results from a 1 percent change in advertising directed toward 1
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Log-linear demand
answer
if the logarithm of demand is a linear function of the logarithms of prices, income, and other variables
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