ECO100Y1 Lecture Notes - Lecture 6: Economic Surplus, Demand Curve, Kilogram

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18 Jan 2018

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Income elasticity of demand: 1. 5 normal good. If there is an increase in income, price will increase and, since (price) demand is elastic, total revenue will fall. Since a normal good, demand will shift to right, price and quantity will increase, so total revenue increases. *elasticity of demand refers to movements along a demand curve and is not relevant when assessing shift in demand curve. A local pizza parlor offers an all-you-can-eat lunch for . You pay at the door, and then the waiter brings you as many slices of pizza as you like. A large number of students enter the pizza parlor. As they enter, one-half of these students are immediately awarded a (cid:862)prize(cid:863) a refund of the . The pizza problem: once student has paid (regardless of whether student obtains refund), p=0, rational student consumes slices of pizza until mu=0, prediction: both groups will consume the same amount of pizza.

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2. In the United States, 2007 was a bad year for growing wheat. And as wheat supply decreased, the price of wheat rose dramatically, leading to a lower quantity demanded (a movement along the demand curve). The accompanying table describes what happened to prices and the quantity of wheat demanded. 2006 2007 Quantity demand (bushels) 2.2 billion 2.0 billion Average price (per bushel) $3.42 $4.26 a. Using the midpoint method, calculate the price elasticity of demand for winter wheat. b. What is the total revenue for U.S. wheat farmers in 2006 and 2007? c. Did the bad harvest increase or decrease the total revenue of U.S. wheat farmers? How could you have predicted this from your answer to part a? 3. A recent study determined the following elasticities for Volkswagen Beetles: Price elasticity of demand = 2 Income elasticity of demand = 1.5 The supply of Beetles is elastic. Based on this information, are the following statements true or false? Explain your reasoning. a. A 10% increase in the price of a Beetle will reduce the quantity demanded by 20%. b. An increase in consumer income will increase the price and quantity of Beetles sold. Since price elasticity of demand is greater than 1, total revenue will go down.

Consumer surplus is the difference between the

Market price and the minimum price required to induce production

The maximum willingness to pay of consumers and the market price

Quantity demanded and the quantity supplied at the market price

Full economic price and the minimum price required to induce production

Show your work!

8.a) What is scarcity? Can it be eliminated? Explain

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b)Why does scarcity exist? How can it be resolved? Explain

_____________________________________________________________________________________

c) IS there such a thing as a free lunch? Yes No. Explain

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What is market equilibrium? Does the market always achieve equilibrium? If so, why? If not, why? Explain. Illustrate with examples and graphs where necessary

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The movement along a given demand curve is the same as a shift in the demand curve.

True False. Explain

If the income elasticity for designer jeans is 1.5, a 10% increase in income will lead to a

15% rise in demand for designer jeans.

0.15% drop in the demand for designer jeans.

0.15% rise in demand for designer jeans.

Show your work

12. Which of the following increases the potential for sustainable long-run industry profits?

Entry.

The availability of multiple substitutes.

Absence of complements.

13. If firms in the pizza industry are earning negative economic profits, which of the following will most likely occur in the future?

Some firms will exit the market.

The economic profits of the firms in the industry will rise.

The market price for pizza will rise.

All of the responses are correct.

Explain your choice

14. You are the manager of a popular hand bag company. You know that the advertising elasticity of demand for your product is 2.5. How much will you have to increase spending on advertising in order to increase demand by 4%?

a. 0.16%.

1.6%.

2%.

10%.

Show your work

15. a) What is meant by price elasticity of demand. List and explain three factors of price elasticity of demand.

b) Why are managers interested in the concept of consumer surplus?

1) All else being equal, the more imprtant an item is in buyers' budgets, the more elastic is demand for the good. (TRUE/FALSE)

2) If the demand curve for a good is a steep, straight line, then the demand for the good is inelastic at every point along that demand curve. (TRUE/FALSE)

3)If the demand for illegal drugs is inelastic, then government efforts to reduce the supply of illegal drugs are likely to cause an increase in total expenditure on them. (TRUE/FALSE)

4) If the demand for mass transit in a city is inelastic, then raising fares will increase mass transit revenue. (TRUE/FALSE)

5)The cross-price elasticity of demand between Levi's blue jeans and Wrangler's blue jeans is most likely positive (TRUE/FALSE)

6) Perfectly inelastic demand occurs when the demand curve is horizontal. (TRUE/FALSE)

7) Among the reasons that farmers' incomes are unstable is _____
A) The supply curve for food can shift dramatically rightward or leftward from year to year.
B) The demand for food is elastic
C) The income elasticity for food is very high
D) All of these
E) None of these

8) If the (absolute value of) the price elasticity of demand for a good is greater than one, then demand for the good is _____
A) Elastic
B) Inelastic
C) Inferior
D) Normal
E) Paranormal

9) As we move leftward along a straight-line demand curve, the (absolute value of the) price elasticity of demand ____
A) Grows smaller
B) Remains constant at zero
C) Remains constant at a value of one
D) Remains constant and equal to the (absolute value of the) slope of the demand curve
E) Grows larger

10) If a good is normal, we know that______
A) income elasticity is positive
B) The good's price elasticity of demand is positive
C) Demand for the good is elastic
D) Demand for the good is inelastic
E) Income elasticity is negative

11) When the price of a good rises by 10%, and nothing else changes, the quantity of the good demanded falls by 5%. The price elasticity of demand fort this good is_____
A) -0.5%
B) -5%
C) -5.0%
D) -2.0%
E) 2.0%

12) If the price elasticity of demand for a good is negative, we know that the good _____.
A) Obey's the law of demand
B) Is normal
C) Is inferior
D) Violates the law of demand
E) is inelastically demanded

13) Which of the following would you expect to have the greatest (in absolute value) price elasticity of demand?
A) Clothing
B) Pants
C) Blue jeans
D) Levi's Blue jeans
E) All of these answers would have approximately the same price elasticity of demand.

14) The price elasticity of demand for a good is -2.0 When the proce of this good rises, what occurs?
A) Quantity demanded will rise as well
B) The income of those who buy the good will increase
C) Total expenditure on this good will fall.
D) All of these
E) All of these answers would have approximately the same price elasticity of demand.

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ECO100Y1 Lecture Notes - Lecture 6: Economic Surplus, Demand Curve, Kilogram

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