ECON 1010H Study Guide - Final Guide: Profiterole, Consumer Choice, Rent Regulation

Assume the price elasticity of demand for a good is 1.5.

a) Is demand for the good elastic or inelastic?

b) Cite 2 reasons the demand might be elastic or inelastic.

c) If the cost of the good increases by 8% next year, how many more or fewer people will buy it? Show your work, and remember to specify whether more or fewer people are expected to buy the good.

1) The fewer the number substitutes there are for a product.

(a) the less the price elastic the demand for the product is.

(b) the more price elastic the demand for the product is.

(c) the greater the income elasticity for the product.

(d) the smaller the income elasticity for the product.

2) When people have more time to respond to price changes, demand becomes

(a) more elastic

(b) less elastic

(c) unitarily elastic

(d) neither more nor less elastic because time has no effect on demand.

3) If the owner of an ice cream store charges a $ 1.20 for an ice cream cone his total revenue is $540 a day. If he lowers the price to $ 1.00 his total revenue is $ 500 a day. The demand for the ice cream is

(a) elastic

(b) inelastic

(c) unitarily elastic

(d) neither more nor less elastic because time has no effect on demand.

4. The Bill Branch Tool Company wants to increase the quantity of tools it sells by 10%. If the price elasticity of demand is -2.5 the company must

(a) decrease price by 4.0%

(b) increase price by 4.0%

(c) decrease price by .025%

(d) increase price by .025%

1. Determinants of the price elasticity of demand

Consider some determinants of the price elasticity of demand:

• The availability of close substitutes
• Whether the good is a necessity or a luxury
• How broadly you define the market
• The time horizon being considered

A good without any close substitutes is likely to have relatively inelastic or elastic demand since consumers cannot easily switch to a substitute good if the price of the good rises?

2. A good's price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the least elastic demand?

a. Diamond necklace

b. Amputation procedures for diabetes sufferers

3. The price elasticity of demand for good also depends on how you define the good.

Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to have the least elastic demand, and which will have demand that falls in between.

4. The price elasticity of demand is also affected by the given time horizon.

If the price of gasoline is relatively high for a long time, consumers are more likely to buy more fuel-efficient cars or switch to alternatives like public transportation. Therefore, the gasoline demand is _______ elastic in the short run than in the long run.

a. less

b. more

c. no more, no less