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EC260 Chapter Notes - Chapter 3: Analysis Of Variance, Tax Incidence, Inferior Good

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School
WLU
Department
Economics
Course
EC260
Professor
Olivia Mesta

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Document Summary

The shapes of the demand and supply curves determine by how much a shock affects the equilibrium price and quantity. How the effect of a supply shock depends on the shape of the demand curve. Shift in the supply curve to s2 has no effect on the equilibrium price. And a substantial effect on the quantity. Elasticity: percentage change in a variable in response to a given percentage change in another variable. Price elasticity of demand (): percentage change in the quantity demanded in response to a given percentage change in the price. An alternative way to measure the elasticity of a function g = f(s) is: if then s and g are directly related, if then s and g are inversely related, if then s and g are unrelated. Along linear demand curve with a function of: Varian (2002) found that the price elasticity of demand for internet use was: 2. 0 for those who used a 128 kbps service.

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Related Questions

interval (or arc) elasticity

cross-price elasticity

price elasticity of demand

elastic demand

income elasticity

inelastic demand

inframarginal units

marginal revenue

point elasticity

price effect

quantity effect

total revenue

unitary elastic demand

1. __________________ A measure of consumers’ sensitivity or responsiveness to changes in the price of a good or service.

2. ___________________ When the percentage change in price (in absolute value) is more than the percentage change in quantity demanded (in absolute value).

3. ___________________ When the percentage change in quantity demanded (in absolute value) is more than the percentage change in price (in absolute value).

4. ___________________ When the percentage change in quantity demanded (in absolute value) is just equal to the percentage change in price (in absolute value).

5. ___________________ Total amount paid to a producer for a good or service P * Q.

6. ___________________ The effect on total revenue of a change in price, holding quantity constant.

7. ___________________ The effect on total revenue of a change in quantity, holding price constant.

8. ___________________ An elasticity calculated over an interval of a demand curve or demand schedule.

9. ___________________ Elasticity at a specific price or point on a demand curve.

10. ___________________ A measure of how responsive quantity demanded is to a change in income, all other things constant.

11. ___________________ A measure showing how responsive the quantity demanded of one good is to changes in the price of another good, other factors constant.

12. ___________________ The additional revenue received by producing and selling one more unit of output.

13. ___________________ Units of output that could have been sold at a higher price had the firm not lowered its price to sell additional (marginal) units.

Given the following demand function:
Q = 2.0 P-1.33 Y2.0 A0.66

Where: Q = quantity demanded (thousands of units)
P = price ($/unit)
Y = disposable income per capita ($ thousand)
A = advertising expenditures ($ thousand)

Determine the following when P = $2/unit, Y = $8 (i.e., $8000), and A = $25 (i.e., $25,000)

a. Price elasticity of demand

b. The percentage increase in demand if disposable income percentage increases by 3%.

c. The percentage increase in demand if advertising expenditures are increased by 5 percent.

From the scenario for Katrina’s Candies, examine the procedure Herb will use to estimate the "demand model" for this product and comment on the expected price elasticity, income elasticity, and cross price elasticity of demand. That is, do you expect demand to be price elastic or inelastic? Will the income elasticity suggest Katrina Candies is a luxury or a necessary good? And, is there likely to be a strong cross price elasticity with the other products that Herb included in his demand model? Explain your answers. What can you determine about consumer demand for a product whose estimated demand elasticities are as follows: Price Elasticity of demand is -0.85 Income Elasticity of demand is 2.5 Cross Price Elasticity of demand with this product and your product is -2 I would like you to think about this simple formula for predicting the change in total revenue when there is a given percentage change in price. Using the example above, if ED (price elasticity of demand) is -.85, then a 10% increase in price will cause the quantity demanded to fall by 8.5%, (-8.5% / 10% = -.85). The Formula for Predicting % Changes in Total Revenue is: %ΔTR = %ΔQ + %ΔP where TR = Total Revenue, Q is Quantity Demanded and P = price. Using this formula, what would be the % Δ in TR if ED is -.85 and the %ΔP is 10%?