Capitulo 4 Microecomonia Parkin
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An s w e r s t o t h e R e v i e w Q u i z z e s
Page 92
1. Why do we need a units-free measure of the responsiveness of the quantity demanded of a
good or service to a change in its price?
The elasticity of demand is a units-free measure. Compare it as a measure of the responsiveness to some
other candidate that depends on the units, such as the slope. The slope of the demand curve changes as the
units measuring the same quantity of the good change (going from pounds to ounces, for example). The
value of the elasticity is independent of the units used to measure the price and quantity of the product. As
a result, the elasticity can be compared across the same good when quantity is measured in different units
and/or the price is measured in different currencies. The elasticities of different goods also can be compared
even though they are measured in different units.
2. Define price elasticity of demand and show how it is calculated.
The price elasticity of demand is units-free measure of the responsiveness of the quantity demanded of a
good to a change in its price when all other influences on buying plans remain the same. It equals the
absolute value (or magnitude) of the ratio of the percentage change in the quantity demanded to the
percentage change in the price. The percentage change in quantity (price) is measured as the change in
quantity (price) divided by the average quantity (price).
3. Why, when we calculate the price elasticity of demand, do we express the change in price as a
percentage of the average price and the change in quantity as a percentage of the average
quantity?
Using the average of both price and quantity gives the elasticity at the midpoint between the original price
and the new price. If we only used percentage change from the original price, we would have a larger value
for the elasticity between two prices when calculating the elasticity for a price fall than when calculating it
for a price rise. Using the average price and quantity measures avoids the value of elasticity being
dependent upon whether a price change reflects a price increase or decrease.
4. What is the total revenue test? Explain how it works.
The total revenue test is a method of estimating the price elasticity of demand by observing the change in
total revenue, given a change in price, holding all other things constant. The total revenue test shows that a
price cut increases total revenue if demand is elastic, decreases total revenue if demand is inelastic, and does
not change total revenue if demand is unit elastic.
5. What are the main influences on the elasticity of demand that make the demand for some
goods elastic and the demand for other goods inelastic?
The magnitude of the price elasticity of demand for a good depends on three main influences:
• Closeness of substitutes. The more easily people can substitute other items for a particular good, the
larger is the price elasticity of demand for that good.
C h a p t e r 4 ELASTICITY
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5 8 CHAP T E R 4
• The proportion of income spent on the good. The larger the portion of the consumer’s budget being
spent on a good, the greater is the price elasticity of demand for that good.
• The time elapsed since a price change. Usually, the more time that has passed after a price change, the
greater is the price elasticity of demand for a good.
6. Why is the demand for a luxury generally more elastic than the demand for a necessity?
Demand for a necessity is generally less elastic than demand for a luxury because there are fewer substitutes
for a necessity.
Page 95
1. What does the cross elasticity of demand measure?
The cross elasticity of demand measures how the quantity demanded of one good responds to a change in
the price of another good. The formula for the cross elasticity of demand is the percentage change in the
quantity of the good demanded divided by the percentage change in the price of the related good.
2. What does the sign (positive versus negative) of the cross elasticity of demand tell us about the
relationship between two goods?
The sign of the cross elasticity of demand reveals whether two goods are substitutes or compliments: The
cross elasticity of demand is positive for substitutes and negative for complements.
3. What does the income elasticity of demand measure?
The income elasticity of demand measures how the quantity demanded of a good responds to a change in
income. The formula for the income elasticity of demand is the percentage change in the quantity of the
good demanded divided by the percentage change in income.
4. What does the sign (positive versus negative) of the income elasticity of demand tell us about a
good?
The sign of the income elasticity of demand reveals whether a good is a normal good or an inferior good:
The income elasticity of demand is positive for normal goods and negative for inferior goods.
5. Why does the level of income influence the magnitude of the income elasticity of demand?
The level of a person’s income can influence the income elasticity of demand by changing how a good or
service is perceived. Some goods, such as automobiles, might seem like a luxury when a person’s income is
very low, but seem like a necessity when income is very high. Therefore, the income elasticity for some
goods, like automobiles, might decrease (become less elastic) as incomes increase.
Page 98
1. Why do we need a units-free measure of the responsiveness of the quantity supplied of a good
or service to a change in its price?
The elasticity of supply is a units-free measure. We need a units-free measure of the elasticity of supply for
the same reason we need a units-free measure of the elasticity of demand: Because the value of the elasticity
of supply is independent of the units used to measure the price and quantity of the product, the elasticity of
supply can be compared across the same good when quantity is measured in different units and/or the price
is measured in different currencies. In addition, the elasticities of supply of different goods also can be
compared even though they are measured in different units.
2. Define elasticity of supply and show how it is calculated.
The elasticity of supply measures the responsiveness of the quantity supplied to a
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