AP Economics – Elasticity Review – 09/23/05
Note: This review guide should not be considered complete; it is a place to start with your review. You should also
consult your text, notes, worksheets, quizzes and classmates.
Elasticity; Define:
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price elasticity of demand
income elasticity of demand
cross elasticity of demand
elastic demand
inelastic demand
unitary elastic demand
perfectly elastic demand
perfectly inelastic demand
total revenue
total cost
profit
luxuries
necessities
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normal goods
inferior goods
substitute goods
complementary goods
independent goods
midpoint formula
price elasticity of supply
elastic supply
inelastic supply
perfectly elastic supply
perfectly inelastic supply
tax incidence
Differentiate between:
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elasticity and slope
price elasticity of demand, income elasticity of demand, & cross elasticity of demand
elastic demand, inelastic demand, & unitary elastic demand
elastic supply, inelastic supply, & unitary elastic supply
market period, short run, long run
Know:
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the relationship between ∆Ed and TR
4 determinants of Ed:
• availability of substitutes
• degree of necessity
• % of budget spent on the good
• time period
determinant of Es:
• time period (market period, short run, long run)
the role of elasticities in determining tax incidence
Formulas:
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price elasticity of demand:
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price elasticity of supply:
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income elasticity of demand:
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total revenue:
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cross elasticity of demand:
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profit:
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Directions: Each of the following questions or incomplete statements below is followed by five suggested answers
or completions. Select the one that is best in each case.
1.
A 20% increase in price generates an 8% increase in sales; hence, the price elasticity of demand is:
A. 5.00
B. 1.25
C. 0.50
D. 0.40
E. 0.33
2.
If a demand curve is perfectly elastic:
I.
the quantity demanded is the same regardless of the price.
II. the demand curve is horizontal.
III. the elasticity of demand is zero.
A.
B.
C.
D.
E.
3.
I only
II only
III only
I and II only
I, II, and III
If a demand curve is perfectly inelastic, a decrease in supply will result in:
A. a lower price and a greater quantity sold.
B. a higher price and a lower quantity sold.
C. a higher price and the same quantity sold.
D. a lower price and the same quantity sold.
E. no change in price and no change in quantity sold.
Questions 4 and 5 are based on the following information.
A local pizzeria lowers the price of a large pizza from $9 to $6 in order to increase revenue. Consequently, the
owner sees sales increase from 100 pizzas a week to 200 pizzas a week.
4.
Using the midpoint formula, the price elasticity of demand for large pizzas at this pizzeria is:
A. 0.40
B. 0.67
C. 1.40
D. 1.67
E. 1.75
5.
Based on the price elasticity of demand for pizzas, we can see that consumers at this
A. are not price sensitive.
B. are price sensitive.
C. are indifferent to a change in price.
D. switched consumption to substitute goods.
E. have relatively inelastic demand for large pizzas.
6.
The proprietor at Al's Fish and Beer Emporium knows the shape and elasticity of his firm's demand curve. If
Al wants to increase his total revenue, he can do so if:
A. present prices are in the elastic range of his demand curve and he lowers prices.
B. present prices are in the inelastic range of his demand curve and he lowers prices.
C. present prices are in the elastic range of his demand curve and he raises prices.
D. competition is such that his demand curve is infinitely elastic and he raises prices.
E. competition is such that his demand curve is perfectly inelastic and he lowers price.
pizzeria:
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7.
The original equilibrium price for good B is $12. The government then passes a $5 per unit sold tax on good
B that will be collected from the producers. The equilibrium price after the tax has taken effect is $14. It can
be assumed that the demand curve for good B is:
A. perfectly inelastic.
B. relatively inelastic.
C. unit elastic.
D. perfectly elastic.
E. relatively elastic.
8.
In the market period, the supply curve is:
A. perfectly elastic.
B. upward sloping.
C. perfectly inelastic.
D. horizontal.
E. relatively elastic.
9.
A tax levied on producers will be paid entirely by producers:
A. if demand is relatively price inelastic.
B. if demand is perfectly price elastic.
C. if demand is relatively price elastic.
D. if supply falls.
E. if no substitutes exist for the good.
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Q
1.
The demand and supply curves of cigarettes are depicted in the diagram above.
(a) Use supply and demand analysis to describe the impact of a per-unit tax on each of the following.
(i)
(ii)
(iii)
(iv)
(v)
The price paid by consumers for cigarettes
The quantity of cigarettes sold
Consumer surplus
Producer surplus
Deadweight Loss
(b) If the demand for cigarettes becomes more elastic, explain how each of the following will differ from
part (a).
(i)
(ii)
(iii)
(iv)
The price and quantity sold of cigarettes
The government's tax revenues
Consumer surplus
Producer surplus
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2.
(v) Deadweight Loss
Assume that the market supply and demand curves for wheat are price inelastic, but not perfectly price
inelastic at the equilibrium price. For ALL parts of the question, assume that price remains in the relatively
inelastic portions of the supply and demand curves.
(a) As a result of favorable growing conditions, the number of bushels of wheat produced increases. Use a
graph to explain the result of this change on each of the following.
(i) Market price of wheat
(ii) Industry output of wheat
(iii) Revenue of wheat farmers
(b) Use a new graph to show what happens in the wheat market if the cost of fertilizer used in the production
of wheat increases, and if the government announces that the consumption of wheat products greatly
reduces the risk of having a heart attack. Explain the impact these events will have on each of the
following.
(ii)
(iii)
(iv)
(v)
(vi)
Market price of wheat
Industry output of wheat
Consumer surplus
Producer surplus
Deadweight Loss
(c) assume now that the government establishes an effective price floor for wheat. Use a new graph to
indicate where an effective price floor will be set. Explain the effects of such a program on each of the
following.
(i)
(ii)
Consumer surplus in the wheat market
Allocative efficiency (societal efficiency and deadweight loss)