1. Suppose the price of a good rises from $10 to $20 and quantity demanded falls
ID: 1215495 • Letter: 1
Question
1. Suppose the price of a good rises from $10 to $20 and quantity demanded falls from 500 to 400. If you calculate the elasticity of demand WITHOUT using the midpoint method, the answer would be _____. If you calculate the elasticity of demand WITH the midp oint method, the answer would be _____. Economists say _____ when calculating elasticity.
A) – 1/2; – 1/3; use the midpoint method
B) – 1/3; – 1/5; do not use the midpoint method
C) – 1/4; – 1/4; it doesn't matter which method you use
D) – 1/5; – 1/3; use the midpoint method
2. On October 1, 2009, the Nintendo Wii's Japanese price dropped from ¥25,000 to ¥20,000. In the three months after the price drop, Japanese sales of the Wii were approximately 1,040,000. Twelve months earlier, over the same interval at the high price, sales totaled 890,000. Using the midpoint method, what is the absolute value of the price elasticity of demand of a Wii console? Is it an elastic or inelastic g ood?
A) 1.43; inelastic
B) 0.7; inelastic
C) 1.43; elastic
D) 0.7; elastic
Use the following to answer question 3:
Figure: Slave Redemption
3.(Figure: Slave Redemption) Refer to the figure. Assume the graph illustrates the
Sudanese slave trade. When slave redeemers enter the market, the total number of
freed slaves is ________ and the net number of freed slaves is ________.
A)1,500; 500
B)1,000; 400
C)1,100; 100
D)500; 1,000
4.A new per unit tax on yacht production decreases the supply of yachts. If yachts are
elastically demanded, what will happen to total revenues from yacht production?
A)They will rise.
B)They will fall.
C)They will remain the same.
D)They will change in an indeterminate direction.
5.The manager of a company notices that the company's total revenue would increase if
she raised the price of the company's product. Accordingly, the manager can assert that the demand for the company's product is:
A)elastic.
B)inelastic.
C)unit elastic.
D)perfectly elastic.
Explanation / Answer
(1) (A)
Elasticity (without midpoint) = % Change in quantity demanded / % Change in price
= [(400 - 500) / 500] / [$(20 - 10) / $10)] = (- 100 / 500) / ($10 / $10) = - 0.2 / 1 = - 1/2
Elasticity (with midpoint) = (Change in quantity / Average quantity) / (Change in price / Average price)
= [- 100 / (400 + 500) / 2] / [$10 / $(10 + 20) / 2] = (- 100 / 450) / (10 / 15) = - 0.22 / 0.66 = - 1/3
(2) (B)
Elasticity = [(1,040,000 - 890,000) / (1,040,000 + 890,000) / 2] / [(25,000 - 20,000) / (25,000 + 20,000) / 2]
= (150,000 / 965,000) / (5,000 / 22,500) = 0.15 / 0.22 = 0.7
Since absolute elasticity is less than 1, demand is inelastic.
(3) Figure missing
(4) (B)
Lower supply will raise price. With elastic demand, higher price will lower total revenue.
(5) (B)
When demand is inelastic, a price rise will increase revenue.
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