Chapter 4 Review Questions
1. What is the difference between the price elasticity of demand along a demand curve and the rate of changealong the demand curve?
2. Price elasticity of demand is defined as
a. What formulas do economists use to calculate%Δquantity demanded and %Δprice?
b. Why do economists use these specific formulas?
c. Suppose that the price elasticity of demand for agood is 20.4. Explain precisely what that means.
3. For each of the following pairs of goods or services, indicatewhich good you would expect to have the smaller(in absolute value) price elasticity of demand. In eachcase, explain why.
a. ExxonMobil gasoline; gasoline in general
b. Beauticians’ services; plumbers’ services
c. Automobiles; color photocopies
d. Coach-class airfare; business-class airfare
4. Give some examples of goods for which demand wouldbe almost perfectly inelastic. Then give some examples ofgoods with almost perfectly elastic demands. In eachcase, justify your answers.
5. What is the relationship between the price elasticity ofdemand for a good and total expenditure on (or totalrevenue from) that good? Explain how this relationshiparises.
6. Are short-run price elasticities of demand generallylarger or smaller (in absolute value) than long-run elasticities?Why is this so?
7. What factors determine the size of the price elasticity ofdemand for a good? Specifically, how does each factorinfluence elasticity?
8. Which of the following goods are likely to be normalgoods? Which are likely to be inferior goods? Defendyour answers.
a. Canned spaghetti
b. Vacuum cleaners
c. Used books
d. Computer software
9. How are the words necessity and luxury used differentlyin economics than in everyday speech?
10. For each of the following pairs of goods, would you expectthe cross-elasticity of demand to be positive or negative?Large (in absolute value) or small? Defend your answers.
a. Computer hardware and computer software
b. Antibiotics and over-the-counter decongestants
c. Gasoline and automobile repairs
11. Explain the “short side” rule of markets. What quantitywould be traded if, at a price ceiling of $40, buyerswanted to buy 5,000 units and sellers wanted to sell4,000 units?
12. Who would bear the burden of an excise tax if supply isperfectly elastic and demand is perfectly inelastic? Whatif the situation were reversed so that supply is perfectlyinelastic and demand is perfectly elastic?
13. Answer the following questions.
a. Why might dentures have a negative income elasticityof demand?
b. What effect did the development of Lasik surgery tocorrect myopia have on the price elasticity of demandand the income elasticity of demand for prescriptioneyeglasses?