SOLVED

11) If the price of steel increases drastically, the quantity of steel demanded by the building industry will fall significantly over the long run because A) buyers of steel are more sensitive to a price change if they have more time to adjust to the price change. B) buyers of steel are less sensitive to a price change if they have more time to adjust to the price change C) sales revenue in the building industry will fall sharply. D) profits will fall by a greater amount in the long run than in the short run. 12) With the increased usage of cell phone services, what has happened to the price elasticity of demand for land-line telephone services? A) It has become more price inelastic. B) It has become more price elastic. C) It has become more income elastic. D) The absolute value of the price elasticity coefficient has probably gone down. 13) Which of the following would result in a higher absolute value of the price elasticity of demand for a product? A) A wide variety of substitutes are available for the good. B) The time period under consideration is short. C) The good is a necessity. D) The expenditure on the good is small relative to one’s budget. 14) If the market for a product is broadly defined, then A) the good has many complements. B) there are few substitutes for the product and the demand for the product is relatively inelastic. C) there are many substitutes for the product and the demand for the product is relatively elastic. D) the expenditure on the good is likely to make up a large share of one’s budget. 15) Rank these three items in terms of the elasticity of the demand for them at any given price, from most elastic to least elastic: hot beverages, coffee and Peets’ Coffee. A) hot beverages, coffee, Peets’ Coffee B) Peets’ Coffee, coffee, hot beverages C) coffee, Peets’ Coffee, hot beverages D) coffee, hot beverages, Peets’ Coffee 16) Necessities tend to have more inelastic demands than luxuries. 17) When there are few substitutes available for a good, demand tends to be relatively inelastic. 18) If the market for a product is narrowly defined, then there are likely to be many substitutes for the product and the demand for the product is relatively elastic. 19) List the five key determinants of price elasticity of demand and explain how each determinant indicates if demand tends to be elastic or inelastic. 1. Availability of close substitutes: If a product has more substitutes available, it will have more elastic demand. If a product has fewer substitutes available, it will have less elastic demand. 2. Passage of time: The more time that passes, the more elastic the demand for a product becomes. 3. Luxuries versus necessities: The demand curve for a luxury is more elastic than the demand curve for a necessity. 4. Definition of the market: The more narrowly a market is defined, the more elastic demand will be. 5. Share of a good in a consumer’s budget: The demand for a good will tend to be more elastic the larger the share of the good in the average consumer’s budget. 20) For each pair of items below determine which product would have the higher price elasticity of demand (in absolute value). a.Insulin for a diabetic or aspirin for someone suffering a headache. b.A new Whirlpool 27 cu.ft. side-by-side refrigerator or electricity to power your all-electric home. c.A can of Red Bull or soft drinks in general. a.The demand for aspirin is more price elastic (its elasticity has a higher absolute value) than the demand for insulin. Insulin is more necessity than luxury and has virtually no substitutes. There are substitutes for aspirin and it it not necessarily a necessity. b.The demand for a new refrigerator is more price elastic than the demand for electricity to power your home. The Whirlpool refrigerator has many substitutes. Electricity to power your all-electric home is more necessity than luxury, and if your home is powered only by electricity, few, if any, substitutes are available. c.The demand for Red Bull is more price elastic than demand for soft drinks in general. Narrowly defined markets (such as the Red Bull drink market) have many substitutes.