Economics Review

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What is the formula for measuring price elasticity of demand? Percentage change in quantity demanded / Percentage change in price   
When the price elasticity coefficient is less than 1, the percentage change in quantity demanded is smaller than  the change in price.  
When the price elasticity coefficient is equal to 1, the percentage change in quantity demanded is equal to  the change in price.  
When the price elasticity coefficient is greater than 1, the percentage change in quantity demanded is greater than  the change in price.  

If a university passed a rule stating that university students must live in university dormitories, what effect would this have on the price elasticity of demand for dorm space? What effect would this have on room rates?  

The price elasticity of demand would be more inelastic, and room rates would increase. 

b. Price and total revenue move in the opposite directions, when the demand is elastic

Determine how the following changes in price would affect total revenue.  
a. Price falls and demand is inelastic. Total revenue decreases   
b. Price rises and demand is elastic. Total revenue decreases   
c. Price rises and supply is elastic. Total revenue increases   
d. Price rises and supply is inelastic. Total revenue increases   
e. Price rises and demand is inelastic. Total revenue increases   
f. Price falls and demand is elastic. Total revenue increases   
g. Price falls and demand is unit-elastic. Total revenue remains unchanged 

You are chairperson of a state tax commission responsible for establishing a program to raise new revenue through excise taxes. The elasticity of demand would be important to you in determining the products on which the taxes should be levied.  

Elasticity of demand would be important because when a tax is levied on a product whose demand is highly inelastic , tax revenue would be high

Because of a legal settlement over state health care claims, in 1999 the U.S. tobacco companies had to raise the average price of a pack of cigarettes from $1.95 to $2.45. The decline in cigarette sales was estimated at 8 percent. What does this imply for the elasticity of demand for cigarettes?  

The price elasticity of demand for cigarettes was inelastic because the price changed by 22.7 percent.

The values indicate that a 1 percent increase in income will increase the quantity of movies demanded by 3.4 percent.   
If the income elasticity coefficient is negative, it means that the good is inferior so that if income falls, the quantity demanded of the good will rise.

Suppose that the total revenue received by a company selling basketballs is $600 when the price is set at $60 per basketball and $600 when the price is set at $40 per basketball. Without using the midpoint formula, can you tell whether demand is elastic, inelastic, or unit-elastic over this price range?  

Demand is unit-elastic  over this range.

CH5
Market failure is the result of goods that have non-rival and non-excludable characteristics  and goods that have external effects .  
An example of an activity that can be affected by both types of market failures would bea fireworks display that caused some fire damage.

Economists say competitive markets are efficient because by producing up to the point where MB = MC, profits are maximized and the maximum potential consumer surplus and producer surplus is generated.   

Which of the following statements is true?
 
Producing less than equilibrium leaves unrealized producer and consumer surplus, and producing more than equilibrium reduces the consumer surplus.  revised 4/11/11
Contrast the characteristics of public goods with those of private goods.  
Public goods differ from private goods because they are non-rival and non-excludable .  
Why won’t private firms produce public goods?
 
Private firms will not produce public goods because of low potential profits and the free-rider problem

Use the distinction between the...
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