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To economists, the term utility refers to the

benefit or satisfaction a consumer receives consuming a good

Suppose that when the price of good X falls from $10 to $8, the quantity demanded of good Y rises from 20 units to 25 units. Using the midpoint method,

the cross-price elasticity of demand is -1.0, and X and Y are complements.

A good will have a more elastic demand,

the greater the availability of close substitutes.the more narrow the definition of the market.

In which of these instances is demand said to be perfectly inelastic?

A decrease in price of 2% causes an increase in quantity demanded of 0%.

Demand is said to be inelastic if the

quantity demanded changes proportionately less than price.

If the cross-price elasticity of two goods is positive, then those two goods are

substitutes

Refer to Figure 5-12. Using the midpoint method, what is the price elasticity of supply between $100 and $220?

0.58

Suppose Fernando allocates his lunch money to pizza and Coke. A Coke costs $1 and a slice of pizza costs $1.50. The marginal utility of the last slice of pizza Fernando ate was 30, and the marginal utility of his last Coke was 25. Fernando spent all of his lunch money. From this information, we can conclude that

Fernando's total utility would have been higher if he had purchased more Coke and less pizza

Refer to Table 5-1. Which of the following is consistent with the elasticities given in Table 5-2?

A has fewer substitutes than B.

Refer to Figure 5-11. When the price is $30, total revenue is

$9,000.00

Refer to Figure 5-11. When price falls from $50 to $40, it can be inferred that demand between those two prices is

elastic, since total revenue increases from $5,000 to $8,000.

Suppose good X has a negative income elasticity of demand. This implies that good X is

an inferior good.

The price elasticity of supply measures how much

the quantity supplied responds to changes in the price of the good.

Consider airfares on flights between New York and Minneapolis. When the airfare is $250, the quantity demanded of tickets is 2,000 per week. When the airfare is $280, the quantity demanded of tickets is 1,700 per week. Using the midpoint method,

the price elasticity of demand is about 1.43, and an increase in the airfare will cause airlines' total revenue to decrease.

Because the demand for wheat tends to be inelastic, the development of a new, more productive hybrid wheat would tend to

decrease the total revenue of wheat farmers.

Refer to Table 5-2. Using the midpoint method, at a price of $12, what is the income elasticity of demand when income rises from $5,000 to $10,000?

1

Refer to Table 5-2. Using the midpoint method, at a price of $16, what is the income elasticity of demand when income rises from $5,000 to $10,000?

1

As we move downward and to the right along a linear, downward-sloping demand curve,

slope remains constant but elasticity changes.

Refer to Exhibit E-7. The marginal utility of the fifth apple is equal to

20

Refer to Figure 5-3. Between point A and point B on the graph, demand is

unit elastic.

Economists compute the price elasticity of demand as the

percentage change in quantity demanded divided by the percentage change in price.

If the price elasticity of demand for a good is 0.25, then a 20 percent decrease in price results in a

5 percent increase in the quantity demanded.

Holding all other forces constant, if increasing the price of a good leads to an increase in total revenue, then the demand for the good must be

inelastic.

Utility theory assumes that marginal utility of a good

decreases as an individual consumes more of the good

The case of perfectly elastic demand is illustrated by a demand curve that is

horizontal.

Last year, Sheila bought 6 pairs of shoes when her income was $40,000. This year, her income is $50,000 and she purchased 10 pairs of shoes. Holding other factors constant, it follows that Sheila

considers shoes to be a normal good.

Refer to Exhibit E-3. Clothes and amusements are priced at $10 each. The marginal utility per dollar for the first unit of amusement is

2

If the price elasticity of demand for tuna is 0.7, then a 1.5% increase in the price of tuna will decrease the quantity demanded of tuna by

1.05%, and tuna sellers' total revenue will increase as a result.

For a good that is a necessity, demand

tends to be inelastic.

Pam is determined to lose 10 pounds and plans to adhere to a strict diet. But at the coffee break, she sees tray of glazed donuts and can't resist. She forgoes the plain bagel and devours a donut. Both the donut and bagel are priced at $0.50. When her office mates tease her, she says matter-of-factly that

the MU/P of donuts is higher than that of the bagel, and that's that!

Greg spends his entire budget on two goods: he plays video games at the mall arcade and he buys pizza. He discovers that his MU/P of video games is lower than his MU/P of pizza. From this, we know that he would be

happier eating more pizza and playing fewer video games

Marginal utility (MU) equals

TU/Q

If a 30 percent change in price causes a 15 percent change in quantity supplied, then the price elasticity of supply is

0.5, and supply is inelastic.

Marginal utility is defined as the

additional satisfaction gained from consuming one more unit of a good

Generally, a firm is more willing and able to increase quantity supplied in response to a price change when

the relevant time period is long rather than short.

If the marginal utilities of the first 4 candy bars consumed are 10, 12, 9, and 7, respectively, the total utility derived from consuming 3 candy bars is

31

When demand is inelastic within a certain price range, then within that price range,

an increase in price would increase total revenue because the decrease in quantity demanded is proportionately less than the increase in price.

When demand is elastic, an increase in price will cause

a decrease in total revenue.

When the price of a watch was $25 each, the jewelry shop sold 20 per month. When it raised the price to $35 each, it sold 14 per month. The price elasticity of demand for watches is about

1.06

You are in charge of the local city-owned golf course. You need to increase the revenue generated by the golf course in order to meet expenses. The mayor advises you to decrease the price of a round of golf. The city manager recommends increasing the price of a round of golf. You realize that

the mayor thinks demand is elastic, and the city manager thinks demand is inelastic.

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