Define the following terms
1. Elastic Demand
2. Elasticity
3. Income Elasticity
4. Inelastic Demand
5. Inferior Good
6. Luxury Good
7. Normal Good
8. Unit Elastic Demand
Discussion Questions:
1. If the percentage change in ____________ is greater than the percentage change in _______________, then demand is said to be elastic.
2. If the percentage change in quantity demanded is ______________ the percentage change in price, the demand is said to be unit elastic.
3. If the percentage change in quantity demanded is ________________ than the percentage change in price, then demand is said to be inelastic.
4. If the total revenue of a good increases as price decreases, then demand elasticity is considered ________________.
5. If the total revenue of a good ________________as price increases, then demand elasticity is considered inelastic.
6. Total revenue is maximized where demand elasticity is _________________________.
7. A horizontal demand curve is considered __________________ because the percentage change in _______________ is zero no matter where you mover along the demand curve.
8. A vertical demand curve is considered __________________ because the percentage change in _______________ is zero no matter where you mover along the demand curve.
7. The more substitutes a good has, the higher the demand elasticity of the good. Explain why this makes sense and why are more expensive goods usually more elastic.
Short Answer Questions:
1. Suppose a 10% change in the price of gasoline decreases the quantity of gasoline demanded by .5%. Calculate the elasticity of demand and determine whether the demand is elastic, inelastic, or unit elastic.
2. Suppose a rise in movie ticket prices from $8.00 to $10.00 reduces the quantity of tickets sold from 1000 to 600. Calculate the demand elasticity for movie tickets and determine whether the demand elasticity is elastic, inelastic, or unit elastic.
3. In 2010, an excise tax on the production of cigarettes increased the price of a pack of cigarettes from $4.00 to $5.00. This decreased the quantity of cigarettes demanded by 5%. Calculate the elasticity of demand and determine whether the demand is elastic, inelastic, or unit elastic.
Use the graph below to answer the following questions.
4. Calculate the elasticity of demand for the following:
From point B to point C. _______________
From point C to point D. _______________
From point D to point E. _______________
5. Order the points from most inelastic to most elastic.
6. Calculate total revenue at each point on the graph above.
TR at point A: ______ x _______ = TR at point B: ______ x _______ =
TR at point C: ______ x _______ = TR at point D: ______ x _______ =
TR at point E: ______ x _______ = TR at point F: ______ x _______ =
7. Suppose incomes increase by 10%. As a result of the price increase, the quantity of BMW's increase by 25%. Calculate the income elasticity and determine whether the good is a normal good, an inferior good, or a luxury good.