Mechanic

George’s Appliance Center sells big screen televisions. On a representative model, when the price was reduced from $2,450 to $2,275, monthly demand increased from 175 to 211 units. What is the price elasticity of demand?

A) -1.69.

B) -2.14.

C) -2.53.

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Price elasticity of demand = % change in quantity demanded / % change in price
% change in quantity = (211 − 175) / [(211 + 175)/2] = 0.187
% change in price = (2,275 − 2,450) / [(2,275 + 2,450)/2] = -0.074
Price elasticity of demand = 0.187 / -0.074 = -2.53

Mechanic

Price elasticity of demand is most accurately defined as the change in:

A) quantity demanded in response to a change in market price.

B) market price in response to a change in the quantity demanded.

C) quantity demanded in response to a change in income.

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Mechanic

The percent change in demand for a good divided by the percent change in the price of another good is known as the:

A) cross price elasticity of demand.

B) income elasticity of demand.

C) price elasticity of demand.

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Mechanic

Assume that for the average consumer, the quantity demanded for gasoline increases from 15 gallons per week to 20 gallons per week response to a price decrease from $2.90 per gallon to $2.46 per gallon. Which of the following is closest to the price elasticity of demand for gasoline?

A) -1.65.

B) -1.86

C) -1.74.

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The percentage change in quantity demanded is (20 – 15) / [(20 + 15) / 2] = 28.57% and the percentage change in price is (2.46 - 2.90) / [(2.90 + 2.46) / 2] = -16.42%. Thus, price elasticity = 28.57% / -16.42% = -1.74.

Mechanic

Gene Bawerk, an economics professor, is lecturing on the factors that influence the price elasticity of demand. He makes the following assertions:

Statement 1: For most goods, demand is more elastic in the long run than the short run.
Statement 2: Demand for a good becomes more elastic when a close substitute for it becomes available on the market.

With respect to Bawerk’s statements:

A) only statement 1 is correct.

B) only statement 2 is correct.

C) both are correct.

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Both of these statements are accurate. Price elasticity for most goods is greater in the long run because individuals can make long-term decisions that require different quantities of the good, such as buying more fuel efficient vehicles to use less gasoline. Price elasticity is greater the better the available substitutes because an increase in price will lead more buyers to switch to the substitute products.

Mechanic

The demand for a product tends to be price inelastic if:

A) few good complements for the product are available.

B) people spend a large share of their income on the product.

C) few good substitutes for the product are available.

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If a large price change results in a small change in quantity demanded, demand is inelastic. Cigarettes are an example of a good with inelastic demand.

Mechanic

If the price of World Cup Soccer tickets increases from $40 a ticket to $50 a ticket and the quantity demanded of tickets stays the same,  demand for the tickets is:

A) elastic, but not perfectly elastic.

B) perfectly inelastic.

C) inelastic, but not perfectly inelastic.

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Since the quantiy of tickets demanded stayed the same after the price changed, the demand curve would have to be vertical which is a perfectly inelastic demand curve.

Mechanic

If the price of a candy bar increases from $0.50 to $0.55 and the quantity demanded decreases from 267 to 235, the price elasticity of demand is:

A) 1.34.

B) -1.23.

C) -1.34.

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Price elasticity of demand is calculated by dividing the percent change in quantity demanded by the percent change in price, using the average value of the variable in the computations. The percent change in quantity demanded is (235 − 267) / [(235 + 267) / 2] = -32 / 251 = -0.127 or -12.7%. The percent change in price is = (0.55 − 0.50) / [(0.55 + 0.50) / 2] = 0.05 / 0.525 = 0.095 or 9.5%. The price elasticity of demand is -12.7 / 9.5 = -1.34.

Mechanic

If the price elasticity of demand is -1.5 and the price of the product increases 2%, the quantity demanded will:

A) decrease approximately 1.5%.

B) decrease approximately 3%.

C) decrease approximately 0.75%.

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If the price elasticity of demand is -1.5, and you increase the price of the product 2%, the quantity demanded will decrease approximately 3%. When the price elasticity is negative, it means that price and demand move in opposite directions. Given a price decrease, demand will increase and vice versa. The absolute value, 1.5, indicates that demand will move one-and-a-half times as much as price.

Mechanic

When household incomes go down and the quantity of a product demanded goes up, the product is:

A) an inferior good.

B) a necessity.

C) a normal good.

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When household incomes go down and the quantity demanded of a product goes up, the product is an inferior good. Inferior goods include things like bus travel and margarine.