Santa monica college October 21, 2015 Due: October 28, 2015 Econ 1 Principles of Microeconomics Assignment 5   Section 1: Multiple Choice 1

Santa monica college

October 21, 2015

Due: October 28, 2015

Econ 1

Principles of Microeconomics

Assignment 5

Section 1: Multiple Choice

1. The price elasticity of demand is a measure of A) the equilibrium price of a product.

A) buyers' responsiveness to changes in the price of a product.

B) the amount of a product purchased when income increases.

C) whether a product is a substitute or a complement.

2. The more substitutes there are for a product:

1. the less price elastic the demand for the product is.
2. the more price elastic the demand for the product is.
3. the greater the income elasticity for the product.
4. the smaller the income elasticity for the product.

3. Total revenue equals A) price × quantity sold.

2. profit - cost.
3. price.
4. quantity sold - cost.

4. Calculate the income elasticity if an 8 percent increase in income leads to a 4 percent increase in quantity demanded for organic produce.

1. -0.66
2. 0.5
3. 1.5
4. 2

5. The price of coffee rose 40 percent and the quantity of coffee demanded fell by 20 percent. The quantity of doughnuts demanded also fell by 20 percent. From this information, we can conclude that A) the demand for coffee is elastic.

2. the demand for coffee is unit elastic.
3. coffee is an inferior good.
4. the cross elasticity demand between coffee and doughnuts is -0.5.

6. Carrie Bradshaw claims that when it comes to buying shoes, "price is no object." If this is true, then her demand for shoes is A) perfectly elastic.

2. perfectly inelastic.
3. unit-elastic.
4. horizontal.

7. People eat at restaurants less often when their incomes fall because of a recession. Eating at restaurants must be 

1. an inferior good.
2. a normal good.
3. a complement to other goods.
4. a substitute for other goods.

8. Suppose when Bob's Bakery raised the price of its breads by 10 percent, the quantity demanded fell by 15 percent. What was the effect on sales revenue? A) Sales revenue increased. 

2. Sales revenue remained unchanged.
3. Sales revenue decreased.
4. It cannot be determined without information on prices.

9. The quantity of TVs sold is 100 at the unit price $200. Suppose the price elasticity of demand for TVs by the initial value method is 2.0, and you would like to decrease the unit price for TVs to $150. Then the new quantity sold must be: A) 125.

2. 150.
3. 200.
4. 250.

10. If a firm facing a linear demand curve experiences an increase in total revenue after lowering the price:

1. the initial price was set at a point where the demand is inelastic.
2. the initial price was set at a point where the demand is elastic.
3. the new price is set where the demand is perfectly elastic.
4. the new price is set where the demand is perfectly inelastic.

Section 2: Short Answer

1. Suppose last month SMC students purchased 60 copies of Jay-Z’s latest album at a price of $16 from SM?ecordz. Amid rumors of a possible divorce for Jay-Z, SM?ecordz decided to increase the price of the album to $20. Chapman [SMC – oops] students responded by purchasing 40 copies at this price. Use the initial value method to calculate the elasticity of demand for the soundtrack. Is demand elastic, inelastic or unit elastic? What happens to revenue?

2. Suppose that the price elasticity of demand for an ice cream cone is 1.9. If the local ice cream shop owner wants to increase total revenue, what would you recommend he or she do?
3. Give an example of a good that we might expect to have perfectly inelastic demand and explain why demand would be perfectly inelastic for this good. Give an example of a good we might expect to have perfectly inelastic supply and explain why supply for this good would be perfectly inelastic. 

4. Put the following products in order from lowest to highest based on their cross-price elasticity of demand with peanut butter: bread, bologna, floppy disks. Justify your answer

5. 

The figure above represents demand and supply in the market for gasoline. Use the diagram to answer the following questions

1. How much is the government tax on each gallon of gasoline? $3.80-$3.20=$0.60
2. What portion of the unit tax is paid by consumers? $0.40 or 2/3 
3. What portion of the unit tax is paid by producers? $0.20 or 1/3
4. What is the quantity sold after the imposition of the tax? 30 billion gallons
5. What is the after-tax revenue per gallon received by producers? 

$3.20 per gallon; total revenue of $3.20*30=$96 billion

6. What is the total tax revenue collected by the government? Tax Revenue = ($3.80-$3.20)*30=$18 billion
7. What is the value of the excess burden (deadweight loss) of the tax?  DWL = ½*($3.80-$3.20)*(35-30) =$1.5 billion