M05_PARK_1243_09_CH04

# M05_PARK_1243_09_CH0 - Chapter 4 ELASTICITY Answers to the Review Quizzes Page 92 1 Why do we need a units-free measure of the responsiveness of

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Answers to the Review Quizzes Page 92 1. Why do we need a units-free measure of the responsiveness of the quantity demanded of a good or service to a change in its price? The elasticity of demand is a units-free measure. Compare it as a measure of the responsiveness to some other candidate that depends on the units, such as the slope. The slope of the demand curve changes as the units measuring the same quantity of the good change (going from pounds to ounces, for example). The value of the elasticity is independent of the units used to measure the price and quantity of the product. As a result, the elasticity can be compared across the same good when quantity is measured in different units and/or the price is measured in different currencies. The elasticities of different goods also can be compared even though they are measured in different units. 2. Define price elasticity of demand and show how it is calculated. The price elasticity of demand is units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same. It equals the absolute value (or magnitude) of the ratio of the percentage change in the quantity demanded to the percentage change in the price. The percentage change in quantity (price) is measured as the change in quantity (price) divided by the average quantity (price). 3. Why, when we calculate the price elasticity of demand, do we express the change in price as a percentage of the average price and the change in quantity as a percentage of the average quantity? Using the average of both price and quantity gives the elasticity at the midpoint between the original price and the new price. If we only used percentage change from the original price, we would have a larger value for the elasticity between two prices when calculating the elasticity for a price fall than when calculating it for a price rise. Using the average price and quantity measures avoids the value of elasticity being dependent upon whether a price change reflects a price increase or decrease. 4. What is the total revenue test? Explain how it works. The total revenue test is a method of estimating the price elasticity of demand by observing the change in total revenue, given a change in price, holding all other things constant. The total revenue test shows that a price cut increases total revenue if demand is elastic, decreases total revenue if demand is inelastic, and does not change total revenue if demand is unit elastic. 5. What are the main influences on the elasticity of demand that make the demand for some goods elastic and the demand for other goods inelastic? The magnitude of the price elasticity of demand for a good depends on three main influences:

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## This note was uploaded on 03/02/2011 for the course ECON 001 taught by Professor Stein during the Fall '07 term at UPenn.

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M05_PARK_1243_09_CH0 - Chapter 4 ELASTICITY Answers to the Review Quizzes Page 92 1 Why do we need a units-free measure of the responsiveness of

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