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Exam 2 Fall 2010-KEY

# Exam 2 Fall 2010-KEY - 1 Exam 2 Fall 2010 Key 1 Charlie...

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1 Exam 2 Fall 2010 Key 1. Charlie Black will purchase 10% more cans of Coke if the price of a can of Coke falls by 5%. Charlie's price elasticity of demand for cans of Coke is: A. 10. B. 5. C. 2. D. ½. Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price = 10%/5% = 2. 2. Suppose the quantity demanded of ski boats falls from 4.0 million to 3.0 million as a result of an average price increase from \$20,000 to \$25,000 per boat. The absolute value of the price elasticity of demand is closest to: Price elasticity of demand is equal to the percentage change in quantity demanded divided by the percentage change in price. Therefore price elasticity of demand is equal to ((4 - 3)/((4 + 3)/2))/((25000 - 20000)/((25000 + 20000)/2)) or 1.29. 3. As the price of beach front cottages in Florida was raised from \$400,000 to \$500,000, their quantity supplied rose from 2,000 to 2,100. Rounding to the nearest tenth, the elasticity of supply of beach front cottages is: Elasticity = [(2,100 - 2,000)/2,050]/[(500,000 - 400,000)/450,000] = (100/2,050)/(100,000/450,000) = 0.2 (rounded).

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2 4. Refer to the graph above. Calculate the approximate elasticity of demand for the line segment CD: Elasticity is [(9 - 6)/7.5]/[(0 - 6)/3] = (3/7.5)/(2) = -.20. We state elasticity of demand as positive. 5. If the supply of a product is inelastic, this implies that a given percentage change in price leads to: A. an equal percentage change in the quantity supplied. B. a larger percentage change in the quantity supplied. C. a smaller percentage change in the quantity supplied. D. no percentage change in the quantity supplied. Inelastic supply means that the percentage change in quantity is less than the percentage change in price. 6. Along a downward-sloping linear demand curve, the price elasticity of demand: At low prices, the demand for goods is relatively inelastic. At higher prices, the demand for a good is relatively elastic. Hence, the price elasticity of demand depends on where one is on the demand curve.
3 7. The supply curve is likely to be most inelastic in which period? In the instantaneous period, quantity supplied is fixed making the elasticity of supply perfectly inelastic. The longer the time period, the less inelastic the supply curve becomes.

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Exam 2 Fall 2010-KEY - 1 Exam 2 Fall 2010 Key 1 Charlie...

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