Ch004_4e

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Answers to Text Questions and Problems Answers to Review Questions 1. A consumer’s price elasticity of demand for a good depends on the fraction of the consumer’s income spent on that good because a price change alters the real value of the consumer’s purchasing power. This effect grows larger as the share of the consumer’s budget spent on a good increases. LO: 1 AACSB: Analytical Skills Bloom’s: Analysis 2. Elasticity of demand at any point is the price-quantity ratio at that point times the reciprocal of the slope of the demand curve. The slope, and hence its reciprocal, is constant along a straight-line demand curve, but the price quantity ratio—and hence price elasticity of demand—declines as we move down the curve. LO: 2 AACSB: Analytical Skills Bloom’s: Application 3. In order for total spending to fall, the percentage increase in price must be smaller than the percentage decrease in the quantity demanded. This implies that the price elasticity of demand must be elastic since in this case a one percent increase in price causes a more than one percent decrease in quantity demanded. LO: 3 AACSB: Analytical Skills Bloom’s: Application 4. The algebraic sign of the elasticity of demand for a good with respect to its own price conveys no useful information because it is always negative. By contrast, the elasticity of demand for a good with respect to the price of another good can be either positive or negative depending on whether the goods are substitutes or complements, so it is important to keep track of the sign in this case.

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