Exam 2 review

# Exam 2 review - Econ Exam 2 Review 1 Define Price...

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Econ Exam 2 Review 1. Define Price Elasticity of Demand and explain what it means for demand to be elastic or inelastic. Price elasticity of Demand – the percentage change in the quantity demanded given a percentage change in the price. We will always talk about elasticity as a positive number. Elastic – greater than 1 – a 1% change in price leads toa greater than 1% change in quantity demanded. Inelastic – less than 1 – a 1% change in price leads to a less than 1% change in quantity demanded. 2. If the slope of a linear demand curve is -4, the price of the good is 5 and the quantity demanded at that price is 20, what is the price elasticity of demand. What do we know about a change in revenue if we were to increase price from this point? Slope = -4 ( Change in Q / Change in P) Price = 5 Quantity = 20 EP = Change in Q / Change in P * P/Q EP = (-4)(5/20) = (-20/20) = -1 SIGN DOESN’T MATTER – UNIT ELASTIC 3. Cross Price Elasticity of Demand – The percentage change in demand due to a percentage change in the price of another good. SIGN MATTERS. If positive, price of B increases, demand for A increases. Goods = substitutes (Good we consume one instead of the others, ex: Coke vs. Pepsi. Price of Good A goes up, we buy less A. We buy less of Good A, we buy more Good B even though its price hasn’t changed). 4. Discuss how the elasticity of demand changes the burden of a sales tax on a good like Soda Pop. If its elastic – producer surplus is larger If its inelastic – consumer surplus is larger 5. True, False or Uncertain: because or economic agent is self-interested it means he or she is also selfish. FALSE: we care about ourselves and what makes us happy. We can and do consider others but only in as much as they affect us. I do good things for others because it makes me feel good, OR less bad in the case of guilt. Altruism is possible – the warm glow of giving. 6. Describe consumer surplus in words and graphically. Consumer surplus – the difference between what we are willing to pay for a good (demand) and what we have to pay (price). The area under the demand curve above price.

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7. Describe producer surplus in words and graphically. Producer surplus – the difference between what a producer is willing to accept (supply) and what they
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## This note was uploaded on 03/21/2012 for the course ECO 201 taught by Professor Dunlevy during the Spring '08 term at Miami University.

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Exam 2 review - Econ Exam 2 Review 1 Define Price...

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