Lecture 3 Quiz

Model Answers Submitted By Students

  1. In a free market, the responsiveness of demand to a change in price is known as its _________.“In a free market, the responsiveness of demand to a change in price is known as its elasticity.” (Lisa H.)
  2. Describe what an inelastic demand is, and give an example of a good having an inelastic demand. Describe what an elastic demand is, and also give an example.“Just as a word ‘elastic’ means ‘stretchable, bendable, and changeable,’ so it should come as no surprise that an inelastic demand is where the demand for a product or service doesn’t change much even if the cost goes up. …” (Sarah C.)

    “An inelastic demand is a demand for something that doesn’t change much if the price is changed. An example of something with an inelastic demand is medical services.” (Brandon M.)

    “An elastic demand is one that fluctuates with changing prices or incomes. An example is fresh fruit or vegetables — when cherries, for example, are not in season (and therefore a lot more expensive) the demand for them goes way down.” (Sarah B.)

    “… Elastic demand is when if you change the price a little the demand will change tremendously. An example would be electronic goods. My Dad bought a DVD player (finally!) When he fount it selling for a great price ($29).” (Abby L.)

  3. Give examples of a complement and a substitute for exercise equipment. Give examples of a complement and a substitute for the Big Mac hamburger.“Examples of a substitute for exercise equipment would be a different brand or a different type of equipment that does the same purpose. A complement of exercise equipment would be sweat pants or some sort of clothing that you can exercise in. The substitute for the Big Mac hamburger would be the Whopper, and a complement to the Big Mac would be fries and a drink.” (Scott J.)

    “Complement of exercise equipment: sneakers

    Substitute of exercise equipment: book teaching self-exercise techniques without equipment

    Complement of Big Mac: fries and a soda

    Substitute of Big Mac: Kentucky Fried Chicken’s home-style chicken strips” (Rebecca B.)

  4. Describe a perfectly elastic demand curve, and a perfectly inelastic one.“A perfect elastic curve is completely horizontal and a perfect inelastic curve is perfectly vertical.” (Daniel L.)

    “A perfectly elastic demand is one in which elasticity is equal to infinity. This curve will be a perfectly straight, perfectly horizontal line. This curve is impossible because for any given price … demand exists nowhere between negative and positive infinity or rather does not exist. A perfectly inelastic demand is in which elasticity is equal to zero. This curve will be a perfectly straight, perfectly vertical line. This curve, unlike its elastic brother, is possible ….” (Michael N.)

  5. At what elasticity does a price change have the least effect on sales revenue? What is the price elasticity of demand for a good that loses 20% in sales volume due to a 10% increase in price?“Answer to first question: 1. Answer to second question: 2, this is called an elastic demand.” (Cara M.)

    “Unit elasticity is the point where a price change has the least effect on sales revenue. A good that loses 20% in sales volume due to a 10% increase in price has a price elasticity of 2 (20%/10%=2).” (Tim S.)

  6. If the demand curve is a straight line, then is the price elasticity of demand constant? Explain.“No. When the demand curve is a straight line, the quantity and price change along that line but not in exact proportion to each other. Therefore, a given percentage increase in price does not necessarily cause the same percentage decrease in demand.” (Chris J.)

    “No, the price elasticity of demand of a straight line is not always constant. … [I]f the line is a diagonally straight line then the price elasticity is not going to be constant because the variables in the equation are not going to be the same. …” (Chris B.)

  7. Describe what a negative income elasticity of demand means. Give an example of a good or service (including charitable services) that might have a negative income elasticity of demand.“A good with negative income elasticity is one that has demand which goes down as income goes up. This is known as an ‘inferior good.’ …” (Greg J.)

    “A negative income elasticity means that demand for a good decreases when the income for a person increases. Examples of ‘inferior’ goods or services are the soup kitchen, store brand products, and used cars.” (Kirstin L.)

  8. The demand for milk is inelastic. Suppose there was a disease that uniformly killed 20% of all cows, but did not affect demand at all (i.e., the public was not scared by the disease). Are dairy farmers better or worse off due to the disease? Explain.“The dairy farmers win because the price of milk will rise and, due to its low elasticity, demand will not significantly be reduced. Thus, the farmers will make more money than they otherwise would have. This is the same industry-wide supply control principle behind OPEC or the De Beers diamond cartel.” (Joseph S.)

    “The dairy farmers might be better off because not only could they sell dairy products for more money (scarcity), but they wouldn’t have to take care of as many cows.” (Sarah S.)

    “Dairy farmers would be better off because of the disease. They wouldn’t have as much milk so the demand will go up as well as the price. They would not have to buy as much food, they would be able to sell some of the machines that milk the cows and they would probably have less stress in their lives. I think that today the public is scared of the disease and would refrain from eating the meat.” (Jessica H.)

    “The dairy farmers are far better off because they can raise the price of milk by [almost] as much as they want and the demand will not fall.” (Anthony B.)

  9. Suppose you own the New York Post, one of many newspapers in New York City. Suppose also that the overall demand curve for the newspaper market in New York is inelastic. Someone who took an inadequate economics course in college told you to raise the price based on the inelasticity of demand. Is he right?“The person who told you to raise the price did not take into account that the demand curve for the whole newspaper market is inelastic. That does not mean that the demand market for th New York Post is inelastic. If the Post raises prices some of their customers may switch to another newspaper. This would make the Post lose money.” (Kris T.)

    “… For someone like myself, I would buy the Post over the New York Times any day because of the Time’s greater liberal bias. Now if the price raise were too much, then I would either buy neither paper or switch over to the Times. Thus if polls are taken by th post’s people to see if people would still buy the paper at a small increase, and if the general response was yes, then certainly, raise it.” (Charles D.)

    “The above situation is guided by the Nash equilibrium. Although, based on the inelasticity of demand, all newspaper publishers could make more money if they were to increase their prices, it is unlikely than any publisher will have the will to increase his prices. If the other publishers do not also raise their prices as the one did, then the one publisher who increased his prices will see his revenue decrease. All newspaper publishers would be better off if they were to increase prices; however none of them are willing to trust the other publishers to increase their prices as well. Thus the Nash equilibrium in this situation is for all of the publishers to maintain low prices. … the New York Post is probably highly elastic because of its competition.” (Eric J.)

  10. Why do addictive goods tend to be inelastic? How does that impact their supply? Explain with examples.“Addictive goods tend to be inelastic because the addict needs the item and is willing to pay any price for it. …” (Matt P.)

    “No matter what the price, the people that are addicted will still pay to have them. The supply is huge since people see the profit possibilities of inelastic goods. The domination of the Superbowl ads by beer commercials shows the great audience that there is for addictive goods. Those companies would not spend that much money on ads if there was not a return on investment.” (Kevin H.)

    “… For example, someone who smokes … a pack of cigarettes a day will buy a pack of cigarettes every day no matter if the price is $2.55 or $4.00 because he ‘needs’ them, since it is addictive.” (Alyssa G.)

    “Addictive goods tend to be inelastic because people THINK they NEED them even though they don’t, they’re just addicted. Companies will continue to produce large amounts of addictive goods to meet the public demand. …” (Zak S.)

  11. Consider the extra cost of religious education, which inevitably increases as the state increases the costs of public schools (through taxation). Meanwhile, imagine a state lottery much larger and more popular than it is now. Would you expect the cross-elasticity of demand for the state lottery relative to religious education to be positive or negative? Explain.“I would expect the cross elasticity for schools and lottery tickets to be in a positive state of elasticity. Since religious schools are considered to be against gambling, I would expect them to be substitutes for each other. If the demand for religious schools increase, then the demand for lottery tickets will probably decrease.” (Chris R.)

    “Negative. If people spend more money on the lottery, they’ll be less likely to spend it on religious education. Also, if the lottery were much bigger and more popular, it would probably mean that fewer and fewer people in society went to church, because many church going people don’t buy lott tickets because they either think it’s evil or they’re in touch with reality.” (Mary Rose B.)

  12. There are many wealthy charitable foundations that administer money donated a long time ago (e.g., the Henry Ford Foundation and the Packard Foundation). Using the “invisible hand” (or lack of it), explain why these foundations almost always eventually spend the money in ways their founders would have never approved.“When a charitable institution gets donated money, it comes to them through donors who work to make the money (i.e., the invisible hand). But when the money is in the charities, they choose to use it as they see fit. People can solicit money through grants for a project related to the foundation. But charities almost always spend the money in ways their founders would have disapproved.” (Alexandra S.)

    “I don’t believe the ‘invisible hand’ applies to this case as much as the law of devolution. Throughout history it is difficult to name a single government, charity, or even church that has not strayed from its original goal given enough time. …” (Chris J.)

    “The founders worked for all their money so they would be more careful to do something good with it. The foundations now, lacking the invisible hand, don’t have a reason to try to spend extra effort to do the best thing with the money.” (Ben S.)