Microeconomics Essay

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ECON 1312 Homework Assignment # 2 Chapter 4 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? Answer: To measure or to compare the demand of the two unrelated goods or services. 2. Define the price elasticity of demand and show how it is calculated. Answer: The units-free measure of the responsiveness of the quantity demanded of a good to a change in it s price when all other influences on buying plans remain the same. 3. What is the total revenue test? Explain how it works. Answer: A method of estimating the price elasticity of demand by observing the change in total revenue that results from a change in the price, when all other influences on the quantity sold remain the same. • If a price cut increases total revenue, demand is elastic. • If a price cut decreases total revenue, demand is inelastic. • If a price cut leaves total revenue unchanged, demand is unit elastic. 4. 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? Answer: • the closeness of substitutes • the proportion of income spent on the good • the time elapsed since the price change 5. Why is the demand for a luxury generally more elastic (or inelastic) than the demand for a necessity? Answer: Luxury has many substitute you can either buy or not buy, that makes it elastic and necessity is inelastic because it has a poor substitute and crucial for our well-being. Percentage change in Quantity demand Price elasticity ________________________________ of demand = percentage change in price 6. What does the cross elasticity of demand measure and how is it calculated? Answer: The responsiveness of the demand for a good to a change in the price of a substitute or complement, other

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