# Chapter 5 Microeconomics (Exam 2)

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1. The most important determinant of demand elasticity is...
the number and closeness of substitutes.
2. If expenditures on a good constitute a fairly large proportion of a consumer's budget, then...
a price change will have a large effect on the consumer's real income
3. Income elasticity of demand
the percentage change in quantity demanded divided by the percentage change in income
4. Inferior goods
Demand for good falls as income increases and they have a negative income elasticity of demand.
5. Normal goods
Goods with a positive income elasticity of demand, which means that demand for such goods increases as income increase
6. Cross-price elasticity of demand
measures the percentage change in quantity demanded of one good divided by the percentage change in price of another good
7. Price elasticity of demand is defined as
the percentage change in quantity demanded divided by the percentage change in price.
8. If demand is price elastic, then
total revenue will increase if the price falls.
9. If demand is price elastic and price decreases, then
the extra revenues from the extra units sold exceed the loss in revenues from the lower price.
10. If a demand curve has an elasticity of demand of 1.0 everywhere, then a 40-percent change in price will
not cause a change in total revenue.
11. Price elasticity of demand is greater
the greater the availability of close substitutes.
12. When expenditures on a certain good make up a large proportion of your budget,
demand is price elastic because an increase in price has a large effect on your ability to buy the good.
13. The greatest response to a price increase for a good is likely to be
after a year.
14. Price elasticity of demand increases over time because
the ability to substitute away from higher-priced goods increases over time.
15. Salt has a low elasticity of demand because
it has few close substitutes and it is a small fraction of a consumer's budget.
16. As time increases
both demand and supply become more elastic.
17. Suppose the government raises the tax on a gallon of gasoline by 20 percent. Then we would expect
tax revenues to rise sharply almost immediately, but to decline from the new levels after a few years.
18. A firm's revenues are the largest possible when it operates on
the point on its demand curve where the elasticity of demand equals 1.0.
19. A unit-elastic supply curve is
a straight line through the origin.
20. Suppose demand increases with rising income, but by a smaller percentage than the increase in income. In this case,
the income elasticity of demand is between zero and 1.0.
21. If the income elasticity of demand is very high, we expect the price elasticity of demand to be
elastic
22. The cross-price elasticity of demand indicates
whether two goods are substitutes or complements
23. A product has a large negative cross-price elasticity with several other products. We would expect the product's price elasticity of demand to be
elastic.
24. Governments tend to tax goods with
inelastic demands because they want tax revenues to be large
 Author: straightupdeme ID: 181723 Card Set: Chapter 5 Microeconomics (Exam 2) Updated: 2012-11-07 19:07:47 Tags: Chapter Microeconomics Folders: Description: Chapter 5 Microeconomics (Exam 2) Show Answers: