Based on Chapter 4 "Microeconomics in context" 4th edition

1. List three reasons why the demand for a good or service may be elastic. List three reasons why the demand for a good or service may be inelastic. Provide an example of a good or service that is elastic and inelastic. 2. What is the formula for the price elasticity of demand? Define and sketch a perfectly inelastic demand curve and a perfectly elastic demand curve. 3. How does elasticity change along a linear demand curve? Is elasticity the same thing as the slope of a curve? 4. What is the relationship between price elasticity of demand and how a firm's revenues change as it changes its prices? 5. Explain how a price change has both "income effects" and "substitution effects" on buyer behavior. 6. Explain why the long-run elasticity of demand for a good may differ from the short-run elasticity. 7. Calculate the price elasticity of demand for the following cases: a) When price rises by 5 percent, quantity demanded drops by 2 percent. b) When price rises by 7 percent, quantity demanded drops by 10 percent. c) When price falls by 10 percent, quantity demanded rises by 5 percent. d) When price falls by 5 percent, quantity demanded rises by 15 percent. 8. Use the formulas for elasticity to answer the following questions. a) Suppose that the price elasticity of demand for bottled water is 0.9. If a grocer raises the price of bottled water by 20 percent, by what percentage will bottled water sales decrease as a result of the price increase? Will the grocer's revenue from bottled water sales go up or down? b) Suppose that the price elasticity of supply for tires is 2.5. You notice that the quantity of tires supplied decreases by 10 percent as the result of a change in the price of tires. Determine by what percentage the price of tires must have declined. c) When Mark's income rises by 5 percent, his expenditure on coffee rises by 15 percent. What is Mark's income elasticity of demand for coffee? Is coffee, for him, a normal or inferior good