List the five key determinants of price elasticity of demand and explain how each determinant indicates if demand tends to be elastic or inelastic
What will be an ideal response?
1. Availability of close substitutes: If a product has more substitutes available, it will have more elastic demand. If a product has fewer substitutes available, it will have less elastic demand.
2. Passage of time: The more time that passes, the more elastic the demand for a product becomes.
3. Luxuries versus necessities: The demand curve for a luxury is more elastic than the demand curve for a necessity.
4. Definition of the market: The more narrowly a market is defined, the more elastic demand will be.
5. Share of a good in a consumer's budget: The demand for a good will tend to be more elastic the larger the share of the good in the average consumer's budget.
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Use the graph below to answer the next question.
Other things equal, an increase in the price of substitute resource would cause a
A. move from a to b on D1. B. shift from D2 to D3 assuming the substitution effect exceeds the output effect. C. move from b to a on D1. D. shift from D3 to D2 assuming the substitution effect exceeds the output effect.
The natural employment deficit ________ be used to determine the effectiveness of discretionary fiscal policy actions because ________
A) cannot; it excludes non-discretionary spending changes B) can; it includes non-discretionary spending changes C) cannot; it includes non-discretionary spending changes D) can; it excludes automatic stabilization expenditures
Which of the following methods can be used to sustain a cartel?
A) removing barriers to entry B) trade groups C) acts of self-interest D) the use of binding contracts
Suppose France can produce 9,000 potatoes or 3,000 lemons per day, and that Italy can produce 3,000 potatoes or 3,000 lemons per day. Which of the following statements in this context is true?
a. France has an absolute advantage in producing lemons. b. Italy has a comparative advantage in producing potatoes. c. Italy would be willing to trade one lemon for anything greater than one potato. d. Both countries would be willing to trade at a rate of one lemon for one potato. e. France has a comparative advantage in producing lemons.