Why is elasticity of demand greater for goods that are a large share of a consumer's budget?
What will be an ideal response?
The greater the share of a consumer's budget accounted for by a good, the greater the elasticity of demand because the real income effect is greater. An increase in the price of a good that accounts for a relatively large share of the budget means that the consumer would have to significantly reduce spending on other goods. It is also more likely the consumer will also cut back on consumption of the good itself too.
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Refer to the figure below. In response to gradually falling inflation, this economy will eventually move from its short-run equilibrium to its long-run equilibrium. Graphically, this would be seen as
A. long-run aggregate supply shifting leftward B. Short-run aggregate supply shifting downward C. Aggregate demand shifting rightward D. Aggregate demand shifting leftward
Computer processors and memory costs have decreased dramatically in the past 25 years. As a result, in the computer market, we have seen
A. an increase in demand. B. an increase in supply. C. a decrease in demand. D. a decrease in supply.
Nonactivists of policies contend that a policy of shifting the aggregate ________ curve will be costly because it produces ________ volatility in both the price level and output
A) supply; less B) supply; more C) demand; less D) demand; more
A monopolist faces a demand curve given by P = 20 - Q and has total costs given by TC = Q2. By using a bit of calculus, you should be able to determine that the firm's marginal revenue is MR = 20 - 2Q and its marginal cost is MC = 2Q. What is its profit-maximizing price?
a. $20 b. $15 c. $10 d. $5