For most goods and services, income elasticity of demand tends to be smaller in the short run than in the long run. However, a recent study shows that the demand for a durable good such as automobiles tends to be more income-elastic in the short run than in the long run. Explain why.
What will be an ideal response?
Since durable goods are typically consumed over a relatively longer period of time, consumers have a higher degree of flexibility to replace old goods with new ones. Demand for automobiles is a good example. Suppose that consumers' income falls due to a recession. Considering that the purchase of an automobile represents a large share of a consumer's budget, the consumer may put off the purchase of a new automobile until next year. In the long run, automobiles will eventually break down and new purchases will be made.
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Given that the own-price elasticity of demand for shoes is -2.6, if the price of shoes rises by 8%, what will happen to the quantity of shoes demanded?
a. It will decrease by 20.8% b. It will increase by 20.8% c. It will decrease by 2.6% d. It will decrease by 2.6%
If the Fed simultaneously raises the discount rate and the reserve requirement, the money supply will:
A. expand. B. contract. C. remain unchanged. D. take on a value that cannot be determined from the information given.
Autonomous consumption
A. is measured by the slope of the consumption function. B. is measured by the intercept of the consumption function and the Y-axis. C. is equal to the minimum savings. D. is the reciprocal of consumption.
There is no deadweight loss if:
A. demand is perfectly inelastic. B. demand is perfectly elastic. C. demand shifts the amount of the tax. D. taxes collected are used for societal good.