Questions for Review without Answers
Chapter 9. Demand Theory II. Elasticity. Indifference Analysis
I. Basics
1) Define elasticity.
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2) Do you remember the rule of thumb?
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II. Price Elasticity
3) If the demand curve is a linear line, where is demand unit elastic, elastic and inelastic?
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4) How do you calculate elasticity between two points?
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5) Explain why unit elasticity and inelasticity do not contradict the law of demand.
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6) Describe the implications of price elasticity and price inelasticity for business revenues.
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7) Describe the relationship between the slope of the demand curve and price elasticity.
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8) Give a numerical example (%Δ in quantity demanded : %Δ in price) of each of the following:
A. zero elasticity
B. inelasticity
C. unit elasticity
D. elasticity
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9) The quantity demanded for Commodity A rises by 12 percent. The price elasticity of demand is 1.3. By how many percent must the price of Commodity A therefore have fallen?
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10) Your university raises tuition fees to raise its revenues. What does it think about price elasticity of tuition?
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11) The price of a commodity drops from $5 to $4.50. Quantity demanded rises from 500 units to 525 units. What is price elasticity?
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III. Cross Elasticity
12) Compare the value of the fraction measuring cross elasticity for complements with the value of the fraction measuring cross elasticity for substitutes.
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IV. Income Elasticity
13) Explain why the income elasticity of inferior goods is negative.
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V. Some Examples
14) Name the characteristics of goods for which price and income elasticity are likely to be high.
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VI. Advanced Topic. Indifference Analysis
15) What is the aim of indifference analysis and how is it achieved?
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16) Write down the equation to express optimal consumer choices that is used in indifference analysis.
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17) And the formula to calculate the MRS.
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18) Explain why the slope of indifference curves equals the MRS.
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19) Why can two indifference curves not intersect?
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20) Your utility function for commodities x and y is u(x,y) = 2x + 6y. You buy 12 units of x and 8 units of y. You now lower your purchases of x to 6. How many units of y must you buy to get the same utility level?
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21) Explain how to derive the demand curve from indifference analysis.
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