Chapter 6, Problem Set #2

Unit 6, Chapter 20

Mr. MaurerName: ______

AP EconomicsDate: ______

Chapter 6, Problem Set #2

Price Elasticity of Supply, Cross Elasticity, and Income Elasticity of Demand

1. In your own words, explain the concept of price elasticity of supply.

It’s how much sellers (or producers, or suppliers, or whatever) respond to a change in price. It’s how much quantity supplied changes when price changes. It’s %ΔQ/%ΔP, but in this case, the Q is the quantity supplied.

2. What factors determine price elasticity of supply?

This is explained at the bottom of page 143.

3. Explain why price elasticity of supply is different over the market period, the short run, and the long run.

This is explained on pages 144 and 145.

4. Explain, in your own words, the idea of cross elasticity of demand. What concept, that we have studied before, is this closely related to?

It’s how much the quantity demanded of one product changes when the price of another product changes. If very similar to the idea of substitute goods and complementary goods. This is explained at the bottom of pages 146 and 147.

5. Suppose a 20% increase in the price of apples leads to a 20% increase the quantity of bananas demanded by consumers. Calculate the cross elasticity of demand for apples and bananas? Are apples and bananas substitute goods, complementary goods, or independent goods?

Exy= 20%/20% = 1. Because the value is positive, the goods are substitutes.

6. Suppose a 20% increase in the price of TVs leads to a 10% decrease the quantity of DVDs demanded by consumers. Calculate the cross elasticity of demand for TVs and DVDs? Are TVs and DVDs substitute goods, complementary goods, or independent goods?

Exy = -10%/20% = -0.5. Because the value is negative, the goods are complements. NOTE: WITH CROSS ELASTICITY OF DEMAND, THE NEGATIVE SIGN DOES MATTER! WHEN WE CALCULATE REGULAR OLD PRICE ELASTICITY OF DEMAND, WE IGNORE THE NEGATIVE SIGN, BUT WE CAN’T DO THAT WITH CROSS ELASTICITY OF DEMAND.

7. Explain the idea of income elasticity of demand. If the income elasticity of demand coefficient is positive (that means as income went up, quantity demanded went up), what type of good are we talking about?

It’s simply how much buyers will change the quantity of a product they will buy when their income changes. If income elasticity is positive, that means the good is a normal good (as people have more income, they will buy more of the product). If income elasticity were negative, it would be an inferior good (as people have more income, they buy less – like Ramen noodles.)AGAIN, WITH INCOME ELASTICITY, THE NEGATIVE SIGN IS IMPORTANT.