Page 875 - Krugmans Economics for AP Text Book_Neat

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SOLUTIONS TO AP REVIEW QUESTIONS

3. c 4. d
4. b 5. c
5. c Tackle the Test:

Tackle the Test: Free-Response Questions
Free-Response Questions 2. a. 40%/20% = 2

2. a. b. elastic
Price c. Price
Elastic demand

S

D
Quantity Quantity

b. An increase in price will decrease total revenue because d. Inputs are readily available and can be shifted into/out of
the negative quantity effect of the price increase is greater production at low cost.
than the positive price effect of the price increase.
Module 49
Module 48
Check Your Understanding
Check Your Understanding 1. A consumer buys each pepper if the price is less than
1. By the midpoint method, the percent increase in (or just equal to) the consumer’s willingness to pay
Chelsea’s income is for that pepper. The demand schedule is constructed
by asking how many peppers will be demanded at any
$18,000 − $12,000 × 100 = $6,000 × 100 = 40%
($12,000 + $18,000)/2 $15,000 given price. The accompanying table illustrates the
demand schedule.
Similarly, the percent increase in her consumption of
CDs is
Quantity Quantity
40 − 10 × 100 = 30 × 100 = 120% Quantity of peppers of peppers
(10 + 40)/2 25 Price of peppers demanded demanded
of pepper demanded by Casey by Josey
Chelsea’s income elasticity of demand for CDs is there-
fore 120%/40% = 3. $0.90 1 1 0
2. The cross-price elasticity of demand is 5%/20% = 0.25. 0.80 2 1 1
Since the cross-price elasticity of demand is positive, the 0.70 3 2 1
two goods are substitutes.
3. By the midpoint method, the percent change in the num- 0.60 4 2 2
ber of hours of web-design services contracted is 0.50 5 3 2
0.40 6 3 3
500,000 − 300,000 × 100 = 200,000 × 100 = 50%
(300,000 + 500,000)/2 400,000 0.30 8 4 4
Similarly, the percent change in the price of web-design 0.20 8 4 4
services is: 0.10 8 4 4
$150 − $100 × 100 = $50 × 100 = 40% 0.00 8 4 4
($100 + $150)/2 $125
The price elasticity of supply is 50%/40% = 1.25. Hence When the price is $0.40, Casey’s consumer surplus
supply is elastic.
from the first pepper is $0.50, from his second pepper
Tackle the Test: $0.30, from his third pepper $0.10, and he does not
Multiple-Choice Questions buy any more peppers. Casey’s individual consumer
surplus is therefore $0.90. Josey’s consumer surplus
1. b from her first pepper is $0.40, from her second pepper
2. d $0.20, from her third pepper $0.00 (since the price
is exactly equal to her willingness to pay, she buys
3. d the third pepper but receives no consumer surplus