Practice Problems (Module 2)

Question #1: The demand for LuLuLemon will be less elastic than the demand for athletic attire.

Answer: False

The demand for LuLuLemon would be MORE elastic than the demand for athletic attire.

Remember, the narrower a product classification is, the greater the elasticity is for consumers. There are more product substitutes for the brand LuLuLemon than there are substitutes for athletic attire overall.

In other words, the more substitutes, the more elastic a product is!

Elasticity is similar to price sensitivity. Consumers are MORE sensitive to the price of LuLuLemon (one single brand) compared to the price of athletic attire overall (many brands).  

Question #2: A person that bears the incidence of a tax is the same person who hands over that tax money to the government.

Answer: True

The legal burden of a tax is experienced by those who are responsible for turning over their tax money to the government. 

This may seem contradictory to Tax Incidence & DWL, however it's important to remember that technically speaking, the person who bears the burden of the tax is the person handing the tax money over to the government.

Question #3: If all other variables are held constant, when the price of a good increases, producer surplus decreases. 

Answer: False

Producer surplus is considered to be the difference between what a consumer actually paid (the market price) and what the producers were willing to sell their product for.

If the price of a good increases, this means that consumers are paying more. This widens the differences between our market price and the producer’s willingness to sell.

Therefore, our producer surplus would increase in this example, not decrease.

Question #4: What is the equation utilized to calculate income elasticity? 

A. %𝚫P / %𝚫Q
B. %𝚫I / %𝚫Q
C. %𝚫in price of related good / %𝚫in Demand
D. %𝚫Q / %𝚫I

A. %𝚫P / %𝚫Q
B. %𝚫I / %𝚫Q
C. %𝚫in price of related good / %𝚫in Demand
D. %𝚫Q / %𝚫I

Similar to the elasticity of demand equation, the income elasticity equation compares the change in quantity to that of the change in income.

This equation is often memorized, but we can interpret it as comparing the change in quantity purchased...

%𝚫Q / %𝚫I

...to the change in income of the consumer.

%𝚫Q / %𝚫I

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