Ehab Abaza Ryan H.W. # 11 QFR #s 7,9,10 7.

10/20/11 C Band

The price elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price. It measures how much the quantity supplied of a good responds to a change in the price of that good. 9. The price elasticity of supply is usually larger in the long run than it is in the short run. In the long run, a firm can buy a new factory or make changes to them so that the quantity supplied has a greater response to price. In the short run, its not easy for a firm to make any changes to the factories that would allow the quantity supplied to be more responsive to the price. 10. The fact that the elasticity of supply and demand is greater in the long run prevented OPEC from maintaining this high price throughout the 1980s. When OPEC countries agreed to reduce their production of oil, they shifted the supply curve to the left. Even though each OPEC member sold less oil, the price rose by so much in the short run that OPEC incomes rose. By contrast, in the long run when supply and demand are more elastic, the same reduction in supply, measured by the horizontal shift in the supply curve, caused a smaller increase in the price. Thus, OPECs coordinated reduction in supply proved less profitable in the long run. PA #s 4,6,7 (explain why) 4a. If Emily always spends one-third of her income on clothing, then her income elasticity of demand is one, because if she allots part of her income towards her clothing the percentage change in her quantity of clothing must equal her percentage change in income. 4b. Emily's price elasticity of clothing demand is one, because every percentage point increase in the price of clothing would lead her to reduce her quantity purchased by the same percentage. 4c. Because Emily spends less of her income on clothing, her quantity demanded will be lower at every price. As a result, her demand curve will shift to the left, however, dude to that fact that she will spend again her price elasticity of demand and her income are still one. 6. Jerry's price elasticity of demand is one, since he spends the same amount on gas, no matter what the price, which means his percentage change in quantity is equal to the percentage change in price. Tom's price elasticity of demand is zero, since he wants the same quantity no matter what the price is. 7. In economic downturns, people have lower income to spend. This is because the income elasticity of restaurant meals must be larger than the income elasticity of spending on food to be eaten at home.