AP_Krugman_Textbook

3. c


4. b


5. c

Tackle the Test:

Free-Response Questions

2. a.

b.An increase in price will decrease total revenue because

the negative quantity effect of the price increase is greater

than the positive price effect of the price increase.

Module 48

Check Your Understanding

1. By the midpoint method, the percent increase in
   Chelsea’s income is

× 100 = × 100 = 40%

Similarly, the percent increase in her consumption of

CDs is

× 100 = × 100 = 120%

Chelsea’s income elasticity of demand for CDs is there-

fore 120%/40% =3.

2. The cross-price elasticity of demand is 5%/20% =0.25.
   Since the cross-price elasticity of demand is positive, the
   two goods are substitutes.


3. By the midpoint method, the percent change in the num-
   ber of hours of web-design services contracted is

× 100 = × 100 = 50%

Similarly, the percent change in the price of web-design

services is:

× 100 = × 100 = 40%

The price elasticity of supply is 50%/40% =1.25. Hence

supply is elastic.

Tackle the Test:

Multiple-Choice Questions

1. b


2. d


3. d

$50

$125

$150 −$100

($100 + $150)/2

200,000

400,000

500,000 −300,000

(300,000 + 500,000)/2

30

25

40 − 10

(10 + 40)/2

$6,000

$15,000

$18,000 −$12,000

($12,000 + $18,000)/2

Quantity

Price

D

Elastic demand

4. d


5. c
   Tackle the Test:
   Free-Response Questions


6. a.40%/20% = 2
   b.elastic
   c.

d.Inputs are readily available and can be shifted into/out of

production at low cost.

Module 49

Check Your Understanding

1. A consumer buys each pepper if the price is less than
   (or just equal to) the consumer’s willingness to pay
   for that pepper. The demand schedule is constructed
   by asking how many peppers will be demanded at any
   given price. The accompanying table illustrates the
   demand schedule.

Quantity

Price

S

SOLUTIONS TO AP REVIEW QUESTIONS S-29

When the price is $0.40, Casey’s consumer surplus

from the first pepper is $0.50, from his second pepper

$0.30, from his third pepper $0.10, and he does not

buy any more peppers. Casey’s individual consumer

surplus is therefore $0.90. Josey’s consumer surplus

from her first pepper is $0.40, from her second pepper

$0.20, from her third pepper $0.00 (since the price

is exactly equal to her willingness to pay, she buys

the third pepper but receives no consumer surplus

Quantity Quantity

Quantity of peppers of peppers

Price of peppers demanded demanded

of pepper demanded by Casey by Josey

$0.90 1 1 0

0.80 2 1 1

0.70 3 2 1

0.60 4 2 2

0.50 5 3 2

0.40 6 3 3

0.30 8 4 4

0.20 8 4 4

0.10 8 4 4

0.00 8 4 4