Economics Principles and Applications 5th Edition by Robert E. Hall - Test Bank

Economics Principles and Applications 5th Edition by Robert E. Hall – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

CHAPTER 5—ELASTICITY

 

MULTIPLE CHOICE

 

1. The price elasticity of demand measures the responsiveness of quantity demanded to changes in price.

a.	True
b.	False

 

 

ANS:  A                    PTS:   1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Price Elasticity of Demand

 

2. A price elasticity of demand of 2 for a specific cola means that if the price increases 1 percent, the quantity demanded of the cola will decrease by 2 percent.

a.	True
b.	False

 

 

ANS:  A                    PTS:   1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Price Elasticity of Demand

 

3. Another term that could be used for elasticity is

a.	sensitivity
b.	utility
c.	surplus
d.	profit
e.	slope

 

 

ANS:  A                    PTS:   1                    DIF:    1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Price Elasticity of Demand

 

4. The price elasticity of demand is important to firms because

a.	it explains the relationship between income and demand for the goods they sell
b.	it shows how price changes affect total expenditures on the goods they sell
c.	the law of demand suggests that elasticity falls as total expenditures continuously rises
d.	it helps identify the equilibrium price and quantity in the market
e.	it relates price to supply

 

 

ANS:  B                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Price Elasticity of Demand

 

5. The sensitivity of one economic variable to changes in another variable is known as

a.	the variability coefficient
b.	elasticity
c.	the sensitivity coefficient
d.	the cross-variability coefficient
e.	the law of demand

 

 

ANS:  B                    PTS:   1                    DIF:    1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Price Elasticity of Demand

 

6. The price elasticity of demand measures the

a.	responsiveness of a good’s price to a change in quantity demanded
b.	adaptability of suppliers when a change in demand alters the price of a good
c.	responsiveness of quantity demanded to a change in a good’s price
d.	adaptability of buyers when there is a change in demand
e.	responsiveness of quantity supplied to a change in quantity demanded

 

 

ANS:  C                    PTS:   1                    DIF:    1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Price Elasticity of Demand

 

7. The price elasticity of demand is the

a.	percentage change in price divided by the percentage change in quantity demanded
b.	average change in price divided by the average change in quantity demanded
c.	percentage change in quantity demanded divided by the percentage change in price
d.	average change in price divided by the average change in quantity demanded
e.	percentage change in quantity demanded divided by the average change in price

 

 

ANS:  C                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Price Elasticity of Demand

 

8. If the price elasticity of demand for Cheer detergent is 3.0, then a

a.	12 percent drop in price leads to a 36 percent rise in the quantity demanded
b.	12 percent drop in price leads to a 4 percent rise in the quantity demanded
c.	$1,000 drop in price leads to a 3,000-unit rise in the quantity demanded
d.	$1,000 drop in price leads to a 333-unit rise in the quantity demanded
e.	12 percent rise in price leads to a 36 percent rise in the quantity demanded

 

 

ANS:  A                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Price Elasticity of Demand

 

9. When calculating the price elasticity of demand, we assume that the price of the good changes while all other variables affecting

a.	demand except buyers’ incomes remain constant
b.	demand except the population size remain constant
c.	demand and supply remain constant
d.	supply remain constant
e.	demand remain constant

 

 

ANS:  E                    PTS:   1                    DIF:    1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Price Elasticity of Demand

 

10. The concept of elasticity is used to

a.	indicate the economy’s ability to rebound from a recession
b.	measure the robustness of a variable
c.	measure the sensitivity of one variable to changes in another
d.	measure price changes
e.	measure income changes

 

 

ANS:  C                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Price Elasticity of Demand

 

11. In measuring the sensitivity of demand, the

a.	price and income elasticities refer to movements along the demand curve; other elasticities refer to shifts of the entire demand curve
b.	price and cross-price elasticities analyze movements along the demand curve; other elasticities refer to shifts of the entire demand curve
c.	income and cross-price elasticities refer to movements along the demand curve; price elasticity refers to shifts of the entire demand curve
d.	price elasticity refers to movements along the demand curve; income and cross-price elasticities refer to shifts of the entire demand curve
e.	income elasticity refers to movements along the demand curve; other elasticities refer to shifts of the entire demand curve

 

 

ANS:  D                    PTS:   1                    DIF:    3

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Price Elasticity of Demand

 

12. If a 10 percent rise in the price of bananas leads to a 20 percent reduction in the quantity of bananas demanded, then the price elasticity of demand is 0.50.

a.	True
b.	False

 

 

ANS:  B                    PTS:   1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Calculating Price Elasticity of Demand

 

13. If the price of a good increases from $20 to $25 and the quantity demanded declines from 15 to 10 units of the good, the price elasticity of demand is 5.

a.	True
b.	False

 

 

ANS:  B                    PTS:   1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Calculating Price Elasticity of Demand

 

14. Suppose that a local supermarket sells apples and oranges for 50 cents apiece, and at these prices is able to sell 100 apples and 200 oranges per week. One week, the supermarket lowered the price per apple to 40 cents and sold 120 apples. The next week, they lowered the price per orange to 40 cents (after raising the price per apple back to 50 cents) and sold 240 oranges. These results imply that the

a.	price elasticity of apples is lower than the price elasticity of oranges
b.	price elasticity of apples is higher than the price elasticity of oranges
c.	demand for apples is more price sensitive than the demand for oranges
d.	demand for oranges is more price sensitive than the demand for apples
e.	price elasticities of demand for apples and oranges are the same over these price ranges

 

 

ANS:  E                    PTS:   1                    DIF:    3

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Calculating Price Elasticity of Demand

 

15. A $1.00 increase in the price of a restaurant meal results in a drop in quantity demanded of 5 meals. Which of the following statements is correct?

a.	The slope of the demand curve is -1/5; there is insufficient information to determine the price elasticity of demand.
b.	The price elasticity of demand is -1/5; there is insufficient information to determine the slope of the demand curve.
c.	Both the slope of the demand curve and the price elasticity of demand are equal to -1/5.
d.	There is insufficient information to determine either the slope of the demand curve or the price elasticity of demand.
e.	The slope of the demand curve is -1/5; the price elasticity of demand is 5.

 

 

ANS:  A                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Calculating Price Elasticity of Demand

 

16. If a 20 percent decrease in the price of chicken results in a 10 percent increase in the quantity demanded, the price elasticity of demand has a value of

a.	0.5
b.	2
c.	1
d.	0.1
e.	none of these

 

 

ANS:  A                    PTS:   1                    DIF:    1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Calculating Price Elasticity of Demand

 

17. The price elasticity of demand is

a.	irrelevant to the determination of prices, incomes, and interest rates
b.	indeterminate in most cases
c.	the percentage change in price divided by the percentage change in quantity demanded
d.	the percentage change in price with respect to the percentage change in quantity supplied
e.	the percentage change in quantity demanded divided by the percentage change in price

 

 

ANS:  E                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Calculating Price Elasticity of Demand

 

Figure 5-1
		Quantity
Good	Price	Demanded
Haircuts per Week	$20	40
	$16	60
Manicures per Week	$12	80
	$  8	120

 

 

18. Figure 5-1 shows the prices of two services offered by Earl’s Barber Shop and the resulting quantities demanded by customers. In this example, the price elasticity of demand for manicures (using the midpoint formula) is

a.	1
b.	2
c.	3
d.	0.5
e.	0.4

 

 

ANS:  A                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Calculating Price Elasticity of Demand

 

19. Figure 5-1 shows the prices of two services offered by Earl’s Barber Shop and the resulting quantities demanded by customers. In this example, the price elasticity of demand for haircuts (using the midpoint formula) is

a.	1
b.	1.8
c.	3.5
d.	2.25
e.	0.5

 

 

ANS:  B                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Calculating Price Elasticity of Demand

 

20. Figure 5-1 shows the prices of two services offered by Earl’s Barber Shop and the resulting quantities demanded by customers. Suppose that the current price for a haircut is $20 and the current price for a manicure is $12, and Earl has a sale of $4 off the price of either a haircut or a manicure. In this example,

a.	haircuts have the smaller absolute change in quantity demanded and the more elastic demand
b.	Earl can earn more revenue from manicures at the lower price
c.	Earl should decrease the number of spaces in his shop allocated to haircuts
d.	the demand for haircuts is unitary elastic
e.	the demand for haircuts is inelastic

 

 

ANS:  A                    PTS:   1                    DIF:    3

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Calculating Price Elasticity of Demand

 

 

Figure 5-2

 

21. Consider demand curve D in Figure 5-2. Between points F and G, the price elasticity of demand is

a.	1
b.	0.5
c.	2
d.	0.2
e.	none of these

 

 

ANS:  B                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Calculating Price Elasticity of Demand

 

22. In Figure 5-2, compare demand curve D between points F and G to demand curve D’ between points J and K. Which of the following statements is correct?

a.	Both demand curves have the same slope, but D’ is more elastic in the $2 to $3 range.
b.	Both demand curves have the same slope, but D’ is less elastic in the $2 to $3 range.
c.	Both demand curves have the same price elasticity of demand, but D’ has a largerslope.
d.	Both demand curves have the same price elasticity of demand, but D’ has a smaller slope.
e.	Both demand curves have the same slope and the same value for the price elasticity of demand.

 

 

ANS:  B                    PTS:   1                    DIF:    3

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Calculating Price Elasticity of Demand

 

23. Daniel’s consumption of pizzas drops from 6 per week to 4 per week when the price rises from $9 to $11. His price elasticity of demand for pizza equals

a.	0.5
b.	1
c.	2
d.	0.08
e.	1.7

 

 

ANS:  C                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Calculating Price Elasticity of Demand

 

 

 

24. In Figure 5-3, the price elasticity of demand equals _____ between points T and U and equals _____ between points V and W.

a.	0.33; 1.86
b.	0.54; 3
c.	3; 0.54
d.	1.86; 0.33
e.	2; 2

 

 

ANS:  D                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Calculating Price Elasticity of Demand

 

25. If the price of a certain brand of sneakers falls from $27.50 to $22.50, and the quantity demanded by consumers increases from 15 to 25 pairs per week, then the price elasticity of demand is

a.	0.25
b.	1.00
c.	2.75
d.	1.50
e.	2.50

 

 

ANS:  E                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Calculating Price Elasticity of Demand

 

Figure 5-4
Price	Quantity Demanded
$ 1	100
$ 2	80
$ 3	60
$ 4	40
$ 5	20

 

 

26. Figure 5-4 shows the demand schedule for hockey pucks. What is the price elasticity of demand when the price changes from $4 per puck to $5 per puck?

a.	0.33
b.	1.00
c.	1.15
d.	3.00
e.	none of these

 

 

ANS:  D                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Calculating Price Elasticity of Demand

 

27. Figure 5-4 shows the demand schedule for hockey pucks. What is the price elasticity of demand when the price changes from $2 per puck to $1 per puck (using the midpoint formula)?

a.	0.33
b.	0.15
c.	3.00
d.	1.00
e.	none of these

 

 

ANS:  A                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Calculating Price Elasticity of Demand

 

28. The price elasticity of demand is usually equal to the slope of the demand curve.

a.	True
b.	False

 

 

ANS:  B                    PTS:   1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and Straight Line Demand Curves

 

29. If the demand curve is a straight line with a negative slope, then demand is more elastic at higher prices than lower prices.

a.	True
b.	False

 

 

ANS:  A                    PTS:   1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and Straight Line Demand Curves

 

30. The elasticity approach to measuring the sensitivity of quantity demanded to changes in price differs from using the slope because the elasticity approach calculates the ratio of the

a.	absolute change in price to the absolute change in quantity demanded
b.	absolute change in quantity demanded to the percentage change in price
c.	absolute change in quantity demanded to the percentage change in price
d.	percentage change in quantity demanded to the percentage change in price
e.	average change in price to the average change in quantity demanded

 

 

ANS:  D                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and Straight Line Demand Curves

 

31. The slope of the demand curve and the price elasticity of demand are

a.	basically the same thing
b.	determined by supply
c.	are derived from production and distribution costs
d.	different because slope is based on absolute changes and elasticity is based on percentage changes
e.	implicit in the shape of the supply curve

 

 

ANS:  D                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and Straight Line Demand Curves

 

 

32. In Figure 5-5, the slope of the demand curve

a.	has a constant value of -2
b.	is higher between points T and U than between points V and W
c.	is lower between points T and U than between points V and W
d.	matches the value of the price elasticity of demand at each point
e.	is lower than the value of the price elasticity of demand at every point

 

 

ANS:  A                    PTS:   1                    DIF:    1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and Straight Line Demand Curves

 

33. If the demand curve is a straight line and has the normal negative slope, then as quantity demanded increases, demand

a.	becomes more elastic
b.	becomes more inelastic
c.	is unitary elastic
d.	rises and then falls
e.	is an inverse function of supply

 

 

ANS:  B                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and Straight Line Demand Curves

 

34. Which of the following statements about straight-line demand curves is true?

a.	The price elasticity of demand becomes larger in absolute value as price falls.
b.	The price elasticity of demand becomes smaller in absolute value as price falls.
c.	The price elasticity of demand is constant along the curve.
d.	The price elasticity of demand and the slope of the demand curve are the same.
e.	Demand is price elastic everywhere along the curve.

 

 

ANS:  B                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and Straight Line Demand Curves

 

35. Which of the following statements concerning the slope and price elasticity of demand along a straight-line demand curve is correct?

a.	Slope measures the change in quantity resulting from a one-dollar change in price.
b.	Elasticity measures the percent change in price resulting from a one-percent change in quantity demanded.
c.	Slope measures the dollar change in price for a one-unit change in quantity demanded.
d.	Elasticity measures the unit change in quantity demanded resulting from a one-dollar change in price.
e.	Slope measures the percent change in price resulting from a one-percent change in quantity demanded.

 

 

ANS:  C                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and Straight Line Demand Curves

 

36. Moving downward along a straight-line demand curve, the absolute value of the price elasticity of demand

a.	always rises
b.	rises until the midpoint of the curve is reached, and then falls
c.	falls until the midpoint of the curve is reached, and then rises
d.	always falls
e.	falls from 1 to 0

 

 

ANS:  D                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and Straight Line Demand Curves

 

37. Suppose that when the price of aspirin rises from $2 to $3 per bottle, the quantity demanded falls from 800 bottles per day to 700 bottles per day. Over this range, the demand for aspirin is

a.	elastic
b.	unitary elastic
c.	perfectly elastic
d.	inelastic
e.	perfectly inelastic

 

 

ANS:  D                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Categorizing Goods by Elasticity

 

38. A local store noticed that when it increased the price of milk from $2.50 to $3.50 per gallon, it sold the same amount of milk per week (165 gallons). Since everything else remained the same, we would say the

a.	demand for milk is perfectly elastic
b.	demand for milk is elastic
c.	demand for milk is perfectly inelastic
d.	demand for milk is unitary elastic
e.	law of supply does not apply in this situation

 

 

ANS:  C                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Categorizing Goods by Elasticity

 

39. If the percentage change in quantity demanded is smaller (in absolute value) than the percentage change in price, then demand is

a.	inelastic
b.	elastic
c.	unit elastic
d.	determined by supply
e.	inadequate compared to supply

 

 

ANS:  A                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Categorizing Goods by Elasticity

 

40. If the percentage change in quantity demanded is greater (in absolute value) than the percentage change in price, then demand

a.	determines supply
b.	is indeterminate
c.	is elastic
d.	is inelastic
e.	is unit elastic

 

 

ANS:  C                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Categorizing Goods by Elasticity

 

41. If demand is elastic, then

a.	the percentage change in quantity demanded is larger in absolute value than the percentage change in price
b.	supply is inelastic
c.	prices can neither rise nor fall
d.	the percentage change in quantity demanded is smaller in absolute value than the percentage change in price
e.	supply is elastic

 

 

ANS:  A                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Categorizing Goods by Elasticity

 

42. If the percentage change in quantity demanded divided by the percentage change in price equals 1, then

a.	supply is inelastic
b.	supply is elastic
c.	demand is elastic
d.	demand is inelastic
e.	demand is unit elastic

 

 

ANS:  E                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Categorizing Goods by Elasticity

 

43. If demand is perfectly inelastic,

a.	the percent change in quantity demanded divided by the percent change in price is zero
b.	the demand curve is a vertical line
c.	supply is perfectly inelastic too
d.	consumers have power over prices
e.	the percentage change in price divided by the percentage change in quantity demanded is zero

 

 

ANS:  A                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Categorizing Goods by Elasticity

 

44. If the demand curve is a vertical line, then

a.	demand is perfectly elastic
b.	demand is perfectly inelastic
c.	demand is unit elastic
d.	demand is determined by supply
e.	supply is a horizontal line

 

 

ANS:  B                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Categorizing Goods by Elasticity

 

45. If demand is perfectly elastic, then

a.	the demand curve is a horizontal line
b.	supply is perfectly inelastic
c.	supply is perfectly elastic
d.	the demand curve is a vertical line
e.	the demand curve is downward sloping

 

 

ANS:  A                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Categorizing Goods by Elasticity

 

46. Celia buys 24 gallons of gasoline per month when the price is $2 per gallon, but only 16 gallons if the price rises to $3 per gallon. Within this range, her demand for gasoline is

a.	unitary elastic
b.	perfectly inelastic
c.	perfectly elastic
d.	inelastic
e.	elastic

 

 

ANS:  A                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Categorizing Goods by Elasticity

 

47. If the price of food falls by 10 percent and the quantity sold increases by 5 percent, then the price elasticity of demand in that range equals

a.	2, and demand is elastic
b.	0.5, and demand is elastic
c.	2, and demand is inelastic
d.	0.5, and demand is inelastic
e.	15, and demand is elastic

 

 

ANS:  D                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Categorizing Goods by Elasticity

 

48. If the numerical value of the price elasticity of demand is 3, then a one-percent change in price will cause a(n)

a.	larger percentage change in quantity demanded, so demand is elastic
b.	larger percentage change in quantity demanded, so demand is inelastic
c.	smaller percentage change in quantity demanded, so demand is elastic
d.	smaller percentage change in quantity demanded, so demand is inelastic
e.	equal percentage change in quantity demand, so demand is unitary elastic

 

 

ANS:  A                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Categorizing Goods by Elasticity

 

 

49. Figure 5-6 shows the demand curve for chicken. Between points L and M, the price elasticity of demand is

a.	0.44, and demand is elastic
b.	0.44, and demand is inelastic
c.	2.25, and demand is elastic
d.	2.25, and demand is inelastic
e.	0.028, and demand is inelastic

 

 

ANS:  B                    PTS:   1                    DIF:    3

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Categorizing Goods by Elasticity

 

50. If the demand curve is a horizontal line,

a.	demand is perfectly elastic
b.	demand is perfectly inelastic
c.	demand is unitary elastic
d.	demand is relatively inelastic
e.	total expenditure is maximized

 

 

ANS:  A                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Categorizing Goods by Elasticity

 

Figure 5-7
Price	Quantity Demanded
$ 10	50
$  9	60
$  8	70
$  7	80
$  6	90

 

 

51. Figure 5-7 shows Sally’s demand for movie theater tickets (quantity of movies per year). At a price of $9 per ticket, her

a.	demand is inelastic
b.	demand is perfectly elastic
c.	demand is elastic
d.	total expenditure is being maximized
e.	demand is perfectly inelastic

 

 

ANS:  C                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Categorizing Goods by Elasticity

 

52. Demand is said to be price inelastic when the coefficient of price elasticity of demand is

a.	greater than +1
b.	between 0 and +1
c.	zero
d.	infinity

 

 

ANS:  B                    PTS:   1                    DIF:    1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Categorizing Goods by Elasticity

 

53. When a one-percent change in price is accompanied by a larger percent change in quantity demanded,

a.	demand is inelastic
b.	supply is elastic
c.	the good is a normal good
d.	the good is an inferior good
e.	demand is elastic

 

 

ANS:  E                    PTS:   1                    DIF:    1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Categorizing Goods by Elasticity

 

Figure 5-8
Price	Quantity Demanded
$ 1	100
$ 2	80
$ 3	60
$ 4	40
$ 5	20

 

 

54. Figure 5-8 shows the demand schedule for hockey pucks. At which price is demand the most price elastic?

a.	$1
b.	$2
c.	$3
d.	$4
e.	$5

 

 

ANS:  E                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Categorizing Goods by Elasticity

 

55. If a change in price does not lead to any change in revenue, then demand over that range of prices is inelastic.

a.	True
b.	False

 

 

ANS:  B                    PTS:   1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and total revenue

 

56. A public university knows that demand from potential students is elastic. If the university wants to increase tuition revenue, it should

a.	raise its tuition rate
b.	hold its tuition rate constant and increase faculty salaries
c.	increase its financial aid
d.	lower its tuition rate
e.	increase its enrollment

 

 

ANS:  D                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and total revenue

 

57. If demand is price inelastic, a decrease in price

a.	raises total revenue to the seller
b.	raises total expenditure on the good, but not total revenue to the seller
c.	reduces total revenue to the seller
d.	leaves total revenue to the seller unchanged
e.	leaves total expenditure on the good unchanged

 

 

ANS:  C                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and total revenue

 

58. If the demand for a good is price inelastic, a decrease in total revenue from the good would result from a(n)

a.	increase in price
b.	decrease in quantity demanded
c.	favorable shift in tastes and preferences
d.	decrease in price
e.	increase in consumers’ incomes

 

 

ANS:  D                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and total revenue

 

59. If demand is perfectly inelastic, a decrease in price results in a(n)

a.	decrease in seller’s total revenue
b.	increase in total seller’s expenditure
c.	increase in expenditure on the good, but a decrease in revenue to the seller
d.	unfavorable shift in tastes and preferences
e.	increase in total revenue to the seller

 

 

ANS:  A                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and total revenue

 

60. If demand is price elastic, a decrease in price results in a(n)

a.	decrease in total expenditure on the good
b.	unfavorable shift in tastes and preferences
c.	decrease in total cost for the seller
d.	increase in supply of the good
e.	increase in total revenue to the seller

 

 

ANS:  E                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and total revenue

 

61. If demand is price elastic, a decrease in seller’s total revenue would result from a(n)

a.	decrease in price
b.	increase in quantity demanded
c.	increase in price
d.	decrease in income for an inferior good
e.	increase in total cost to the seller

 

 

ANS:  C                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and total revenue

 

62. If demand is unitary elastic, a price decrease results in

a.	an increase in total seller’s total revenue
b.	no change in total seller’s total revenue
c.	a decrease in total expenditure on the good
d.	a decrease in quantity demanded of the good
e.	an increase in supply of the good

 

 

ANS:  B                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and total revenue

 

63. If a price decrease results in no change in seller’s total revenue then

a.	supply determined demand
b.	supply is unresponsive to demand
c.	demand is elastic
d.	demand is inelastic
e.	demand is unitary elastic

 

 

ANS:  E                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and total revenue

 

64. Suppose a local bookstore notices that a 2 percent increase in book prices leads to a 2 percent decrease in the number of books sold. Which of the following is true?

a.	Demand for books is price elastic.
b.	The store’s sales revenue did not change.
c.	Demand for books is price inelastic.
d.	Demand for books is perfectly inelastic.
e.	The bookstore could increase revenue by further lowering prices.

 

 

ANS:  B                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and total revenue

 

65. If demand is price inelastic,

a.	price and total revenue change in opposite directions
b.	a seller should decrease the price to increase total revenue
c.	too few goods are being produced from society’s point of view
d.	price and total revenue change in the same direction
e.	the market can never be in equilibrium

 

 

ANS:  D                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and total revenue

 

Figure 5-9
Price	Quantity Demanded
$ 10	50
$  9	60
$  8	70
$  7	80
$  6	90

 

 

66. Figure 5-9 shows Sally’s demand for movie theater tickets (quantity of movies per year). If the price per ticket fell from $8 to $7,

a.	there would be no change in Sally’s total expenditure on movie tickets
b.	Sally would spend less money on movie tickets
c.	Sally would spend more money on movie tickets
d.	Sally’s demand curve would shift to the left
e.	the supply curve would shift to the right

 

 

ANS:  A                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and total revenue

 

67. As a result of heavy spring rains in the Midwest, the corn crop declined sharply. If corn growers experienced an increase in sales revenue, the demand for corn must be

a.	price elastic
b.	price inelastic
c.	unitary elastic
d.	perfectly inelastic
e.	perfectly elastic

 

 

ANS:  B                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and total revenue

 

 

68. If demand for a good is represented by curve D in Figure 5-10, then an increase in supply of the good will cause

a.	the equilibrium quantity to rise, but seller’s total revenue to fall
b.	the equilibrium quantity to fall, but seller’s total revenue to rise
c.	both the equilibrium quantity and seller’s total revenue to fall
d.	the equilibrium quantity to rise, but seller’s total revenue will not change
e.	both the equilibrium quantity and seller’s total revenue to rise

 

 

ANS:  E                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and total revenue

 

69. If demand for a good is represented by curve D’ in Figure 5-10, then a decrease in supply of the good will cause

a.	both the equilibrium price and revenue to rise
b.	both the equilibrium price and revenue to fall
c.	the equilibrium price to rise, but revenue to fall
d.	the equilibrium price to fall, but revenue to rise
e.	neither the equilibrium price nor revenue to change

 

 

ANS:  A                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and total revenue

 

70. If demand for a good is represented by curve D” in Figure 5-10, then an increase in supply of the good will cause the equilibrium

a.	price to fall, but revenue will not change
b.	quantity to fall, but revenue to rise
c.	quantity to rise, but revenue will not change
d.	price to rise, but revenue to fall
e.	price to fall. Seller’s total revenue could rise or fall depending on the price elasticity of demand

 

 

ANS:  E                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and total revenue

 

71. Consider a good with a price elasticity equal to 1 at every point on its demand curve. Which of the following statements is correct?

a.	Total revenue always rises exactly in proportion to a drop in the price.
b.	Total revenue always rises exactly in proportion to a rise in the price.
c.	Total revenue does not change if the price changes.
d.	Total revenue drops to zero whenever the price rises.
e.	Total revenue always doubles if the price drops.

 

 

ANS:  C                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and total revenue

 

72. Perfect planting and harvesting weather results in a record high crop of wheat. If wheat growers experience an increase in total sales revenue, then the demand for wheat must be

a.	price-inelastic
b.	unitary elastic
c.	perfectly inelastic
d.	price-elastic
e.	perfectly elastic

 

 

ANS:  A                    PTS:   1                    DIF:    3

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and total revenue

 

73. Demand for goods in broader category definitions, such as “beverages”, is usually less elastic than demand for more narrowly defined goods, such as “diet colas.”

a.	True
b.	False

 

 

ANS:  A                    PTS:   1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Determinants of Elasticity

 

74. Which of the following goods is likely to have the most elastic demand over the relevant range of prices?

a.	insulin
b.	eggs
c.	milk
d.	Pepsi Cola
e.	gasoline

 

 

ANS:  D                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Determinants of Elasticity

 

75. Which of the following goods is likely to have the most price inelastic demand?

a.	margarine
b.	Tide detergent
c.	cigarettes
d.	Coca-Cola
e.	ground beef

 

 

ANS:  C                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Determinants of Elasticity

 

76. Generally, as goods are more broadly defined,

a.	demand becomes more price elastic
b.	demand becomes less price elastic
c.	total expenditure falls as the price decreases
d.	the demand curve becomes straighter
e.	more substitute goods can be identified

 

 

ANS:  B                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Determinants of Elasticity

 

77. In general, the more of an individual’s total budget that is spent on a given product, the

a.	greater the supply-side response
b.	less elastic is the demand for that good
c.	more elastic is the demand for that good
d.	more the demand curve will shift when the price changes
e.	less the demand curve will shift when the price changes

 

 

ANS:  C                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Determinants of Elasticity

 

78. The more available substitutes there are for a good, the

a.	larger the number of consumers
b.	smaller the number of consumers
c.	smaller the supply side response
d.	more elastic the demand for that good
e.	less elastic the demand for that good

 

 

ANS:  D                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Determinants of Elasticity

 

79. A more elastic demand for a good would generally result from

a.	an increase in the supply of that good
b.	an increase in the number of substitutes for that good
c.	a decrease in the number of substitutes for that good
d.	smaller consumer incomes
e.	a reduction in the number of consumers

 

 

ANS:  B                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Determinants of Elasticity

 

80. The more narrowly we define a good, the easier it is to find substitutes, and

a.	the greater is the number of producers of that good
b.	the greater is the supply-side response
c.	fewer consumers therefore wish to purchase the good
d.	less elastic is the demand for that good
e.	more elastic is the demand for that good

 

 

ANS:  E                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Determinants of Elasticity

 

81. The price elasticity of demand will be larger in absolute value if

a.	expenditure on the good represents a smaller proportion of the consumer’s total expenditure
b.	we define the good more broadly
c.	we define the good more narrowly
d.	the number of substitutes is smaller
e.	the number of consumers is larger

 

 

ANS:  C                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Determinants of Elasticity

 

82. The long-run price elasticity of demand for a good is

a.	zero
b.	smaller (in absolute value) than the short-run price elasticity
c.	larger (in absolute value) than the short-run price elasticity
d.	infinite
e.	the same as the short-run elasticity

 

 

ANS:  C                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Determinants of Elasticity

 

83. A less elastic demand for a good could result from

a.	strong supply-side reactions
b.	an increased number of available substitutes
c.	lower consumer incomes
d.	a longer time horizon
e.	a shorter time horizon

 

 

ANS:  E                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Determinants of Elasticity

 

84. For which of the following types of goods would demand be most price-elastic?

a.	necessities
b.	goods with many substitutes
c.	goods that require only a small portion of the buyer’s budget
d.	goods with vertical demand curves
e.	goods with vertical supply curves

 

 

ANS:  B                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Determinants of Elasticity

 

85. For which of the following categories of goods is demand likely to be the most price elastic?

a.	automobiles
b.	foreign-made automobiles
c.	foreign-made sports cars
d.	a BMW sports car

 

 

ANS:  D                    PTS:   1                    DIF:    1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Determinants of Elasticity

 

86. For which of the following items is demand likely to be the most price elastic?

a.	Tide liquid laundry detergent
b.	laundry detergent in general
c.	powdered laundry detergent
d.	liquid laundry detergent

 

 

ANS:  A                    PTS:   1                    DIF:    1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Determinants of Elasticity

 

87. Demand for a good is likely to be less elastic

a.	the more narrowly defined the good is
b.	the larger the good’s share of the buyer’s budget
c.	in the long run than in the short run
d.	the smaller the number of substitute goods available
e.	at high prices

 

 

ANS:  D                    PTS:   1                    DIF:    1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Determinants of Elasticity

 

88. For which of the following is demand likely to be the most price elastic?

a.	a good for which there are no close substitutes
b.	a good for which there are no easily-obtained substitutes
c.	a good with close substitutes that are difficult to obtain
d.	a good that is no longer being produced
e.	a good for which close substitutes are easily obtained

 

 

ANS:  E                    PTS:   1                    DIF:    1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Determinants of Elasticity

 

89. The more narrowly a good is defined, the

a.	easier it is to find substitutes, and the less price-elastic is the demand
b.	easier it is to find substitutes, and the more price-elastic is the demand
c.	more difficult it is to find substitutes, and the less price-elastic is the demand
d.	more difficult it is to find substitutes, and the more price-elastic is the demand
e.	more difficult it is to find substitutes, but this has no impact on the price elasticity of demand

 

 

ANS:  B                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Determinants of Elasticity

 

90. For which of the following medical services is the income elasticity of demand likely to be the smallest?

a.	face-lifts
b.	plastic surgery
c.	manicures
d.	emergency services after a car accident
e.	hair transplants

 

 

ANS:  D                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Income Elasticity of Demand

 

91. If a 5 percent increase in income leads to a 15 percent increase in the quantity demanded of a service, then the income elasticity of demand for that service equals 0.33.

a.	True
b.	False

 

 

ANS:  B                    PTS:   1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Income Elasticity of Demand

 

92. Ink jet printers are a normal good only if, as income falls by a certain percentage, the quantity demanded rises by an even greater percentage.

a.	True
b.	False

 

 

ANS:  B                    PTS:   1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Income Elasticity of Demand

 

93. An inferior good is defined by an income elasticity less than 1.

a.	True
b.	False

 

 

ANS:  B                    PTS:   1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Income Elasticity of Demand

 

94. The percentage change in quantity demanded divided by the percentage change in income is referred to as the

a.	price elasticity of demand
b.	income elasticity of demand
c.	cross-price elasticity of demand
d.	slope of the demand curve
e.	demand curve

 

 

ANS:  B                    PTS:   1                    DIF:    1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Income Elasticity of Demand

 

95. If the quantity of higher education demanded rises by 5 percent when incomes rise by 10 percent,

a.	higher education is a normal good
b.	higher education is an inferior good
c.	the demand for higher education is price elastic
d.	the law of demand applies to higher education
e.	the demand for higher education is price inelastic

 

 

ANS:  A                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Income Elasticity of Demand

 

96. After John’s income rose by 8 percent, the amount of chicken he consumed fell by 2 percent. This means that

a.	his income elasticity for chicken is positive
b.	chicken is a normal good for John
c.	his demand curve for chicken shifted to the left
d.	his demand curve for chicken shifted to the right
e.	John is spending more of his income on chicken than before

 

 

ANS:  C                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Income Elasticity of Demand

 

97. For which of the following goods is the income elasticity of demand likely to be largest?

a.	poultry products
b.	meals at restaurants
c.	lemonade
d.	used books
e.	paperback mystery novels

 

 

ANS:  B                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Income Elasticity of Demand

 

Figure 5-11
Income	Quantity of Public Higher Education Demanded
$45 billion	90,000 student years
$55 billion	110,000 student years
$65 billion	130,000 student years
$75 billion	150,000 student years
$85 billion	170,000 student years

 

 

98. Figure 5-11 shows five different levels of income for a particular state (in billions of dollars) and the quantity of public higher education demanded there (for a given level of tuition). What is the income elasticity of demand if income rises from $45 billion to $55 billion?

a.	1.00
b.	0.06
c.	-1.00
d.	0
e.	none of these

 

 

ANS:  A                    PTS:   1                    DIF:    3

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Income Elasticity of Demand

 

99. Figure 5-11 shows five different levels of income for a particular state (in billions of dollars) and the quantity of public higher education demanded there (for a given level of tuition). Given this information, what can be said about the state’s demand for public higher education?

a.	It follows the law of demand.
b.	It violates the law of demand.
c.	Public higher education is an inferior good for income levels above $65 million.
d.	Public higher education is a normal good.

 

 

ANS:  D                    PTS:   1                    DIF:    3

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Income Elasticity of Demand

 

100. When Brenda was in college, she worked part-time delivering pizzas and she ate five boxes of macaroni and cheese per week. After graduation, she became a high school teacher and ate only two boxes of macaroni and cheese per week. From this information,

a.	macaroni and cheese is a normal good for Brenda
b.	the law of demand applies to macaroni and cheese for Brenda
c.	macaroni and cheese are substitute goods
d.	macaroni and cheese is an inferior good for Brenda
e.	Brenda’s income elasticity of demand for macaroni and cheese is positive

 

 

ANS:  D                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Income Elasticity of Demand

 

101. An inferior good is

a.	any good whose demand curve shifts to the left as income rises
b.	any good of low quality
c.	one that has few substitutes
d.	any good produced by inexpensive labor
e.	any good that consumers buy less of as its price falls

 

 

ANS:  A                    PTS:   1                    DIF:    1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Income Elasticity of Demand

 

102. Suppose that the income elasticity of demand for college education is 1.3. This indicates that

a.	college education is a necessity
b.	college education is an inferior good
c.	the demand curve for college education slopes downward
d.	college education is a normal good
e.	the demand curve for college education is horizontal

 

 

ANS:  D                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Income Elasticity of Demand

 

103. The fact that travel on buses fell as incomes increased in many cities suggests that

a.	bus travel is a normal good
b.	the law of demand does not apply to bus travel
c.	bus travel is an inferior good
d.	there are no good substitute goods for bus travel

 

 

ANS:  C                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Income Elasticity of Demand

 

104. For a normal good, quantity demanded

a.	increases as income rises, so the income elasticity of demand is positive
b.	increases as income rises, so the income elasticity of demand is negative
c.	falls as income rises, so the income elasticity of demand is positive
d.	falls as income rises, so the income elasticity of demand is negative
e.	remains unchanged as income rises, so the income elasticity of demand is zero

 

 

ANS:  A                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Income Elasticity of Demand

 

105. If the income elasticity of demand for a good is -2.5, then

a.	it is a normal good, and its demand curve will shift to the left if buyers’ incomes increase
b.	it is a normal good, and its demand curve will shift to the right if buyers’ incomes increase
c.	it is an inferior good, and its demand curve will shift to the right if buyers’ incomes increase
d.	it is an inferior good, and its demand curve will shift to the left if buyers’ incomes increase
e.	there is insufficient information to determine whether the good is normal or inferior

 

 

ANS:  D                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Income Elasticity of Demand

 

106. If the income elasticity of demand for a good is 0.5, then

a.	it is a normal good, and its demand curve will shift to the left if buyers’ incomes increase
b.	it is a normal good, and its demand curve will shift to the right if buyers’ incomes increase
c.	it is an inferior good, and its demand curve will shift to the right if buyers’ incomes increase
d.	it is an inferior good, and its demand curve will shift to the left if buyers’ incomes increase
e.	there is insufficient information to determine whether the good is normal or inferior

 

 

ANS:  B                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Income Elasticity of Demand

 

107. A 10 percent increase in buyers’ incomes results in a 5 percent drop in the quantity of hot dogs demanded. In this range, the income elasticity of demand for hot dogs is

a.	0.5
b.	2.0
c.	5.0
d.	-2.0
e.	-0.5

 

 

ANS:  E                    PTS:   1                    DIF:    1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Income Elasticity of Demand

 

108. Suppose that the income elasticity of demand for fresh vegetables is 0.26. If buyers’ incomes rise by 10 percent, then

a.	the demand curve for fresh vegetables will shift to the left
b.	the quantity of fresh vegetables demanded will rise by 2.6 percent
c.	the quantity of fresh vegetables demanded will rise by 12.6 percent
d.	there will be a movement down and to the right on the demand curve for fresh vegetables
e.	there will be a movement up and to the left along the demand curve for fresh vegetables

 

 

ANS:  B                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Income Elasticity of Demand

 

109. The income elasticity of demand measures

a.	the relative certainty of future income
b.	how elastic supply is compared to demand
c.	the percent change in quantity demanded relative to the percent change in income
d.	the percent change in income relative to the percent change in quantity demanded
e.	how much income will stretch to make expected payments

 

 

ANS:  C                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Income Elasticity of Demand

 

110. If the income elasticity of demand is negative, this means that the good is

a.	an inferior good
b.	sold at a lower than equilibrium price
c.	provided by a monopoly producer
d.	provided by competitive producers
e.	a normal good

 

 

ANS:  A                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Income Elasticity of Demand

 

111. With an income elasticity of demand of 0.5, cigarettes are an example of

a.	a normal good
b.	an inferior good
c.	irrational demand
d.	complements to health care
e.	unitary elasticity

 

 

ANS:  A                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Income Elasticity of Demand

 

112. The cross-price elasticity of demand is useful for determining which pairs of commodities serve as substitutes for each other.

a.	True
b.	False

 

 

ANS:  A                    PTS:   1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Cross-Price Elasticity of Demand

 

113. The cross-price elasticity of demand is measured by the

a.	change in quantity demanded of one good divided by the change in price of another good
b.	percentage change in quantity demanded of one good divided by the percentage change in its price
c.	percentage change in demand for one good divided by the percentage change in income
d.	percentage change in quantity supplied of one good divided by the percentage change in the price of another good
e.	percentage change in quantity demanded of one good divided by the percentage change in price of another good

 

 

ANS:  E                    PTS:   1                    DIF:    1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Cross-Price Elasticity of Demand

 

114. The cross-price elasticity of demand measures

a.	how the quantity demanded of one good changes along with income
b.	the slope of the demand curve
c.	the slope of the supply curve at the point of equilibrium
d.	the responsiveness of the quantity demanded of one good to changes in the price of another good
e.	how responsive changes in price are to changes in quantity demanded

 

 

ANS:  D                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Cross-Price Elasticity of Demand

 

115. If the cross-price elasticity of demand between two goods is -2.2, then the

a.	two goods are substitutes
b.	two goods are complements
c.	income elasticity of demand must be between 0 and 1.0
d.	goods are both normal goods
e.	goods are both inferior goods

 

 

ANS:  B                    PTS:   1                    DIF:    1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Cross-Price Elasticity of Demand

 

116. The cross-price elasticity of demand between butter and margarine is most likely

a.	positive, since the goods are substitutes
b.	positive, since the goods are complements
c.	negative, since the goods are complements
d.	negative, since the goods are substitutes
e.	zero, since the goods are both normal

 

 

ANS:  A                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Cross-Price Elasticity of Demand

 

Figure 5-12
Price Per Chair	Quantity of Desks Demanded
$ 45	210
$ 55	190
$ 65	150
$ 75	120

 

 

117. Bill’s Office Furniture sells office chairs and desks. Bill’s has changed the price per chair by $10 in each of four successive weeks. Figure 5-12 shows the four prices along with the corresponding sales of desks. What is the cross-price elasticity of demand of desks with respect to chairs when the price of a chair changes in the $45 to $55 range?

a.	-2.0
b.	2.0
c.	0.5
d.	-0.5
e.	1.0

 

 

ANS:  D                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Cross-Price Elasticity of Demand

 

118. Bill’s Office Furniture sells office chairs and desks. Bill’s has changed the price per chair by $10 in each of four successive weeks. Figure 5-12 shows the four prices along with the corresponding sales of desks. From this information, it can be seen that

a.	office chairs and desks are unrelated goods
b.	office chairs and desks are complementary goods
c.	office chairs and desks are substitute goods
d.	both goods are normal goods
e.	both goods obey the law of demand

 

 

ANS:  B                    PTS:   1                    DIF:    3

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Cross-Price Elasticity of Demand

 

119. When there is a positive cross-price elasticity of demand between two goods,

a.	they are independent goods
b.	they are complementary goods
c.	they are substitute goods
d.	they are normal goods
e.	the income elasticity of demand is positive

 

 

ANS:  C                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Cross-Price Elasticity of Demand

 

120. The effect of a change in the price of tea on the quantity of coffee demanded is measured by the

a.	price elasticity of demand
b.	substitute elasticity of demand
c.	cross-price elasticity of demand
d.	income elasticity of demand
e.	alternative elasticity of demand

 

 

ANS:  C                    PTS:   1                    DIF:    1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Cross-Price Elasticity of Demand

 

121. The cross-price elasticity of demand between Texaco gasoline and Mobil gasoline sold at the same intersection would be

a.	positive
b.	negative
c.	0
d.	1.0
e.	-1.0

 

 

ANS:  A                    PTS:   1                    DIF:    1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Cross-Price Elasticity of Demand

 

122. If a decrease in the price of one good causes the demand curve for another good to shift to the left, the two goods must be

a.	inferior
b.	normal goods
c.	inferior goods
d.	substitutes
e.	complements

 

 

ANS:  D                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Cross-Price Elasticity of Demand

 

123. We would expect the cross-price elasticity of demand between two different brands of flour to be

a.	negative with a high absolute value
b.	negative with a low absolute value
c.	zero
d.	positive with a low absolute value
e.	positive with a high absolute value

 

 

ANS:  E                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Cross-Price Elasticity of Demand

 

124. The cross-price elasticity of demand is

a.	price elasticity of demand multiplied by the income elasticity of demand
b.	the percent change in the price of one commodity with respect to a one-percent change in the quantity demanded of another commodity
c.	the percent change in the demand for one commodity with respect to a one-percent change in the price of another commodity
d.	negative for substitute goods
e.	price elasticity of demand crossed with consumer incomes

 

 

ANS:  C                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Cross-Price Elasticity of Demand

 

125. The percent change in the quantity of one commodity demanded divided by the percent change in the price of another commodity is the

a.	price elasticity of demand
b.	price elasticity of supply
c.	income elasticity of demand
d.	income elasticity of supply
e.	cross-price elasticity of demand

 

 

ANS:  E                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Cross-Price Elasticity of Demand

 

126. If the cross-price elasticity of demand is positive, then the

a.	two goods are complements
b.	two goods are substitutes
c.	two goods have no relationship to each other
d.	price is below the equilibrium
e.	price is above the equilibrium

 

 

ANS:  B                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Cross-Price Elasticity of Demand

 

127. If two commodities are substitutes, then

a.	they tend to be used together by consumers
b.	their prices are generally regulated by the government
c.	an increase in the price of one of them increases the supply of the other
d.	the cross-price elasticity of demand is positive
e.	the cross-price elasticity of demand is negative

 

 

ANS:  D                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Cross-Price Elasticity of Demand

 

128. If the cross-price elasticity of demand between two goods is negative, then

a.	the two goods are complements
b.	the two goods are substitutes
c.	as price of one good rises, the quantity demanded of the other good also rises
d.	one of the goods must be inferior
e.	the two goods are rarely used together by consumers

 

 

ANS:  A                    PTS:   1                    DIF:    3

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Cross-Price Elasticity of Demand

 

129. The sign of the cross-price elasticity tells us whether two commodities are complements or substitutes, but the size of this elasticity measure tells us

a.	how the supply side of the market reacts to changes in demand
b.	whether the government should regulate the two markets
c.	which technology producers use
d.	how closely the two goods are related
e.	whether or not excess profits can be made in either market

 

 

ANS:  D                    PTS:   1                    DIF:    3

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Cross-Price Elasticity of Demand

 

130. Butter and margarine are examples of

a.	substitutes
b.	complements
c.	externalities
d.	inferior goods
e.	goods that are independent of each other

 

 

ANS:  A                    PTS:   1                    DIF:    1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Cross-Price Elasticity of Demand

 

131. The price elasticity of supply

a.	is a number between 0 and 1.
b.	measures the percent change in quantity supply as a result of a 1-percent change in price
c.	measures the percent change in quantity supplied as a result of a 1-percent change in cost.
d.	measures the shift in supply as the result of a price change
e.	measures the movement of a supply curve along a fixed demand curve

 

 

ANS:  B                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Price Elasticity of Supply

 

132. Price elasticity of supply

a.	is always a number between 0 and 1
b.	is always a negative number
c.	is always greater than or equal to 0
d.	is always greater than 1.
e.	can take on any value.

 

 

ANS:  C                    PTS:   1                    DIF:    1

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Price Elasticity of Supply

 

133. The supply of a good is more price elastic,

a.	the fewer alternatives there are to producing the good in question
b.	the more broadly the market for the good is defined
c.	the longer the time horizon over which it is measured
d.	the higher the cost of production
e.	the more elastic the demand for that good.

 

 

ANS:  C                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Price Elasticity of Supply

 

134. The supply of a good is more price elastic

a.	the more alternatives there are to producing the good in question
b.	the more broadly the market for the good is defined.
c.	the shorter the time horizon over which it is measured.
d.	the higher the cost of production.
e.	the more elastic the demand for that good.

 

 

ANS:  A                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Price Elasticity of Supply

 

135. A perfectly elastic supply curve

a.	has an elasticity of 1
b.	has an elasticity less than 1
c.	has an elasticity of 0
d.	is horizontal
e.	is upward sloping

 

 

ANS:  D                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Price Elasticity of Supply

 

136. A perfectly inelastic supply curve

a.	cannot exist
b.	is horizontal
c.	has an elasticity of 0
d.	has an elasticity of 1
e.	is vertical

 

 

ANS:  E                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Price Elasticity of Supply

 

137. Along a perfectly elastic supply curve

a.	the quantity supplied is always the same
b.	the price elasticity of demand is always the same
c.	the price is always the same
d.	the cross-price elasticity of demand is always the same
e.	the elasticity of supply is different at each point.

 

 

ANS:  C                    PTS:   1                    DIF:    2

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Price Elasticity of Supply

 

138. If the elasticity of demand is much greater than the elasticity of supply, an excise tax levied on the suppliers will

a.	cause the suppliers to incur a greater burdan of the tax than demanders
b.	cause the demanders to incur a greater burdan of the tax than suppliers
c.	the burdan of the tax will be shared equally between the suppliers and the demanders
d.	cause the entire burdan of the tax to rest on the demanders
e.	Without more information as to the amount of the excise tax, who will incur a greater burdan will be unclear

 

 

ANS:  A                    PTS:   1                    DIF:    3

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity of demand

 

139. If the elasticity of supply is much greater than the elasticity of demand, an excise tax levied on the suppliers will

a.	cause the suppliers to incur a greater burdan of the tax than demanders
b.	cause the demanders to incur a greater burdan of the tax than suppliers
c.	the burdan of the tax will be shared equally between the suppliers and the demanders
d.	cause the entire burdan of the tax to rest on the demanders
e.	Without more information as to the amount of the excise tax, who will incur a greater burdan will be unclear

 

 

ANS:  B                    PTS:   1                    DIF:    3

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity of supply

 

140. If the elasticity of supply is much greater than the elasticity of demand, a subsidy awarded to demanders will

a.	benefit the demanders more than the suppliers
b.	benefit the suppliers more than the demanders
c.	the benefit of the subsidy will be equally shared between the demanders and the suppliers
d.	allow the demanders to be the only ones who will benefit
e.	Without more information as to the amount of the subsidy, who will benefit more can not be determined

 

 

ANS:  A                    PTS:   1                    DIF:    3

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity of supply

 

141. If the elasticity of demand is much greater than the elasticity of supply, a subsidy awarded to demanders will

a.	benefit the demanders more than the suppliers
b.	benefit the suppliers more than the demanders
c.	the benefit of the subsidy will be equally shared between the demanders and the suppliers
d.	allow the demanders to be the only ones who will benefit
e.	Without more information as to the amount of the subsidy, who will benefit more can not be determined

 

 

ANS:  B                    PTS:   1                    DIF:    3

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity of demand

 

142. If the demand for good A is more elastic than the demand for good B, a small decrease in supply in both markets will cause

a.	a much greater increase in price for good A than for good B
b.	a much greater increase in price for good B than for good A
c.	the price will icrease by the same amount in both markets
d.	only the price of good B will increase
e.	only the price of good A will icnrease

 

 

ANS:  B                    PTS:   1                    DIF:    3

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Elasticity and total revenue

 

143. If the demand for good A is more elastic than the demand for good B, a small increase in supply in both markets will cause

a.	a much greater decrease in price for good A than for good B
b.	a much greater decrease in price for good B than for good A
c.	the price will decrease by the same amount in both markets
d.	only the price of good B will decrease
e.	only the price of good A will decrease

 

 

ANS:  B                    PTS:   1                    DIF:    3

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Price elasticity of demand

 

144. If the demand for good A is more elastic than the demand for good B, a small increase in supply in both markets will cause

a.	a much greater increase in the equilbrium quantity of good A than for good B
b.	a much greater increase in the equilbrium quantity of good B than for good A
c.	the equilibrium quantity will decrease by the same amount in both markets
d.	only the equilibrium quantity of good B will decrease
e.	only the equilibrium quantity of good A will decrease

 

 

ANS:  A                    PTS:   1                    DIF:    3

NAT:  Analysis | Financial theories, analysis, reporting, and markets

LOC:  Elasticity        TOP:   Price elasticity of demand