Economics Principles and Policy International Edition 10th Edition by William J. Baumol - Test Bank

Economics Principles and Policy International Edition 10th Edition by William J. Baumol – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Demand and Elasticity

 

TRUE/FALSE

 

1. The market demand curve shows how the quantity demanded of a product, during a specified time period, changes as the price of that product changes.

 

ANS:  T                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

2. The law of demand states that a lower price increases the amount of a commodity that people are willing to buy.

 

ANS:  T                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

3. The demand curve depicts quantities demanded that have been gathered as prices have changed over time.

 

ANS:  F                    DIF:    Difficult         TOP:   Elasticity: The Measure of Responsiveness

 

4. The quantity demanded in a market depends on many things, but the concept of elasticity focuses on the effect of changes in the price of the good.

 

ANS:  T                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

5. Elasticity is a measure of the responsiveness of change in quantity demanded to a change in price.

 

ANS:  T                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

6. Elasticity of demand equals the ratio of the percentage change in quantity demanded to the percentage change in the price of the good.

 

ANS:  T                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

7. Elasticity of demand equals the ratio of the percentage change in the price of a good to the percentage change in the quantity demanded.

 

ANS:  F                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

8. Price elasticity of demand can be written as percentage change in Q divided by percentage change in P.

 

ANS:  T                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

9. Elasticity of demand is calculated using percentage changes in both price and quantity.

 

ANS:  T                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

10. Price elasticity of demand is a numerical measure of how much quantity demanded rises as price falls or quantity demanded falls as price rises.

 

ANS:  T                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

11. Elasticity computations related to demand carry a minus sign to show that the demand curve is negatively sloped.

 

ANS:  F                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

12. The elasticity formula solves the units problem because percentages are unaffected by the units of measure.

 

ANS:  T                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

13. The price elasticity of demand measure is generally stated as an absolute value.

 

ANS:  T                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

14. A line that is perfectly elastic has an elasticity of demand of zero.

 

ANS:  F                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

15. Perfectly inelastic demand schedules are vertical.

 

ANS:  T                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

16. Perfectly elastic demand schedules are vertical.

 

ANS:  F                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

17. A vertical demand curve has an elasticity of demand equal to zero.

 

ANS:  T                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

18. A horizontal demand curve is perfectly elastic because a change in price will not induce a change in quantity demanded.

 

ANS:  F                    DIF:    Difficult         TOP:   Elasticity: The Measure of Responsiveness

 

19. A horizontal demand curve is perfectly elastic because a change in price will induce an infinite change in quantity demanded.

 

ANS:  T                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

20. A straight-line demand schedule has the same elasticity throughout its length.

 

ANS:  F                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

21. A straight-line demand schedule has an elasticity that becomes smaller as we move from left to right along the schedule.

 

ANS:  T                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

22. A unit-elastic demand curve will be concave toward the origin.

 

ANS:  F                    DIF:    Difficult         TOP:   Elasticity: The Measure of Responsiveness

 

23. The unit-elastic demand curve is a rectangular hyperbola.

 

ANS:  T                    DIF:    Difficult         TOP:   Elasticity: The Measure of Responsiveness

 

24. A demand curve with an elasticity of 1.0 is said to be an elastic demand curve.

 

ANS:  F                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

25. A demand curve with an elasticity of 1.0 is a unit-elastic demand curve.

 

ANS:  T                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

26. When the goods of competing companies are identical, consumers have no reason to prefer one product over the other so the demand curves for the manufacturers will be perfectly elastic.

 

ANS:  T                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

27. Elasticity of demand is another way to measure slope.

 

ANS:  F                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

28. The difference between slope and elasticity is that slope measures absolute change and elasticity measures percentage change.

 

ANS:  T                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

29. The slope of the demand curve conveys all the useful information about elasticity.

 

ANS:  F                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

30. The elasticity of a demand curve at any point can be ascertained by its steepness.

 

ANS:  F                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

31. The elasticity of a straight-line demand curve is the same as its slope.

 

ANS:  F                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

32. The elasticity of any demand curve is the same as its slope.

 

ANS:  F                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

33. As one moves down a straight-line demand curve, the elasticity increases.

 

ANS:  F                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

34. As one moves down a straight-line demand curve, the elasticity decreases.

 

ANS:  T                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

35. As one moves down a straight-line demand curve away from the vertical axis, demand becomes less elastic and then inelastic.

 

ANS:  T                    DIF:    Difficult         TOP:   Elasticity: The Measure of Responsiveness

 

36. Buyers’ expenditures and sellers’ revenues are always identical.

 

ANS:  T                    DIF:    Easy

TOP:   Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure

 

37. Total expenditure equals price times elasticity.

 

ANS:  F                    DIF:    Moderate

TOP:   Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure

 

38. Total expenditure equals price times quantity.

 

ANS:  T                    DIF:    Easy

TOP:   Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure

 

39. Demand elasticity equals quantity times price.

 

ANS:  F                    DIF:    Easy

TOP:   Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure

 

40. If demand is elastic, an increase in price will decrease total revenue.

 

ANS:  T                    DIF:    Easy

TOP:   Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure

 

41. If demand is elastic, an increase in price will increase total revenue.

 

ANS:  F                    DIF:    Moderate

TOP:   Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure

 

42. If demand is elastic, a rise in price will decrease total expenditure.

 

ANS:  T                    DIF:    Moderate

TOP:   Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure

 

43. If demand is inelastic, a drop in price will raise total expenditure.

 

ANS:  F                    DIF:    Moderate

TOP:   Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure

 

44. If price goes up 20 percent and quantity demanded declines by 10 percent, total revenue will rise.

 

ANS:  T                    DIF:    Moderate

TOP:   Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure

 

45. If a demand curve is unit elastic, then P times Q will remain constant when P changes.

 

ANS:  T                    DIF:    Moderate

TOP:   Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure

 

46. A demand curve with unit elasticity can never touch either the vertical or horizontal axes.

 

ANS:  T                    DIF:    Difficult

TOP:   Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure

 

47. If demand is unit elastic, then a 10 percent increase in the price will lead to a 10 percent increase in quantity demanded.

 

ANS:  F                    DIF:    Moderate

TOP:   Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure

 

48. If demand is unit elastic, then a 10 percent increase in price will lead to a 10 percent drop in quantity demanded.

 

ANS:  T                    DIF:    Moderate

TOP:   Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure

 

49. A rise in price will always result in an increase in the total amount consumers spend on a product.

 

ANS:  F                    DIF:    Moderate

TOP:   Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure

 

50. A price increase will always increase a firm’s revenue.

 

ANS:  F                    DIF:    Moderate

TOP:   Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure

 

51. A price increase will always cause a firm’s revenue to fall, because they will sell less of the good.

 

ANS:  F                    DIF:    Moderate

TOP:   Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure

 

52. A tax on cigarettes can be expected to reduce teen smoking more than it reduces adult smoking.

 

ANS:  T                    DIF:    Moderate

TOP:   Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure

 

53. The elasticity of demand is determined partly by whether the good is a necessity or a luxury.

 

ANS:  T                    DIF:    Easy               TOP:   What Determines Demand Elasticity?

 

54. Necessities such as food and shelter have inelastic demand.

 

ANS:  T                    DIF:    Easy               TOP:   What Determines Demand Elasticity?

 

55. If a product constitutes a large portion of a consumer’s income, demand will be more inelastic.

 

ANS:  F                    DIF:    Moderate       TOP:   What Determines Demand Elasticity?

 

56. If there are many close substitutes available for a good, its elasticity of demand will be higher.

 

ANS:  T                    DIF:    Easy               TOP:   What Determines Demand Elasticity?

 

57. Since an individual spends a small share of her income on salt, the elasticity of demand is likely to be low.

 

ANS:  T                    DIF:    Moderate       TOP:   What Determines Demand Elasticity?

 

58. Elasticity of demand is likely to be higher for less-expensive goods, other things being equal.

 

ANS:  F                    DIF:    Moderate       TOP:   What Determines Demand Elasticity?

 

59. As a price change persists over a long period of time, we should expect the demand elasticity to fall.

 

ANS:  F                    DIF:    Moderate       TOP:   What Determines Demand Elasticity?

 

60. The ratio of the percentage change in quantity demanded to the percentage change in income is known as the cross elasticity of demand.

 

ANS:  F                    DIF:    Easy               TOP:   Elasticity as a General Concept

 

61. Income elasticity of demand describes how change in income affects the quantity demanded of a good.

 

ANS:  T                    DIF:    Moderate       TOP:   Elasticity as a General Concept

 

62. Cross-elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price of another good.

 

ANS:  T                    DIF:    Easy               TOP:   Elasticity as a General Concept

 

63. If an increase in quantity demanded of a product reduces the quantity demanded of another, then the two goods are said to be substitutes.

 

ANS:  T                    DIF:    Easy               TOP:   Elasticity as a General Concept

 

64. Cross-elasticity of demand could be used to measure the responsiveness of the quantity demanded of swimming pools to a change in the price of picnic tables.

 

ANS:  T                    DIF:    Moderate       TOP:   Elasticity as a General Concept

 

65. A negative cross elasticity indicates that two goods are complements.

 

ANS:  T                    DIF:    Moderate       TOP:   Elasticity as a General Concept

 

66. Two goods are substitutes if a decrease in the price of one raises the quantity demanded of the other.

 

ANS:  F                    DIF:    Moderate       TOP:   Elasticity as a General Concept

 

67. Two goods with a low cross elasticity of demand are competing in the same market.

 

ANS:  F                    DIF:    Moderate       TOP:   Elasticity as a General Concept

 

68. Demand curves often do not remain stationary; they shift because of changes in other variables.

 

ANS:  T                    DIF:    Easy

TOP:   Changes in Demand: Movements Along the Demand Curve vs. Shifts in the Demand Curve

 

69. When price falls, demand rises.

 

ANS:  F                    DIF:    Moderate

TOP:   Changes in Demand: Movements Along the Demand Curve vs. Shifts in the Demand Curve

 

70. A decrease in the price of a good will cause a movement along the demand schedule to a higher quantity demanded.

 

ANS:  T                    DIF:    Moderate

TOP:   Changes in Demand: Movements Along the Demand Curve vs. Shifts in the Demand Curve

 

71. A buyer’s response to a change in income is an example of a “change in demand.”

 

ANS:  T                    DIF:    Easy

TOP:   Changes in Demand: Movements Along the Demand Curve vs. Shifts in the Demand Curve

 

72. A fall in the price of a competing product will produce an outward shift in the demand curve for most products.

 

ANS:  F                    DIF:    Moderate

TOP:   Changes in Demand: Movements Along the Demand Curve vs. Shifts in the Demand Curve

 

73. Historical demand curves are always suspect because their demand curves are likely to have shifted over time.

 

ANS:  T                    DIF:    Difficult

TOP:   The Time Period of the Demand Curve and Economic Decision

 

74. An accurate demand curve can be derived by examining the quantities of a good that are sold over time as the price varies.

 

ANS:  F                    DIF:    Easy

TOP:   Appendix: How Can We Find a Legitimate Demand Curve from Historical Statistics?

 

MULTIPLE CHOICE

 

1. Elasticity

a.	deals with percentage changes in price and quantity demanded.
b.	employs percentage changes calculated in terms of average values of the prices and quantities at issue.
c.	is generally stated in absolute value.
d.	All of the above are correct.

 

 

ANS:  D                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

2. Price elasticity of demand is defined as

a.	slope divided by price.
b.	percentage change in price divided by percentage change in quantity demanded.
c.	percentage change in quantity demanded divided by percentage change in price.
d.	the inverse of the price elasticity of supply.

 

 

ANS:  C                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

3. The formula for price elasticity of demand that is used in practice

a.	usually drops all minus signs.
b.	usually takes on different values at different points on the demand curve.
c.	may calculate the percentage change in price between P1 and P2 as “(P2 – P1) as a percentage of (P1 + P2)/2.”
d.	All of the above are correct.

 

 

ANS:  D                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

4. A correct formula (dropping all minus signs) for the calculation of the elasticity of demand between point Q1, P1 and point Q2, P2 is

a.	(Q2 + Q1)(P2 – P1)/(P2 + P1)(Q2 – Q1).
b.	(Q2 – Q1)P1/(P2 – P1)Q1.
c.	(Q2 – Q1)(P2 + P1)/(P2 – P1)(Q2 + Q1).
d.	(Q2 – Q1)/(P2 – P1).

 

 

ANS:  C                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

5. At $6 per steak, consumers are willing to buy two steaks. At a price of $2, consumers are willing to buy six steaks. The elasticity of the market demand curve between P = $6 and P = $2 (dropping all minus signs) is

a.	0.33.
b.	1.
c.	2.
d.	4.

 

 

ANS:  B                    DIF:    Difficult         TOP:   Elasticity: The Measure of Responsiveness

 

6. If the price of gasoline rises by 20 percent and consumption of gasoline falls 5 percent,

a.	demand is elastic.
b.	demand is unit-elastic.
c.	demand is inelastic.
d.	elasticity of demand cannot be calculated.

 

 

ANS:  C                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

7. Demand is said to be price elastic at a point on a demand curve if a

a.	1 percent rise in price reduces the quantity demanded by more than 1 percent.
b.	1 percent rise in price reduces the quantity demanded by less than 1 percent.
c.	1 percent rise in price reduces the quantity demanded by more than 10 percent.
d.	10 percent rise in price reduces the quantity demanded by less than 10 percent.

 

 

ANS:  A                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

Figure 6-1

 

 

8. In Figure 6-1,

a.	D1 is more elastic than D2 below P2 and less elastic above P2.
b.	D1 is less elastic than D2 at all prices.
c.	D2 is less elastic than D1 at all prices.
d.	D2 is more elastic than D2 above P2 but less elastic below P2.

 

 

ANS:  C                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

Figure 6-2

 

 

9. In Figure 6-2, the price elasticity of demand (dropping all minus signs) is ____ between P = 4 and P = 6 than between P = 10 and P = 12 because between the lower set of prices the percentage change in price is ____.

a.	smaller; smaller
b.	smaller; greater
c.	greater; smaller
d.	greater; greater

 

 

ANS:  B                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

10. From Figure 6-2, we can infer that demand is ____ between P = 12 and P = 10 and ____ between P = 6 and P = 4.

a.	elastic; elastic
b.	elastic; inelastic
c.	inelastic; elastic
d.	inelastic; inelastic

 

 

ANS:  B                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

Figure 6-3

 

 

11. In Figure 6-3(a), at any price above $6, quantity demanded

a.	falls to zero.
b.	becomes infinitely large.
c.	is equal to price.
d.	is equal to the elasticity of demand.

 

 

ANS:  A                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

12. In Figure 6-3(a), demand is

a.	perfectly elastic.
b.	perfectly inelastic.
c.	unit elastic.
d.	fixed at one particular quantity.

 

 

ANS:  A                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

13. In Figure 6-3(b), as price falls from $15 to $6, total expenditure

a.	falls.
b.	increases.
c.	remains constant.
d.	first falls and then increases.

 

 

ANS:  B                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

14. Along the inelastic portion of a demand curve, the

a.	change in price will always be less than the change in quantity demanded.
b.	percentage change in price will be less than the percentage change in quantity demanded.
c.	change in price will always be more than the change in quantity demanded.
d.	percentage change in price will be more than the percentage change in quantity demanded.

 

 

ANS:  D                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

Figure 6-4

 

 

15. In Figure 6-4, total expenditure ____ as price falls from P = 12 to P = 10.

a.	falls
b.	stays constant
c.	rises
d.	rises by more than $12

 

 

ANS:  C                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

16. If the elasticity of demand for cigarettes is 0.4, then an increase in the price of a pack of cigarettes from $1.00 to $1.30 would reduce quantities demanded by about

a.	27 percent.
b.	40 percent.
c.	12 percent.
d.	95 percent.

 

 

ANS:  C                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

17. If the price of apples decreases by 2 percent and causes apple consumption to increase by 4 percent, the price elasticity of demand is ____, indicating the demand is ____.

a.	2, elastic
b.	2, inelastic
c.	0.5, elastic
d.	0.5, inelastic

 

 

ANS:  A                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

18. If a 10 percent rise in price leads to a reduction in quantity demanded of more than 10 percent,

a.	demand is elastic.
b.	demand is inelastic.
c.	elasticity of demand is unitary.
d.	None of the above is correct.

 

 

ANS:  A                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

19. If the price elasticity of demand for radios is 2.5 (dropping the minus sign), then a 50 percent reduction in the price of radios will lead to

a.	the sale of 200 additional radios.
b.	the sale of 125 percent more radios than before.
c.	the sale of 150 percent more radios than before.
d.	the sale of 25 percent more radios than before.

 

 

ANS:  B                    DIF:    Difficult         TOP:   Elasticity: The Measure of Responsiveness

 

Figure 6-5

 

 

20. If the demand curve in Figure 6-5 is unit elastic, then total expenditure at A is ____ total expenditure at B.

a.	greater than
b.	less than
c.	equal to
d.	less elastic than

 

 

ANS:  C                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

21. In Figure 6-5, if price falls from point A to point B along the unit-elastic demand curve,

a.	total expenditure remains unchanged.
b.	total expenditure increases.
c.	total expenditure decreases.
d.	total expenditure first increases and then declines.

 

 

ANS:  A                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

22. A demand curve is described as perfectly inelastic if

a.	the same quantity is purchased regardless of price.
b.	the same price is charged regardless of quantity sold.
c.	neither price nor quantity demanded ever change.
d.	only quantity demanded can change.

 

 

ANS:  A                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

23. A demand curve is described as perfectly elastic if

a.	any quantity can be sold at a given price.
b.	the same quantity is sold regardless of price.
c.	neither price nor quantity demanded ever change.
d.	only price can change.

 

 

ANS:  A                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

24. A perfectly elastic demand curve for a firm

a.	is represented by a vertical line.
b.	means that with every unit price increase there will be a unit decrease in demand.
c.	is formulated by P ´ Q = a constant, for all prices and quantities.
d.	indicates that any increase in price will eliminate all purchases of its product.

 

 

ANS:  D                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

25. The price elasticity of a vertical demand curve is always

a.	infinitely large.
b.	zero.
c.	one.
d.	increasing as price increases.

 

 

ANS:  B                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

26. The price elasticity of a horizontal demand curve is always

a.	infinitely large.
b.	zero.
c.	one.
d.	increasing as price increases.

 

 

ANS:  A                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

27. Along a perfectly elastic demand curve,

a.	the slope is always zero.
b.	the price elasticity of demand is infinite.
c.	consumer purchases will not respond at all to a change in price.
d.	All of the above are true.

 

 

ANS:  D                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

28. If the demand curve is vertical, the elasticity is

a.	1.0.
b.	0.0.
c.	0.5.
d.	infinite.

 

 

ANS:  B                    DIF:    Easy               TOP:   Elasticity: The Measure of Responsiveness

 

29. As we move down a straight-line demand curve, the price elasticity becomes

a.	larger.
b.	smaller.
c.	larger, then smaller.
d.	smaller, then larger.

 

 

ANS:  B                    DIF:    Difficult         TOP:   Elasticity: The Measure of Responsiveness

 

30. Along a straight-line demand curve (dropping all minus signs), the price elasticity of demand

a.	gets larger as quantity demanded gets larger.
b.	gets smaller as quantity demanded gets larger.
c.	always equals one.
d.	is constant (though not necessarily equal to one).

 

 

ANS:  B                    DIF:    Difficult         TOP:   Elasticity: The Measure of Responsiveness

 

31. Along a straight-line demand curve the

a.	slope is constant.
b.	ratio P/Q constantly changes.
c.	elasticity grows much smaller toward the right-hand end.
d.	All of the above are correct.

 

 

ANS:  D                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

Figure 6-6

 

 

32. The purchase of premium cable channels is an “all or nothing” choice. Which graph in Figure 6-6 best illustrates the cable market demand curve?

a.	1
b.	2
c.	3
d.	4

 

 

ANS:  A                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

33. An article in the Wall Street Journal reports that “most cable TV operators are aware that cable is price sensitive, and there comes a point where people won’t pay the price.” Which demand curve in Figure 6-6 best illustrates this situation?

a.	1
b.	2
c.	3
d.	4

 

 

ANS:  C                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

34. A craze for apples in Riverdale increases the quantity demanded at every price by five bushels. Between any two prices, the new demand curve will be ____ the old demand curve.

a.	more elastic than
b.	less elastic than
c.	equal in elasticity to
d.	More information is needed to predict the relationship.

 

 

ANS:  B                    DIF:    Difficult         TOP:   Elasticity: The Measure of Responsiveness

 

35. The emigration of some of Whoville’s workers reduces the quantity of thingamabobs supplied at every price by 50. The new supply curve will ____ the old supply curve.

a.	be steeper and less elastic at every price than
b.	have the same slope and the same elasticity at every price as
c.	have the same slope and be more elastic at every price than
d.	More information is needed to predict the relationship between the elasticities of the two supply curves.

 

 

ANS:  C                    DIF:    Moderate       TOP:   Elasticity: The Measure of Responsiveness

 

36. Elasticity provides a guide to both

a.	market stability and change in revenue as price changes.
b.	responsiveness of quantity demanded to a change in price and market stability.
c.	responsiveness of quantity demanded to a change in price and change in revenue as price changes.
d.	technological change and change in revenue as price changes.

 

 

ANS:  C                    DIF:    Moderate       TOP:   Price Elasticity of Demand and Total Expenditure

 

37. Total expenditure by a buyer is equal to the

a.	slope at any point along the demand curve.
b.	price times quantity demanded at any point along the demand curve.
c.	elasticity times price at any point along the demand curve.
d.	elasticity times quantity demanded at any point along the demand curve.

 

 

ANS:  B                    DIF:    Easy               TOP:   Price Elasticity of Demand and Total Expenditure

 

38. A price cut will decrease the revenue a firm receives if the demand for its product is

a.	elastic.
b.	inelastic.
c.	of unit elasticity.
d.	straight elastic.

 

 

ANS:  B                    DIF:    Easy               TOP:   Price Elasticity of Demand and Total Expenditure

 

39. A price cut will increase the revenue a firm receives if the demand for its product is

a.	elastic.
b.	inelastic.
c.	of unit elasticity.
d.	straight elastic.

 

 

ANS:  A                    DIF:    Easy               TOP:   Price Elasticity of Demand and Total Expenditure

 

40. When Johanna cut prices in her jewelry store by 20 percent, the dollar value of her sales fell by 20 percent. This indicates that

a.	demand was elastic.
b.	demand was inelastic.
c.	demand was unit elastic.
d.	the demand curve was vertical.

 

 

ANS:  D                    DIF:    Moderate       TOP:   Price Elasticity of Demand and Total Expenditure

 

41. In an attempt to raise sales, Hannah cut prices in her bookstore by 20 percent. If the dollar value of her sales remained constant, that indicates

a.	old customers bought no more books.
b.	no new customers bought books.
c.	the quantity of books sold increased 20 percent.
d.	the demand curve is vertical.

 

 

ANS:  C                    DIF:    Moderate       TOP:   Price Elasticity of Demand and Total Expenditure

 

42. The term “unit elasticity” is used to describe a situation in which a rise in price is accompanied by

a.	a fall in total expenditure.
b.	a rise in total expenditure.
c.	constant total expenditure.
d.	a unit decrease in total expenditure.

 

 

ANS:  C                    DIF:    Moderate       TOP:   Price Elasticity of Demand and Total Expenditure

 

43. According to the estimates of a Harvard economist, the demand for cocaine is unit elastic. This means if the price of cocaine were to rise by 10 percent, (i) quantity consumed would fall 10 percent and (ii) dealer income from the sale of cocaine would fall 10 percent. Which of these two statements are correct?

a.	i and ii
b.	i not ii
c.	ii not i
d.	neither i nor ii

 

 

ANS:  B                    DIF:    Moderate       TOP:   Price Elasticity of Demand and Total Expenditure

 

44. When Scuba, Inc., lowered the price of a tank of compressed air by 20 percent, it sold 10 percent more tankfulls. The price elasticity for compressed air is

a.	2.
b.	1/2.
c.	1.
d.	20.

 

 

ANS:  B                    DIF:    Moderate       TOP:   Price Elasticity of Demand and Total Expenditure

 

45. Big Alice Ice Cream Parlor reduced its price of an ice cream cone from $1 to 90 cents. Sales consequently increased from 1,000 cones per week to 1,050. The approximate price elasticity is

a.	10.
b.	2.
c.	1/2.
d.	1.

 

 

ANS:  C                    DIF:    Moderate       TOP:   Price Elasticity of Demand and Total Expenditure

 

Figure 6-7

 

 

46. In Figure 6-7, which total expenditure curve belongs to a demand curve that is unit elastic throughout?

a.	1
b.	2
c.	3
d.	4

 

 

ANS:  C                    DIF:    Difficult         TOP:   Price Elasticity of Demand and Total Expenditure

 

47. Julia knows the price elasticity of movie rentals is 3. She knows, therefore, that if she raises her price from $2 to $2.50, her rentals will drop by approximately

a.	150 percent.
b.	100 percent.
c.	75 percent.
d.	33 percent.

 

 

ANS:  C                    DIF:    Moderate       TOP:   Price Elasticity of Demand and Total Expenditure

 

48. Tele-Com, Inc., the nation’s largest cable TV company, tested the effect of a price reduction for the Disney Channel. It lowered prices from $10.75 to $7.95 and found that the number of customers more than doubled. This means the

a.	demand curve for the Disney Channel shifted to the right.
b.	supply curve of the Disney Channel shifted to the left.
c.	demand for the Disney Channel is elastic in this price range.
d.	demand for the Disney Channel is inelastic in this price range.

 

 

ANS:  C                    DIF:    Moderate       TOP:   Price Elasticity of Demand and Total Expenditure

 

Figure 6-8

 

 

49. Libya sold more crude oil in 1985 than it sold five years earlier, but revenues were 17 percent less. Which graph in Figure 6-8 is consistent with this set of facts?

a.	1
b.	2
c.	3
d.	4

 

 

ANS:  C                    DIF:    Moderate       TOP:   Price Elasticity of Demand and Total Expenditure

 

50. To avoid an increase in the local property tax, Sullivan County, New York, proposed a 2 percent hotel tax, which presumably would be passed on to tourists. The hotel industry argued that the tax would hurt hotel business. They are really arguing that

a.	tourist and convention demand is inelastic, so hotel bookings will decline.
b.	tourist and convention demand is very elastic, so hotel bookings will decline.
c.	they would prefer a property tax increase instead.
d.	it is unfair to tax people who do not live in the area.

 

 

ANS:  B                    DIF:    Moderate       TOP:   Price Elasticity of Demand and Total Expenditure

 

51. Suppose that the supply of insulin is perfectly elastic and the demand for insulin perfectly inelastic. Then the real burden of an excise tax on insulin will be

a.	split equally between buyers and sellers.
b.	borne entirely by sellers.
c.	borne entirely by buyers.
d.	borne by sellers on units sold up to the initial equilibrium quantity and by buyers on all additional units.

 

 

ANS:  C                    DIF:    Easy               TOP:   Price Elasticity of Demand and Total Expenditure

 

52. If the marginal cost of producing vanity license plates is virtually zero (by prison inmates with little else to do), then states would maximize their profits on plate sales at the point on a linear demand curve where

a.	demand is inelastic.
b.	demand is elastic.
c.	demand is unit elastic.
d.	the demand curve crosses the horizontal axis.

 

 

ANS:  C                    DIF:    Difficult         TOP:   Price Elasticity of Demand and Total Expenditure

 

53. Would a profit-maximizing firm sell where demand is inelastic?

a.	No, this would not follow the rule of MC = MR.
b.	No, the firm could not profitably raise price.
c.	Yes, the firm could profitably lower price to attract sales.
d.	Yes, in this case there are few substitutes for the good.

 

 

ANS:  A                    DIF:    Difficult         TOP:   Price Elasticity of Demand and Total Expenditure

 

54. A recent study on enrollment at a liberal arts college concluded that demand elasticity is 0.91. The administration is considering a tuition increase to help balance the budget. The revenue-maximizing decision is to

a.	decrease tuition, which should boost enrollment enough to balance the budget.
b.	decrease tuition, which would bring in more revenue.
c.	leave tuition as is-an increase would not help balance the budget.
d.	increase tuition, which would generate revenue.

 

 

ANS:  D                    DIF:    Moderate       TOP:   Price Elasticity of Demand and Total Expenditure

 

55. The local symphony recently raised its price for tickets to their summer concerts in the park. At the end of the summer season, the symphony was surprised to see that total revenue had actually decreased. The reason was that the elasticity of demand for tickets was

a.	unit elastic.
b.	inelastic.
c.	elastic.
d.	Not enough information is given.

 

 

ANS:  C                    DIF:    Moderate       TOP:   Price Elasticity of Demand and Total Expenditure

 

56. John’s Bait Shop was surprised to learn that when it raised prices by 10 percent, total revenue was unaffected. This is because the elasticity for bait is

a.	unit elastic.
b.	inelastic.
c.	elastic.
d.	Not enough information is given.

 

 

ANS:  A                    DIF:    Moderate       TOP:   Price Elasticity of Demand and Total Expenditure

 

57. If demand is unit elastic, revenue

a.	and price rise and fall together.
b.	rises as price falls.
c.	falls as price rises.
d.	remains constant as price rises or falls.

 

 

ANS:  D                    DIF:    Easy               TOP:   Price Elasticity of Demand and Total Expenditure

 

58. If, as price increases by 10 percent, total revenue decreases by 10 percent demand is

a.	elastic.
b.	unit elastic.
c.	inelastic.
d.	perfectly inelastic.

 

 

ANS:  A                    DIF:    Difficult         TOP:   Price Elasticity of Demand and Total Expenditure

 

59. When the price of penicillin tablets increases by $5 per dozen, the drug company’s revenue increases by $6 million. Its elasticity of demand (in absolute terms) must be

a.	zero.
b.	greater than one.
c.	less than one.
d.	infinitely large.

 

 

ANS:  C                    DIF:    Moderate       TOP:   Price Elasticity of Demand and Total Expenditure

 

60. The demand for Exxon gasoline is ____ the demand for all gasoline.

a.	exactly as elastic as, and of a different slope from
b.	more elastic than
c.	less elastic than
d.	exactly as elastic and of a different slope from

 

 

ANS:  B                    DIF:    Easy               TOP:   What Determines Demand Elasticity?

 

61. The demand for French Roast coffee is likely to be

a.	elastic.
b.	inelastic.
c.	unit elastic.
d.	perfectly inelastic.

 

 

ANS:  A                    DIF:    Easy               TOP:   What Determines Demand Elasticity?

 

62. The price elasticity of demand for widgets at any particular price is determined by

a.	whether widgets are luxuries or necessities.
b.	how much of their budgets consumers spend on widgets.
c.	whether there are any good substitutes for widgets.
d.	All of the above are correct.

 

 

ANS:  D                    DIF:    Easy               TOP:   What Determines Demand Elasticity?

 

63. The demand for potatoes at current prices is likely to be

a.	elastic.
b.	inelastic.
c.	unit elastic.
d.	perfectly elastic.

 

 

ANS:  B                    DIF:    Easy               TOP:   What Determines Demand Elasticity?

 

64. A 10 percent increase in the cost of restaurant meals, which are a luxury, will most likely

a.	increase the purchase of meals by 10 percent.
b.	increase the purchase of meals by less than 10 percent.
c.	decrease the purchase of meals by more than 10 percent.
d.	decrease the purchase of meals by less than 10 percent.

 

 

ANS:  C                    DIF:    Moderate       TOP:   What Determines Demand Elasticity?

 

65. If both matches and automobile prices increase by 10 percent, consumers will likely buy

a.	more matches and more automobiles.
b.	approximately the same quantity of matches and fewer automobiles.
c.	less matches and fewer automobiles.
d.	more matches and fewer automobiles.

 

 

ANS:  B                    DIF:    Moderate       TOP:   What Determines Demand Elasticity?

 

66. A relatively large increase in the cost of electricity would likely

a.	result in a large increase in the use of gas for home use immediately.
b.	cause an immediate large decline in the use of electricity.
c.	increase the use of gas and decrease the use of electricity after a time lapse.
d.	cause an equal reduction in the use of electricity immediately.

 

 

ANS:  C                    DIF:    Moderate       TOP:   What Determines Demand Elasticity?

 

67. The demand for a new effective drug for the cure of AIDS would most likely be

a.	elastic.
b.	unit elastic.
c.	perfectly elastic.
d.	highly inelastic.

 

 

ANS:  D                    DIF:    Moderate       TOP:   What Determines Demand Elasticity?

 

68. When OPEC raises the price of petroleum, American expenditures on oil imports increase, suggesting that

a.	the United States’ elasticity of demand for imported oil is greater than one.
b.	the United States’ elasticity of demand for imported oil is less than one.
c.	imported oil and domestically produced oil are complementary goods.
d.	the short-run elasticity of demand for oil is greater than the long-run elasticity.

 

 

ANS:  B                    DIF:    Easy               TOP:   What Determines Demand Elasticity?

 

69. A decrease in the price of rice from 50 cents to 40 cents a pound increases consumption from 16 to 20 tons a week in Gainesville and from 160 to 200 tons in the larger city of Miami. The elasticity of demand for rice is

a.	greater in Miami than in Gainesville, even taking into account the population difference.
b.	greater in Gainesville than in Miami in spite of the population difference.
c.	equal in Gainesville and Miami regardless of the population difference.
d.	impossible to compare because of the population difference.

 

 

ANS:  C                    DIF:    Moderate       TOP:   What Determines Demand Elasticity?

 

70. Which of the following goods will have the most inelastic demand at any time?

a.	jewelry
b.	Big Macs
c.	electricity
d.	pork chops

 

 

ANS:  C                    DIF:    Moderate       TOP:   What Determines Demand Elasticity?

 

71. Which of the following goods will have the most elastic demand at any time?

a.	coffee
b.	gasoline
c.	restaurant meals
d.	insulin

 

 

ANS:  C                    DIF:    Moderate       TOP:   What Determines Demand Elasticity?

 

72. The price elasticity of new automobile purchases is about 1.2. This implies that an increase of $1,000 on a $10,000 automobile will

a.	reduce the number of autos sold by 1.2 percent.
b.	increase the consumer expenditures on autos by 1.2 percent.
c.	reduce the number of autos sold by 12 percent.
d.	increase consumer expenditures on autos by 12 percent.

 

 

ANS:  C                    DIF:    Easy               TOP:   What Determines Demand Elasticity?

 

73. A good will tend to be more price elastic if it

a.	is a luxury good.
b.	has no close substitutes.
c.	is a small part of the household budget.
d.	is a necessity.

 

 

ANS:  A                    DIF:    Easy               TOP:   What Determines Demand Elasticity?

 

74. A study of New York City (NYC) tax rates concluded that taxes on the nonmanufacturing sector should be higher since that sector has fewer alternatives. Manufacturers are more mobile and may move to avoid higher taxes. This means that

a.	nonmanufacturing firms have a more elastic demand for NYC locations.
b.	manufacturing firms have an inelastic demand for the NYC locations.
c.	nonmanufacturing firms have relatively inelastic demand for the NYC locations.
d.	nonmanufacturing demand for NYC locations is perfectly elastic.

 

 

ANS:  C                    DIF:    Moderate       TOP:   What Determines Demand Elasticity?

 

75. The price of an airline ticket rises as the amount of time between purchase and flight departure gets smaller. The airlines base the policy on the assumption that

a.	consumers are not aware of airline prices.
b.	consumer demand is unrelated to prices.
c.	consumer demand becomes more elastic as departure time approaches.
d.	consumer demand becomes less elastic as departure time approaches.

 

 

ANS:  D                    DIF:    Moderate       TOP:   What Determines Demand Elasticity?

 

76. In 1975, New York City increased regulated taxi fares by 17.5 percent and expected taxi revenue to increase a like amount. The taxi commission believed taxi demand was

a.	unit elastic.
b.	inelastic.
c.	elastic.
d.	perfectly inelastic.

 

 

ANS:  D                    DIF:    Moderate       TOP:   What Determines Demand Elasticity?

 

77. The relationship between a change in consumer income and a resulting change in demand for a good is

a.	demand elasticity.
b.	income elasticity of demand.
c.	cross elasticity of income demand.
d.	supply elasticity.

 

 

ANS:  B                    DIF:    Moderate       TOP:   Elasticity as a General Concept

 

78. The elasticity of supply is calculated by

a.	determining the slope of the supply curve.
b.	dividing the absolute change in quantity supplied by the absolute change in price.
c.	dividing the percentage change in quantity supplied by the percentage change in price.
d.	dividing the percentage change in price by the percentage change in quantity demanded.

 

 

ANS:  C                    DIF:    Moderate       TOP:   Elasticity as a General Concept

 

Figure 6-9

 

 

79. In 1983, government price supports raised the price of sugar above its equilibrium value. Which graph in Figure 6-9 illustrates the impact of sugar price supports on the sugar substitute fructose?

a.	1
b.	2
c.	3
d.	4

 

 

ANS:  C                    DIF:    Moderate       TOP:   Elasticity as a General Concept

 

80. Certain goods are related such that an increase in the price of one good decreases the quantity demanded of the other. These goods are

a.	complements.
b.	substitutes.
c.	luxury goods.
d.	competing goods.

 

 

ANS:  A                    DIF:    Easy               TOP:   Elasticity as a General Concept

 

81. The measure used to determine whether two products are substitutes or complements is called

a.	price elasticity of demand.
b.	income elasticity of demand.
c.	cross elasticity of demand.
d.	inverse elasticity of demand.

 

 

ANS:  C                    DIF:    Easy               TOP:   Elasticity as a General Concept

 

82. If two goods are complements, their cross elasticity of demand will normally be

a.	zero.
b.	a negative number.
c.	a positive number.
d.	infinity.

 

 

ANS:  B                    DIF:    Moderate       TOP:   Elasticity as a General Concept

 

83. The price of coffee rose 50 percent and coffee sales fell 25 percent. Doughnut sales also fell 25 percent. From this information we can conclude that

a.	demand for coffee is inelastic.
b.	coffee and doughnuts are complements.
c.	the cross elasticity of demand is minus 0.5 percent.
d.	All of the above are correct.

 

 

ANS:  D                    DIF:    Moderate       TOP:   Elasticity as a General Concept

 

84. Two economists from Ohio University estimated that the demand curve for kerosene in Indonesia was such that a 10 percent increase in the price reduced the quantity demanded by 2.2 percent and that a 10 percent increase in the price of electricity increased the demand for kerosene by 1.6 percent. This indicates that (i) the demand for kerosene is price inelastic and (ii) kerosene and electricity are substitutes. Which of these two statements is correct?

a.	i and ii
b.	i not ii
c.	ii not i
d.	neither i nor ii

 

 

ANS:  A                    DIF:    Moderate       TOP:   Elasticity as a General Concept

 

85. The elasticity measure which has been employed by the courts to assess the degree of market competition is

a.	price elasticity of demand.
b.	income elasticity of demand.
c.	cross elasticity of demand.
d.	inverse elasticity of demand.

 

 

ANS:  C                    DIF:    Easy               TOP:   Elasticity as a General Concept

 

86. If goods X and Y are complements, the

a.	quantities demanded of X and Y tend to move in opposite directions.
b.	quantities demanded of X and Y tend to move in the same direction.
c.	prices of X and Y tend to move in the same direction.
d.	supply curves for X and Y tend to move in the same direction.

 

 

ANS:  B                    DIF:    Easy               TOP:   Elasticity as a General Concept

 

87. The definition of cross elasticity of demand for two products X and Y is

a.	percentage change in quantity of X demanded/percentage change in quantity of Y demanded.
b.	percentage change in price of Y/percentage change in quantity of X demanded.
c.	percentage change in price of Y/percentage change in price of X.
d.	percentage change in quantity of X demanded/percentage change in price of Y.

 

 

ANS:  D                    DIF:    Easy               TOP:   Elasticity as a General Concept

 

88. Chicken and fish are substitutes. Therefore, the cross elasticity of demand between chicken and fish is

a.	negative.
b.	positive.
c.	zero.
d.	Any of the above is possible.

 

 

ANS:  B                    DIF:    Easy               TOP:   Elasticity as a General Concept

 

89. If the cross elasticity of demand for potato chips and pretzels equals 1.5,

a.	potato chips and pretzels must both be luxury goods.
b.	either potato chips or pretzels must be a luxury good, and both may be luxury goods.
c.	potato chips and pretzels must be substitutes.
d.	potato chips and pretzels must be complements.

 

 

ANS:  C                    DIF:    Easy               TOP:   Elasticity as a General Concept

 

90. If the price elasticity of supply of doodads equals 0.50 and the price rises by 3 percent, then the quantity supplied of doodads will rise by ____.

a.	0.50 percent.
b.	0.60 percent.
c.	1.50 percent.
d.	15 percent.

 

 

ANS:  C                    DIF:    Moderate       TOP:   Elasticity as a General Concept

 

91. Hot dogs and hot dog buns are found to be related by the cross elasticity of demand. If they are complementary goods, the cross elasticity will be

a.	positive.
b.	equal to zero.
c.	negative.
d.	unknown.

 

 

ANS:  C                    DIF:    Moderate       TOP:   Elasticity as a General Concept

 

92. After a $5 million ad campaign, Coca-Cola measured its effectiveness by calculating the cross elasticity of demand between Coke and Pepsi. A successful campaign would be indicated if the cross elasticity went from

a.	0.9 to 0.5.
b.	0.9 to 1.5.
c.	-0.5 to -0.2.
d.	-0.9 to -1.5.

 

 

ANS:  A                    DIF:    Difficult         TOP:   Elasticity as a General Concept

 

93. After a number of acquisitions, Air American controls 75 percent of the U.S. market. It has been charged with “monopolizing” the U.S. air markets by the Justice Department. In its defense, the airline would want to introduce evidence that

a.	cross elasticities for air and rail travel were very high.
b.	income elasticities for air and rail travel were very high.
c.	price elasticity for air, rail, and auto travel were negative.
d.	management always considered the public interest when setting prices.

 

 

ANS:  A                    DIF:    Difficult         TOP:   Elasticity as a General Concept

 

94. A rightward shift in the demand curve for a product will ordinarily result from

a.	a decrease in the advertising budget.
b.	a decrease in the price of a competing product.
c.	an increase in consumer income.
d.	an increase in the price of a complementary good.

 

 

ANS:  C                    DIF:    Easy

TOP:   Changes in Demand: Movements Along the Demand Curve vs. Shifts in the Demand Curve

 

95. Scientific evidence suggests that consumption of foods rich in fiber lowers cholesterol. As a result, the demand for bran increases at every price by 5,000 bushels and the supply curve for bran is perfectly price elastic. The quantity of bran consumed will

a.	not change.
b.	change unless the demand curve is perfectly inelastic.
c.	rise by exactly 5,000 bushels.
d.	not rise by exactly 5,000 bushels unless the demand curve is perfectly inelastic.

 

 

ANS:  C                    DIF:    Moderate

TOP:   Changes in Demand: Movements Along the Demand Curve vs. Shifts in the Demand Curve

 

96. If the demand for gasoline becomes more elastic over time,

a.	the demand curve will shift out.
b.	the demand curve will become flatter.
c.	other things being equal, the equilibrium price of gasoline must fall.
d.	other things being equal, the equilibrium quantity of gasoline must fall.

 

 

ANS:  B                    DIF:    Easy

TOP:   Changes in Demand: Movements Along the Demand Curve vs. Shifts in the Demand Curve

 

97. As a result of a decline in interest rates and a rise in household income, the demand curve for housing has shifted to the right, but has retained the same slope. Consequently, the elasticity of demand for housing

a.	has declined.
b.	has increased.
c.	has remained unchanged.
d.	cannot be compared.

 

 

ANS:  A                    DIF:    Difficult

TOP:   Changes in Demand: Movements Along the Demand Curve vs. Shifts in the Demand Curve

 

98. Historical data on prices and quantities sold do not provide the basis for drawing an accurate demand curve because

a.	reporters who gather these data are often wrong.
b.	factors other than price may change over time.
c.	they do not include measures of price close to the quantity axis.
d.	they sometimes tend to be clustered around one point.

 

 

ANS:  B                    DIF:    Moderate

TOP:   Appendix: How Can We Find a Legitimate Demand Curve from Historical Statistics?

 

ESSAY

 

1. Define the following terms and explain their importance to the study of economics.

a.	price elasticity
b.	complements
c.	substitutes
d.	cross elasticity
e.	supply elasticity

 

 

ANS:

a.	Price elasticity is the ratio of the percentage change in quantity demanded to the percentage change in price that brings about the change in quantity demanded. The term is used extensively in economic predictions.
b.	Two goods are called complements if an increase in the quantity consumed of one increases the quantity demanded of the other, all other factors remaining constant.
c.	Two goods are called substitutes if an increase in the quantity consumed of one cuts the quantity demanded of the other, all other factors remaining constant.
d.	Cross-elasticity of demand for some good X to a change in the price of another good Y is the ratio of the percentage change in quantity demanded of X to the percentage change in the price of Y that brings about the change in quantity demanded. This is used in antitrust analysis in determining the boundary of a market.
e.	Supply elasticity is the ratio of the percentage change in quantity supplied to the percentage change in price that brings about the change in quantity supplied. The term is used extensively in economic predictions.

 

 

DIF:    Easy

 

2. Explain what happens to the magnitude of price elasticity of demand as price increases along a straight-line demand curve.

 

ANS:

Price elasticity is the ratio of percentage change in quantity to the percentage change in price. One form of the formula is [(change in Q)/(change in P)] [P/Q]. Since slope of a straight line is constant, only P/Q changes. As P increases, Q decreases, so P/Q increases. Thus, elasticity increases (in absolute value).

 

DIF:    Moderate

 

3. The Sandy Deli operates near a college campus. It has been selling 325 sandwiches a day at $1.75 each and is considering a price cut. It estimates 450 sandwiches would sell per day at $1.50 each. Calculate the marginal revenue of such a price cut and the elasticity between the two points.

 

ANS:

Revenue is currently 325 ´ $1.75 = $568.75. Revenue at the new price is 450 ´ $1.50 = $675. The marginal revenue is $675 – $568.75 = $106.25. Elasticity is (% DQ)/(% DP) = [125/387.5]/[.25/1.625] = 2.097.

 

DIF:    Moderate

 

4. The current price of Heavy Plastic CDs is $20 each, and the company has been selling 400 per week. If price elasticity is 2.5 and the price changes to $21, how many CDs will be sold per week?

 

ANS:

The percentage change in price is 1/20.5 = .0488. The percentage change in quantity is .0488 ´ 2.5 = .1220. The new quantity is 400 – [400 ´ .122] = 400 – 48.8 = 351.2.

 

DIF:    Moderate

 

5. Suppose that elasticity has been reliably measured as 1.55 and the unit price decreases from $20 to $17.50. How much will quantity demanded increase?

 

ANS:

The percentage change in price is 2.5/18.75 = .1333. The percentage change in quantity is .1333 ´ 1.55 = .2067. In percentages, the change is 20.67 percent.

 

DIF:    Moderate

 

6. The following table contains information regarding price and output for a firm. For each point except the first, calculate the elasticity between it and the point above.

 

Price	Quantity	Elasticity
$7	10
6	20
5	30
4	40
3	50
2	60
1	70

 

 

ANS:

Price	Quantity	Elasticity
$7	10	(None)
6	20	4.33
5	30	2.2
4	40	1.286
3	50	.7778
2	60	.4545
1	70	.231

 

 

DIF:    Moderate

 

7. In a recent fare war, U.S. Air reduced the price of its Charlotte, North Carolina, to New York City round-trip fare from $198 to $138 to match American Airlines. U.S. Air did so reluctantly, saying it would cost the company millions of dollars in revenue. American, on the other hand, believed the fare cut would increase its revenue. What different assumptions about the underlying price elasticity of demand did each airline believe true?

 

ANS:

U.S. Air must have believed demand in this price range to be inelastic, so that a fare cut would lead to a relatively small increase in quantity demanded. American must have believed the opposite, that the fare cut would stimulate a more than proportional, or elastic, consumer response.

 

DIF:    Moderate

 

8. For each pair of goods, explain which is more elastic: toothpicks vs. cars; electricity vs. yachts; IBM computers vs. Apple computers.

 

ANS:

The more elastic are cars, yachts, and IBM computers. Cars take a larger fraction of income than do toothpicks, electricity is a necessity vs. luxury yachts, and there are many IBM clones (while the substitutes for Apples are not as close).

 

DIF:    Moderate

 

9. Arrange the following goods from least to most elastic, explaining your ordering: gasoline, Exxon gas, Exxon gas at a particular gas station.

 

ANS:

Gasoline is least elastic, since there are few substitutes for it in the operation of cars. Exxon gas at a particular station is most elastic, since one can substitute other Exxon stations or other brands of gas.

 

DIF:    Easy

 

10. Why is it customary to report price elasticity of demand in absolute value terms, while cross elasticities and income elasticities are reported with their sign attached?

 

ANS:

Price elasticity of demand is always negative, since the law of demand says that an increase in price will reduce quantity demanded. It is simpler to use the absolute value, recognizing that the true sign is always negative. Cross elasticities and income elasticities can be positive or negative, with the signs giving information. A positive cross elasticity indicates that as the price of product Y increases, purchases of X increase, so the two goods are substitutes. Income elasticities are typically positive, as increased income leads to a greater quantity purchased, but the opposite does occasionally happen for inferior goods such as Spam.

 

DIF:    Moderate

 

11. Using the general concept of elasticity, would you expect the elasticity of demand for advertising to be positive or negative? Explain.

 

ANS:

Firms would advertise only if they believe it would increase sales. So one would expect this elasticity to always be positive. A negative elasticity should never occur, since it violates MR = MC to incur a positive MC if MR is less than zero.

 

DIF:    Moderate

 

12. Sun City’s public bus line has been operating at a deficit. The city decides to raise the fare from 50 cents to 75 cents, anticipating enough additional revenue to cover the deficit. What assumption is the city making about price elasticity?

 

ANS:

Sun City is assuming demand is price inelastic. This means an increase in revenue would accompany an increase in price.

 

DIF:    Easy

 

13. What are the main determinants of demand elasticity? Explain their importance.

 

ANS:

First is the nature of the good. Necessities have less-elastic demand than do luxury goods. Second, there’s availability of close substitutes. The more substitutes exist and the closer they are to the original good, the more elastic demand will be. Third is the fraction of income absorbed; the smaller the fraction of income spent on an item, the more elastic demand will be. Fourth is the passage of time; the more time that passes after a price change, the greater the demand elasticity.

 

DIF:    Moderate

 

14. How might a court use cross elasticity in an antitrust case?

 

ANS:

One major issue a court must settle is the boundary of a market. Legal language is addressed to particular lines of commerce in parts of the country. This requires the definition of the relevant market in product and geographical terms. The opening quotation from the DuPont Cellophane case shows the importance of the computation.

 

DIF:    Difficult

 

15. How might a market research analyst use measures of elasticity-price, cross, and income-in her work? Explain.

 

ANS:

A market researcher is interested in determining the effects of changes on demand for a product or industry. Each measure of elasticity can be critical here. Price elasticity helps predict changes in unit output for a price change. Income elasticity helps predict changes in demand as buyer income changes, perhaps over a business cycle. Cross elasticity helps predict the impact of a change in prices of competitors in the industry, competing products, and other products that affect demand for a particular product. Market researchers rely upon all of these in defining markets, defining boundaries of markets, and analyzing effects from competitors.

 

DIF:    Difficult

 

16. How can one tell from cross elasticity what kind of relationship exists between any two goods?

 

ANS:

If the price of X increases and the quantity demanded of Y decreases, resulting in a negative cross elasticity, the two goods are complements. If the price of X increases and the quantity demanded of Y increases, resulting in a positive cross elasticity, the two goods are substitutes.

 

DIF:    Moderate

 

17. The cross elasticity between two goods has been measured at -1.2. How are the goods related? Explain. Give an example of goods for which this might be a reasonable measure of cross elasticity.

 

ANS:

The goods are complements. An increase in the use of one increases the use of both. A decrease in the price of one increases the quantity demanded of both goods. Examples include hamburgers and buns, cameras and film, cars and gasoline, etc.

 

DIF:    Moderate

 

18. If the income of buyers increases and a company maintains the same price, what is the most likely impact on quantity sold? Explain. Draw a graphical display of the result.

 

ANS:

The most likely result will be an increase in demand, so that quantity will increase at all prices. The graph should look like Figure 6-5 in the text.

 

DIF:    Moderate

 

19. Specifically, what might cause the quantity demanded of a particular good to double at a particular price?

 

ANS:

This results from a rightward shift in the demand curve, which could be caused by an increase in consumer income, an increase in advertising expenditure, reduction in the price of a complementary good, or an increase in the price of a substitute good.

 

DIF:    Easy

 

20. In the DuPont cellophane case, rivals accused DuPont of monopolizing cellophane. DuPont claimed that the relevant market was flexible wrapping material, such as wax paper and aluminum foil, rather than just cellophane. DuPont won the case. What type of evidence constituted DuPont’s defense?

 

ANS:

DuPont needed to show that other flexible wrapping materials are substitutes for cellophane, which requires a large, positive cross elasticity. DuPont showed that as the price of other flexible wrapping materials increased, sales of cellophane declined substantially, showing a large, positive cross elasticity.

 

DIF:    Moderate

 

21. If Polaroid wants damages against Kodak for infringing on its instant development film process, and the courts find a high positive cross elasticity between purchases of Polaroid instant film and 35mm regular film, will this strengthen or weaken Polaroid’s claim against Kodak?

 

ANS:

A large positive cross elasticity shows a strong substitute relationship, so that Polaroid is losing sales not only to Kodak instant film but also to 35mm film in general. Hence, it cannot claim all lost sales are due to Kodak’s infringement, which reduces the damages it can claim.

 

DIF:    Moderate

 

22. Why are time series data unlikely to give an accurate estimate of demand?

 

ANS:

Demand may have shifted over time, so that instead of obtaining points on a single demand curve, one is connecting points from several demand curves. One needs to obtain several price, quantity points at a single point in time to be assured of an accurate estimate of a single demand curve.

 

DIF:    Difficult

 

23. The sales manager of a retail outlet suggests that the best way to increase customers is to have a sale. If a 10 percent price cut doesn’t bring in enough customers, then he’ll cut prices 20 percent. Increased cash flow should take care of profits. Do you agree? Explain.

 

ANS:

A price cut will (usually) lead to increased unit sales. However, if demand is inelastic, then the price cut will reduce total revenue. The pricing plan makes more sense if demand is elastic.

 

DIF:    Moderate

 

24. Would a profit-maximizing firm sell at a price where demand is inelastic? Explain.

 

ANS:

No. If demand is inelastic, then marginal revenue is negative. The firm could not possibly follow the profit-maximizing rule of MR = MC.

 

DIF:    Moderate

 

25. How would Bill Clinton’s proposed increase in cigarette taxes succeed according to the following criteria: collecting a large amount of tax revenue; distorting demand as little as possible; discouraging consumption of harmful commodities?

 

ANS:

Assuming demand for cigarettes is fairly inelastic among adults, the tax is a good candidate for collecting a lot of revenue. As price increases as a consequence of the additional tax, quantity demanded will not decrease much. So the government will get additional tax revenue on a large quantity. The cigarette tax also does well by not distorting demand very much, since higher price causes only a small change in consumption for the inelastic case. The tax also discourages consumption of a harmful commodity, although by a small amount if demand is inelastic.

 

Since the demand for cigarettes is more elastic among younger smokers, the effects would be different. The tax causes the price of cigarettes to rise, causing a greater reduction in smoking among teens, and thus the government will be not increase its revenues very much-in fact, revenues may actually decrease. In this case the tax does distort demand considerably (and that is in fact one of the goals of the policy).

 

DIF:    Moderate