ESSENTIAL FOUNDATIONS OF ECONOMICS 7TH EDITION By BADE - Test Bank

ESSENTIAL FOUNDATIONS OF ECONOMICS 7TH EDITION By BADE – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Foundations of Macroeconomics, 7e (Bade/Parkin)

Chapter 5   GDP: A Measure of Total Production and Income

 

5.1   GDP, Income, and Expenditure

 

1) A measure of a country’s production is its

1. A) gross daily production.
2. B) general daily product.
3. C) general domestic production.
4. D) gross domestic product.
5. E) gross total output.

Answer:  D

Topic:  GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

2) The total production within an economy is measured as

1. A) Gross Home Product.
2. B) Total Domestic Output.
3. C) Annual Production Value.
4. D) Gross Domestic Product.
5. E) Total Annual Output.

Answer:  D

Topic:  GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

3) Gross Domestic Product is equal to the market value of all the final goods and services ________ in a given period of time.

1. A) produced within a country
2. B) consumed within a country
3. C) consumed by the citizens of a country
4. D) produced by the citizens of a country
5. E) produced and consumed within a country

Answer:  A

Topic:  GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

4) Gross Domestic Product measures the

1. A) quantity of the goods and services produced in a given year, listed item by item, within a country.
2. B) income of the business sector within a country.
3. C) market value of the final goods and services produced in a given year within a country.
4. D) measures the market value of the domestic labor in a given year within a country.
5. E) market value of the final goods and services consumed by households in a given year within a country.

Answer:  C

Topic:  GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

5) Gross Domestic Product is the market value of all ________ produced within a country in a given period of time.

1. A) final goods
2. B) intermediate goods
3. C) final services
4. D) intermediate services
5. E) final goods and services

Answer:  E

Topic:  GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  New

AACSB:  Reflective thinking

 

6) To calculate GDP it is necessary to

1. A) add the total amounts of all the goods produced.
2. B) use the market price to place a dollar value on each good produced.
3. C) use production cost to place a dollar value on all goods produced.
4. D) use the average market price over the last five years to place a dollar value on all goods produced.
5. E) average the cost of producing a good with the price of the good to place a dollar value on all goods produced.

Answer:  B

Topic:  GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

7) How are final goods and services valued when measuring nominal GDP?

1. A) at current market prices
2. B) at base year prices
3. C) at foreign exchange parity
4. D) at factor market prices
5. E) at producer cost

Answer:  A

Topic:  GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

8) Measuring total production by valuing items at their market value allows us to

1. A) separate the value of different goods with identical prices.
2. B) separate the value of different goods with different prices.
3. C) add together the value of different goods that have different prices.
4. D) add together the value of identical goods that have identical prices.
5. E) ignore the problem that goods and services differ in how long they last.

Answer:  C

Topic:  GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

9) Wobet is a small country that produces only steak and potatoes. Steaks have a price of $10 each and potatoes have a price of $1 each. Suppose that Wobet produces 10 steaks and 20 potatoes in 2010. Using ________, Wobet has GDP equal to ________.

1. A) market value; 30 units
2. B) a market basket; 30 units
3. C) market value; $120
4. D) real value; $120
5. E) a price index; $120

Answer:  C

Topic:  GDP

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

10) To calculate GDP it is necessary to add up the market value of all the ________ produced within a country during a year.

1. A) goods but not services produced
2. B) goods and services produced
3. C) intermediate goods and services produced
4. D) final goods and services produced
5. E) intermediate goods and services produced and all the final goods and services produced

Answer:  D

Topic:  GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

11) GDP is best defined as the ________ in a given time period.

1. A) number of goods and services produced within a country
2. B) number of final goods and services produced within a country
3. C) market value of the final goods and services produced within a country
4. D) market value of the final goods and services consumed by a nation’s citizens
5. E) market value of all the goods and services produced within a country

Answer:  C

Topic:  GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

12) If you make dinner for yourself,

1. A) the market value of your dinner is added to GDP.
2. B) your service in preparing the meal is valued at a cook’s wage and added to GDP.
3. C) none of what you bought to prepare for dinner is included in GDP.
4. D) only the market value of ingredients that you purchased this year is added to GDP.
5. E) the difference between the cost of the ingredients that you purchased this year and the market value of the dinner is added to GDP.

Answer:  D

Topic:  GDP

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

13) Gross Domestic Product is defined to be the market value of all the final goods and services produced during a given time period

1. A) within a country.
2. B) within and outside a country by that country’s citizens.
3. C) by citizens of the country, regardless of their place of residence.
4. D) by only legal residents of the country.
5. E) within a county minus the market value of all the final goods and services produced by that country’s citizens outside the country.

Answer:  A

Topic:  GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

14) Where are the final goods and services produced that are included in Germany’s GDP?

1. A) within Germany
2. B) anywhere, as long as they are produced using German resources
3. C) outside of Germany
4. D) anywhere, as long as they are produced using German labor
5. E) within Germany but only if they are produced using only German resources

Answer:  A

Topic:  GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

15) GDP includes the goods and services produced

1. A) within a country’s borders by citizens and by non-citizens.
2. B) by a country’s legal citizens regardless of where in the world they are located.
3. C) by a country’s citizens but not by non-citizens within the country’s borders.
4. D) within a country’s borders by citizens and non-citizens plus goods produced abroad by the country’s citizens.
5. E) within a country’s borders by citizens and by non-citizens minus the production abroad by the country’s citizens.

Answer:  A

Topic:  GDP

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

16) Which of the following is included in Germany’s GDP?

1. BMWs produced in a German-owned factory in South Carolina
2. the value of the stocks sold on the German stock exchange, the Frankfurt Stock Exchange

iii.   china produced by the English-owned Wedgewood Company at a factory in Berlin, Germany

1. A) i and iii
2. B) ii only
3. C) iii only
4. D) i and ii
5. E) None of the above answers is correct.

Answer:  C

Topic:  GDP

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

17) Which of the following is included in U.S. GDP?

1. the rental value of homes owned by U.S. citizens
2. the production of Suburban SUVs by GM in its plant in Mexico

iii.   tickets sold by U2 for concerts held in the United States

1. A) ii only
2. B) ii and iii
3. C) i, ii and iii
4. D) i and iii
5. E) i only

Answer:  D

Topic:  GDP

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

18) Which of the following is NOT directly included in Canadian GDP?

1. A) the purchase of tickets to a Kanye West concert in Montreal
2. B) the sale of tickets to the Vancouver Olympics to U.S. citizens
3. C) gasoline purchased by a tour bus operator in Quebec
4. D) bus tickets sold to tourists for a tour bus ride in Montreal
5. E) All of the items would be included in Canadian GDP.

Answer:  C

Topic:  GDP, final goods and services

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

19) Which of the following is NOT directly included in U.S. GDP?

1. A) sales to tourists of beach umbrellas in Hilton Head, South Carolina
2. B) sales of sandwiches at a Subway store in Bangor, Maine
3. C) ticket sales to Ripley’s Aquarium in Gatlinburg, Tennessee
4. D) popcorn purchased by a movie theater chain in Georgia
5. E) movie tickets purchased by consumers in Georgia

Answer:  D

Topic:  GDP, final goods and services

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  New

AACSB:  Reflective thinking

 

20) Which of the following is classified as a final good or service?

1. tires bought by GM to put on new Tahoes
2. mustard bought by Subway to put on its sub sandwiches

iii.    your purchase of online access to the Wall Street Journal

1. A) i and ii
2. B) i, ii and iii
3. C) iii only
4. D) ii and iii
5. E) ii only

Answer:  C

Topic:  GDP, final goods and services

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

21) Which of the following correctly describes a final good?

1. A final good is bought by its final consumer.
2. A final good can be used by a firm as a component of another good or service.

iii.   Investment goods cannot be a final good.

1. A) i only
2. B) i and ii
3. C) i, ii and iii
4. D) i and iii
5. E) ii and iii

Answer:  A

Topic:  GDP, final goods and services

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

22) Which of the following is a final good or service?

1. A) the grilled chicken purchased by Taco Bell for use in their burritos
2. B) a new replacement muffler installed by Midas Mufflers
3. C) the fertilizer purchased by Royal Lawn and Landscape
4. D) the computers purchased by Office Depot for sale to its customers
5. E) the CPUs purchased by Dell to be used in their computers

Answer:  B

Topic:  GDP, final goods and services

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

23) Which of the following is a final good or service?

1. A) tires purchased by Ford for use on one of their SUVs
2. B) the new economics textbook you are using
3. C) the hair gels used by a hair stylist at the local hair salon
4. D) the butter used by a chef to make butter cream frosting
5. E) the taco shells purchased by Taco Bell for use in their tacos

Answer:  B

Topic:  Intermediate goods and services

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

24) A restaurant buys fish to offer as a daily menu special. The purchase of the fish by the restaurant is

1. A) a consumption expenditure.
2. B) an investment.
3. C) an intermediate good.
4. D) an example of government expenditures on goods and services.
5. E) part of net exports if the fish was caught beyond the U.S. border.

Answer:  C

Topic:  Intermediate goods and services

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

25) Which of the following is classified as an intermediate good?

1. the purchase of a Big Mac by a college student
2. McDonald’s purchase of pickles

iii.   a McDonald’s restaurant owner’s interest payment for the loan on her building

1. A) ii only
2. B) ii and iii
3. C) i only
4. D) i and iii
5. E) i, ii and iii

Answer:  A

Topic:  Intermediate goods and services

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

26) Which of the following is an example of an intermediate good or service?

1. A) gasoline purchased by Sam for her commute to work
2. B) flour purchased by Jake to bake a cake for his spouse
3. C) training seminars for employees of an accounting firm
4. D) golf balls sold to Tiger Woods
5. E) None of the above are examples of intermediate goods or services.

Answer:  C

Topic:  Intermediate goods and services

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  New

AACSB:  Reflective thinking

 

27) Which of the following would NOT be directly included in the U.S. GDP in 2010?

1. A) the market value of restaurant meals sold in 2010
2. B) the market value of the jet fuel bought by Delta to use for its flights in 2010
3. C) the value of the automobiles produced in 2010 at the Toyota plant located in Georgetown, Kentucky
4. D) legal services provided to first time home buyers during 2010
5. E) the purchase of a new home in Atlanta, Georgia in 2010

Answer:  B

Topic:  Intermediate goods and services

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

28) One bag of coffee beans is sold for $7 to a cafe that uses it to brew coffee which it sells to customers for a total of $15. A second bag of coffee is sold directly to Joan for $7, who uses it to brew coffee for her family every morning. What is the contribution to GDP from the purchases of coffee beans and coffee?

1. A) $7
2. B) $14
3. C) $15
4. D) $22
5. E) $29

Answer:  D

Topic:  Intermediate goods and services

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  New

AACSB:  Reflective thinking

 

29) Consumption expenditure includes spending

1. A) on intermediate goods and services by firms.
2. B) on office supplies by firms.
3. C) by households.
4. D) by households and spending on office supplies by firms.
5. E) by governments when they are buying goods and services that consumers also buy.

Answer:  C

Topic:  Consumption expenditure

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

30) Consumption goods and services include

1. A) washing machines and tickets to football games.
2. B) new homes and existing homes (as long as improvements have been made to the existing home).
3. C) tickets to concerts and medical care provided to veterans by the government.
4. D) new and used textbooks as long as they are sold via stores or online.
5. E) vacation time accumulated by workers.

Answer:  A

Topic:  Consumption expenditure

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

31) Expenditures on U.S. produced steaks, shoes, and doctor visits are most likely classified as

1. A) consumption expenditure.
2. B) investment.
3. C) government expenditure on goods and services.
4. D) net exports of goods and services.
5. E) net imports of goods and services.

Answer:  A

Topic:  Consumption expenditure

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

32) Investment is the expenditure done by

1. A) savers.
2. B) firms.
3. C) governments.
4. D) the rest of the world.
5. E) Both answers A and B are correct.

Answer:  B

Topic:  Investment

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

33) Investment is defined as the purchase of

1. A) any financial asset only.
2. B) additions to inventories only.
3. C) financial assets and inventories only.
4. D) new capital goods and additions to inventories.
5. E) new capital goods but not additions to inventories.

Answer:  D

Topic:  Investment

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

34) Which of the following is included as investment in GDP?

1. cars produced during the year but unsold at the end of the year
2. new capital equipment produced and purchased during the year

iii.   purchases of a company’s stocks and bonds

1. A) i only
2. B) ii only
3. C) iii only
4. D) i and ii
5. E) i, ii, and iii

Answer:  D

Topic:  Investment

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

35) Economists define investment to include purchases of

1. A) capital goods and inventories.
2. B) capital goods, household durable goods, and inventories.
3. C) capital goods, such as tools, instruments, and buildings.
4. D) capital goods, equity stocks, and bonds.
5. E) capital goods, equity stocks, and inventories.

Answer:  A

Topic:  Investment

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

36) Investment includes

1. A) GM’s purchase of robotic machinery.
2. B) student purchases of laptops.
3. C) Wal-Mart’s purchase of health insurance for its workers.
4. D) the New York City Library’s purchase of new books.
5. E) wages paid to military personnel.

Answer:  A

Topic:  Investment

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

37) In measuring GDP, which of the following is included?

1. A) the value of preparing meals at home
2. B) the value of stocks and bonds bought and sold
3. C) the value of used goods when they are sold
4. D) the value of increases in business inventories
5. E) the value of durable consumption goods but not the value of nondurable consumption goods.

Answer:  D

Topic:  Investment, inventory

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

38) If a firm does not sell all of the goods that it produces in a given time period, then the goods

1. A) do not count in GDP ever.
2. B) do not count in GDP for that time period but always count next period.
3. C) count positively in GDP as inventory investment.
4. D) count negatively in GDP as inventory investment.
5. E) count in GDP the period they are sold to the final user.

Answer:  C

Topic:  Investment, inventory

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

39) This year a firm produces $100 million worth of cars this year and sells $102 million worth of cars. Which of the following is true?

1. A) GDP for this year will increase by $100 million.
2. B) GDP for this year will increase by $102 million.
3. C) Inventory investment will increase by $2 million.
4. D) GDP for this year will increase by $202 million.
5. E) The premise of the question is wrong because it is impossible for a firm to sell more than it produces in a given time period.

Answer:  A

Topic:  Investment, inventory

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

40) Bob’s Funky T-shirts began the year with 1,000 shirts in inventory, produced 10,000 shirts during the year and ended the year with 1,100 shirts in inventory. The 100 shirts added to his inventory will be classified as

1. A) consumption expenditure.
2. B) investment.
3. C) net exports of goods and services.
4. D) exports of goods and services.
5. E) nondurable consumption goods.

Answer:  B

Topic:  Investment, inventory

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

41) Kelly’s Surf Shop orders 5,000 new surf boards at the beginning of the year but only sells 4,500 by the end of the year. How are the 500 unsold surfboards accounted for in Gross Domestic Product?

1. A) They will be included in the nondurable consumption category of GDP.
2. B) They will be included in the residential investment category of GDP.
3. C) They will be included in the government spending category of GDP.
4. D) They will be included in the inventory investment category of GDP.
5. E) They will be included in the durable consumption category of GDP.

Answer:  D

Topic:  Investment, inventory

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  New

AACSB:  Reflective thinking

 

42) When measuring GDP,

1. A) the government sector is not included because it is the public sector not the private sector.
2. B) the government sector is counted, and the value of the government sector in GDP is equal to its tax revenue.
3. C) only the federal government’s expenditure on goods and services are included.
4. D) the expenditure on goods and services by all levels of government are included.
5. E) the government sector is not counted because it does not produce goods and services.

Answer:  D

Topic:  Government expenditure on goods and services

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

43) Government expenditures on goods and services include

1. the New York City Library’s purchase of new books.
2. Washington D.C.’s purchase of gas for its city buses.

iii.   California’s payment of wages to prison guards.

1. A) i and ii
2. B) i and iii
3. C) ii and iii
4. D) i, ii and iii
5. E) i only

Answer:  D

Topic:  Government expenditure on goods and services

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

44) Net exports of goods and services is equal to the value of

1. A) exports plus the value of imports.
2. B) imports minus the value of exports.
3. C) domestic consumption minus the value of imports.
4. D) exports minus the value of imports.
5. E) domestic consumption minus the value of exports.

Answer:  D

Topic:  Net exports of goods and services

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

45) Net exports of goods and services are defined as the

1. A) value of the goods we sell to foreigners.
2. B) income we receive from selling goods to foreigners.
3. C) value of exports minus the value of imports.
4. D) value of exports minus the income we receive from foreigners.
5. E) value of exports plus the income we receive from foreigners.

Answer:  C

Topic:  Net exports of goods and services

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

46) U.S. net exports include

1. A) sales of Hollywood movies to the rest of the world.
2. B) the production of Ford Mustangs in China that are sold in China.
3. C) Honda automobiles produced and sold in Japan.
4. D) the sale of shares of Nike stock on the New York Stock Exchange.
5. E) the sale of U.S. government securities to U.S. citizens.

Answer:  A

Topic:  Net exports of goods and services

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

47) In calculating GDP, we must

1. A) add the market value of imports and subtract the market value of exports.
2. B) add the market value of exports and subtract the market value of imports.
3. C) exclude net exports of goods and services (NX).
4. D) add the value of the goods produced outside of the United States by American firms.
5. E) subtract the market value of imports, because these goods are produced in a country other than the United States, and subtract the market value of exports, because these goods are consumed in a country other than the United States.

Answer:  B

Topic:  Net exports of goods and services

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

48) Which of the following expenditure components of GDP can be negative or positive?

1. A) Consumption expenditure
2. B) Investment
3. C) Government expenditure on goods and services
4. D) Net exports of goods and services
5. E) None of the above because expenditure can never be negative.

Answer:  D

Topic:  Net exports of goods and services

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

49) Last year U.S. net exports of goods and services was negative. This fact means that last year

1. A) there was an error made when calculating net exports of goods and services for the United States.
2. B) the value of U.S. exports was greater than the value of U.S. imports.
3. C) the value of U.S. exports was less than the value of U.S. imports.
4. D) U.S. consumption expenditure plus investment was less than the value of exports plus the value of imports.
5. E) U.S. consumption expenditure plus investment plus government expenditures on goods and services was less than the value of exports plus the value of imports.

Answer:  C

Topic:  Net exports of goods and services

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

50) When an American college student in Davis, California spends $200 on a pair of Louis Vuitton jeans (a famous French brand), U.S. consumption ________, U.S. net exports ________, and U.S. GDP ________.

1. A) does not change; increases by $200; increases by $200
2. B) increases by $200; decreases by $200; does not change
3. C) increases by $200; does not change; increases by $200
4. D) does not change; does not change; does not change
5. E) does not change; decreases by $200; decreases by $200

Answer:  B

Topic:  Net exports of goods and services

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  New

AACSB:  Reflective thinking

 

51) The purchase of a new Boeing fighter jet by Israel is classified in the U.S. GDP accounts as

1. A) export expenditure.
2. B) consumption expenditure.
3. C) investment expenditure.
4. D) government expenditure.
5. E) import expenditure.

Answer:  A

Topic:  Net exports of goods and services

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

52) Gross Domestic Product equals

1. A) Y = C + I – G + NX.
2. B) Y = C – I + G + NX.
3. C) Y = C + I + G + NX.
4. D) Y = C – I – G – NX.
5. E) Y = C + I + G – NX.

Answer:  C

Topic:  Total expenditure

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

53) Last year in Candamica, consumption expenditure was $20 billion, interest, rent, and profit were $2.5 billion, government expenditure on goods and services was $7 billion, net exports of goods and services was $5 billion, and investment was $2 billion. Hence total expenditure was

24. A) $24.5 billion.
25. B) $34.5 billion.
26. C) $36.5 billion.
27. D) $34 billion.
28. E) undetermined without information about imports.

Answer:  D

Topic:  Total expenditure

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

54) Everything else the same, if government expenditure increases by $400 billion and imports increase by $400 billion, then GDP

1. A) increases by $400 billion.
2. B) increases by $200 billion.
3. C) decreases by $400 billion.
4. D) does not change.
5. E) decreases by $200 billion.

Answer:  D

Topic:  Total expenditure

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

55) Suppose that business firms spend $500 million on new capital equipment this year.  Of this $500 million, $300 million was spent on domestically produced capital and $200 million was spent on foreign-produced capital.  All else equal, these transactions contribute ________ to GDP.

1. A) $0
2. B) $200 million
3. C) $300 million
4. D) $500 million
5. E) $800 million

Answer:  C

Topic:  Total expenditure

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  New

AACSB:  Analytical thinking

 

56) Undistributed profits ________ counted as part of GDP because ________.

1. A) are not; households are not paid by the firms
2. B) are; they can be used to buy other goods
3. C) are ; they are considered income paid to households and loaned back to firms
4. D) are not; they are considered an intermediate good
5. E) are; firms are required to pay corporate income taxes on them

Answer:  C

Topic:  Income approach

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

57) Total expenditure equals total income

1. A) because firms pay out everything they receive as income to the factors of production.
2. B) if firms earn zero profit.
3. C) if firms do not save for future investment.
4. D) only if firms sell all the goods they produce in a given time period.
5. E) only if net taxes equals government expenditures on goods and services.

Answer:  A

Topic:  Circular flow

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

58) The circular flow shows that GDP measures

1. total income.
2. total expenditures.

iii.   price changes.

1. A) i only
2. B) ii only
3. C) iii only
4. D) i and ii
5. E) i, ii, and iii

Answer:  D

Topic:  Circular flow

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

59) Because of the circular flows of expenditure and income in the economy, total ________ equals total ________ equals total ________.

1. A) expenditure; investment; income
2. B) expenditure; income; value of production
3. C) consumption; expenditure; value of production
4. D) investment; income; consumption
5. E) consumption; investment; expenditure

Answer:  B

Topic:  Circular flow

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

60) In the circular flow, how are the “value of production,” “income,” and “expenditures” related?

1. A) They have no relationship to each other.
2. B) Once tax payments are subtracted at each stage, they are equal.
3. C) Expenditures on GDP equals the value of production which equals income.
4. D) Once net exports of goods and services are subtracted from GDP, all three are equal.
5. E) Value of production always equals income but expenditures is smaller because households save some of their income and do not spend it.

Answer:  C

Topic:  Circular flow

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

61) In a circular flow diagram,

1. the value of production = income.
2. the value of production = expenditure.

iii.   expenditure = income.

1. A) i, ii and iii are true statements.
2. B) Only iii is a true statement.
3. C) i and ii are true statements.
4. D) i and iii are true statements.
5. E) Only i is a true statement.

Answer:  A

Topic:  Circular flow

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

62) The abbreviation “GDP” stands for

1. A) Gross Domestic Product.
2. B) Gross Domestic Prices.
3. C) General Domestic Prices.
4. D) Great Domestic Prices.
5. E) Government’s Domestic Politics.

Answer:  A

Topic:  GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

63) GDP is equal to the ________ value of all the final goods and services produced within a country in a given period of time.

1. A) production
2. B) market
3. C) wholesale
4. D) retail
5. E) typical

Answer:  B

Topic:  GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

64) The following are all final goods EXCEPT

1. A) flour used by the baker to make cupcakes.
2. B) bread eaten by a family for lunch.
3. C) pencils used by a 6th grader in class.
4. D) Nike shoes used by a basketball player.
5. E) a computer used by Intel to design new computer chips.

Answer:  A

Topic:  GDP, final goods and services

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

65) Which of the following is directly included in the U.S. GDP for 2013?

1. a 2013 Cadillac Escalade produced and sold as a new car in the United States in 2031
2. tires produced in the United States, purchased by General Motors, and installed on a new Cadillac Escalade sold in 2013

iii.   General Motors cars produced in Canada because General Motors is an American corporation

1. A) i only
2. B) ii only
3. C) i and iii
4. D) ii and iii
5. E) i, ii, and iii

Answer:  A

Topic:  GDP within a country

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

66) Production by Honda, a Japanese firm, in the United States is included in ________ GDP and production by Nike Corporation, a U.S. firm, in Vietnam is included in ________ GDP.

1. A) Japanese; U.S.
2. B) U.S.; Vietnamese
3. C) U.S.; U.S.
4. D) Japanese; Vietnamese
5. E) U.S. and Japanese; U.S. and Vietnamese

Answer:  B

Topic:  GDP within a country

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

67) Investment is defined as

1. A) the purchase of a stock or bond.
2. B) financial capital.
3. C) what consumers do with their savings.
4. D) the purchase of new capital goods by firms.
5. E) spending on capital goods by governments.

Answer:  D

Topic:  Investment

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

68) In one year, a firm increases its production by $9 million and increases sales by $8 million. All other things in the economy remaining the same, which of the following is true?

1. A) GDP increases by $8 million and inventory investment decreases by $1 million.
2. B) GDP increases by $9 million and inventory investment increases by $1 million.
3. C) Inventory investment decreases by $1 million.
4. D) GDP increases by $8 million and investment increases by $1 million.
5. E) GDP increases by $17 million.

Answer:  B

Topic:  Investment, inventory

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

69) Net exports of goods and services increase when

1. A) exports of goods and services decrease and imports of goods and services do not change.
2. B) consumption expenditure increases.
3. C) exports of goods and services increase and imports of goods and services do not change.
4. D) consumption expenditure decreases.
5. E) imports of goods and services increase and exports of goods and services do not change.

Answer:  C

Topic:  Net exports of goods and services

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

70) Total expenditure equals

1. A) C + I + G + NX.
2. B) C + I + G – NX.
3. C) C + I – G + NX.
4. D) C – I + G + NX.
5. E) C – I – G – NX.

Answer:  A

Topic:  Total expenditure

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

71) Total income in a country in 2012 is $780 billion. Total expenditure in the country

1. A) cannot be determined.
2. B) is greater than $780 billion.
3. C) is $780 billion.
4. D) is less than $780 billion.
5. E) is either less than or equal to $780 billion.

Answer:  C

Topic:  Total expenditure

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

72) Total expenditure in the United States is equal to consumption expenditure plus investment

1. A) plus government expenditure on goods and services plus imports of goods and services.
2. B) minus government expenditure on goods and services minus imports of goods and services.
3. C) plus government expenditure on goods and services plus exports of goods and services.
4. D) plus government expenditure on goods and services plus exports of goods and services minus imports of goods and services.
5. E) plus government expenditure on goods and services plus exports of goods and services plus imports of goods and services.

Answer:  D

Topic:  Total expenditure

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

5.2   Measuring U.S. GDP

 

1) In order to measure gross domestic product, we can follow

1. A) only one approach: the circular flow approach.
2. B) only one approach: the national accounts approach.
3. C) two approaches: the expenditure approach and the income approach.
4. D) three approaches: the expenditure approach, the income approach, and the production approach.
5. E) three approaches: the expenditure approach, the income approach, and the market-based approach.

Answer:  C

Topic:  Measuring GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

2) In 2011, U.S. GDP was

1. A) $15 trillion using the expenditure approach.
2. B) $15 trillion using the income approach.
3. C) $15 trillion using the expenditure approach and $14 trillion using the income approach.
4. D) $16 trillion using the income approach and $14 trillion using the expenditure approach.
5. E) both A and B are correct.

Answer:  E

Topic:  Measuring GDP

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

3) The expenditure approach to measuring GDP is done by using data on only

1. A) consumption expenditure.
2. B) consumption expenditure and investment.
3. C) consumption expenditure, investment, government expenditure on goods and services, and net exports of goods and services.
4. D) consumption expenditure, investment, and government expenditures.
5. E) wages, rent, interest, and profit.

Answer:  C

Topic:  Expenditure approach

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

4) In comparing the magnitudes of the components of GDP according to the expenditure approach, we see that in the United States

1. A) government expenditure on goods and services is the largest category.
2. B) investment is the largest category.
3. C) investment is much larger than government expenditure on goods and services.
4. D) investment is less than government expenditure on goods and services.
5. E) investment, government expenditure on goods and services, and consumption expenditure are all about the same size.

Answer:  D

Topic:  Expenditure approach

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

5) The largest expenditure category in the United States is

1. A) consumption expenditure.
2. B) investment.
3. C) government expenditure on goods and services.
4. D) net exports of goods and services.
5. E) wages.

Answer:  A

Topic:  Expenditure approach

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

6) If consumption was 70 percent of GDP and investment and government expenditure were both 18 percent each, then we see that

1. A) GDP can be over 100 percent because it is “gross” rather than “net.”
2. B) the error is due to rounding.
3. C) exports must be less than imports.
4. D) exports must be more than imports.
5. E) we must subtract depreciation from investment so that the components of GDP do not exceed 100 percent.

Answer:  C

Topic:  Expenditure approach

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

7) In recent years, which of the following has been negative?

1. A) consumption expenditure
2. B) investment
3. C) government expenditure on goods and services
4. D) net exports of goods and services
5. E) wages

Answer:  D

Topic:  Expenditure approach

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

8) In 2009 in the United States, consumption expenditure was $9,996 billion, investment was $1,559 billion, government expenditures on goods and services were $2,927 billion, and total exports were $1,492 billion. GDP equaled

1. A) $12,641 billion.
2. B) $10,120 billion.
3. C) $11,488 billion.
4. D) $14,415 billion.
5. E) some amount, but there is not enough information given to calculate GDP.

Answer:  E

Topic:  Expenditure approach

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

 

9) The following table reports transactions that occurred in Whoville. Nominal GDP in Whoville is ________.

 

Item	Price per Unit	Quantity
Bottles of French Wine	$20	10
Boxes of Cereal	$4	20
Used Tires	$15	5
Shares of Twitter Stock	$10	15
Hours of Swimming Lessons	$5	8

 

1. A) $320
2. B) $545
3. C) $120
4. D) $395
5. E) $195

Answer:  C

Topic:  Expenditure approach

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  New

AACSB:  Analytical thinking

 

10) Based on the data in the table above, what does GDP equal?

1. A) $10,200 billion
2. B) $10,400 billion
3. C) $10,000 billion
4. D) $9,800 billion
5. E) $8,900 billion

Answer:  C

Topic:  Expenditure approach

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

 

 

11) The table gives data for a nation. What is the amount of the country’s GDP?

1. A) $6,000 billion
2. B) $6,200 billion
3. C) $6,600 billion
4. D) $6,900 billion
5. E) $5,800 billion

Answer:  B

Topic:  Expenditure approach

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

12) The table gives data for a nation. The value of the country’s net exports of goods and services shows that the country’s

1. A) value of its exports exceeded the value of its imports.
2. B) value of its imports are negative.
3. C) net exports of goods and services are decreasing.
4. D) value of its imports exceeded the value of its exports.
5. E) value of its imports must equal zero.

Answer:  A

Topic:  Expenditure approach, net exports of goods and services

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

13) The value of used goods ________ counted as part of GDP ________.

1. A) are; as long as they are classified as consumption goods
2. B) are; as long as they are classified as investment goods
3. C) are not; because they were counted during the period when they were counted as new goods
4. D) are not; because most fall in value and would cause a decrease in the value of GDP
5. E) may be; as long as their value has risen

Answer:  C

Topic:  Expenditures not in GDP, used goods

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

 

14) If the purchase of used goods was to be incorporated into measuring GDP using the expenditure approach, then

1. A) we also will have to account for spending on financial assets.
2. B) it will be very difficult to assign a fair market value to a used good.
3. C) we will be counting the value of the used goods both at the time of their production and at the time of their re-sale.
4. D) we will have to account for the natural depreciation that a used good experiences.
5. E) consumption spending would need to be adjusted for depreciation.

Answer:  C

Topic:  Expenditures not in GDP, used goods

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

15) When calculating GDP, purchases of used goods are

1. A) included at the original price.
2. B) included by taking the original price and subtracting the (current) used price.
3. C) included at the (current) used price.
4. D) not included.
5. E) included at the original price minus any depreciation.

Answer:  D

Topic:  Expenditures not in GDP, used goods

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

16) If you buy a five-year-old TV from a friend, the amount you paid for the TV is

1. A) always added to consumption expenditures but not investment.
2. B) always added to investment but not consumption.
3. C) not included in this year’s GDP.
4. D) added to investment if the TV is expected to last more than 5 additional years and added to consumption if the TV is expected to last less than 5 additional years.
5. E) included in this year’s GDP only if the TV set was manufactured in the United States.

Answer:  C

Topic:  Expenditures not in GDP, used goods

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

 

17) When Jamie purchases a classic 1968 Plymouth Cuda convertible from Shane, GDP

1. A) does not change, because the car was not produced this year.
2. B) increases, because the car is a durable good and increases consumption.
3. C) increases, because the car is a durable good and increases investment.
4. D) does not change, because Jamie did not buy the car from a dealership.
5. E) increases, because this expenditure decreases saving.

Answer:  A

Topic:  Expenditures not in GDP, used goods

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

18) Spending on financial assets ________ counted as part of GDP ________.

1. A) are; because the cash exchanged represents an expenditure
2. B) are not; because their purchase is not spending on goods or services
3. C) are; as long as their purchase produces income
4. D) are not; because interest must be paid on them
5. E) may be; as long as their value increases

Answer:  B

Topic:  Expenditures not in GDP, financial assets

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

19) The purchase of 500 shares of Honda stock by the California State Employees’ Pension fund

1. A) is counted as consumption expenditure.
2. B) is not counted as part of GDP.
3. C) is counted as investment in the GDP accounts.
4. D) is counted as part of export expenditure in the GDP accounts because Honda is a foreign firm.
5. E) is counted as part of import expenditure in the GDP accounts because Honda is a foreign firm.

Answer:  B

Topic:  Expenditures not in GDP, financial assets

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

 

20) Recently, the government made adjustments to how GDP is calculated that included placing software purchases into the category of

1. A) intermediate goods because software is not a final good.
2. B) inventory and now software purchases are not directly counted as part of GDP.
3. C) investment and now directly counts software purchases as part of GDP.
4. D) net exports of goods and services because most software is written abroad.
5. E) net operating surplus.

Answer:  C

Topic:  Eye on the U.S. economy, is a computer program an intermediate good?

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

21) Which of the following is true regarding the measurement of GDP?

1. A) Wages and profit income are used in the income approach to GDP.
2. B) Wages and consumption are used in the expenditure approach to GDP.
3. C) Consumption and investment are used in the income approach to GDP.
4. D) Government expenditure is only counted in the income approach to GDP.
5. E) Investment and wages are expenditures, and are therefore are used in the expenditure approach to GDP.

Answer:  A

Topic:  Income approach

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

22) The income approach measures GDP by summing

1. A) C + I + G + NX.
2. B) the total production of all final goods and services produced in a year within a country’s borders.
3. C) the wealth of households, business and government.
4. D) the incomes paid households for the resources they own.
5. E) Both answers A and D are correct.

Answer:  D

Topic:  Income approach

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

 

23) The income approach to measuring GDP is based on summing

1. A) the production of each industry.
2. B) wages, interest, rent, and profits.
3. C) the values of final goods, intermediate goods and services, used goods, and financial assets.
4. D) consumption expenditure, investment, government expenditures on goods and services, and net exports of goods and services.
5. E) consumption expenditure and wages.

Answer:  B

Topic:  Income approach

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

24) According to the income approach to measuring GDP, the largest income category is

1. A) wages.
2. B) interest.
3. C) rent.
4. D) profits.
5. E) consumption expenditure.

Answer:  A

Topic:  Income approach

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

25) In 2009 in the United States, net domestic product at factor cost was $11,091 billion. Additionally, rent was $2,000 billion, profits were $1,000 billion, and interest was $358 billion. Hence wages were

1. A) $7,733 billion.
2. B) $9,091 billion.
3. C) $10,091 billion.
4. D) $8,091 billion.
5. E) $12,091 billion.

Answer:  A

Topic:  Income approach

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

 

26) When measuring GDP by the income approach, wage income includes

1. health-care insurance paid for by the firm for its employees.
2. Social Security contributions made by the firm.

iii.   wages paid during a worker’s vacation time.

1. A) i, ii and iii
2. B) i and ii only
3. C) i only
4. D) ii only
5. E) ii and iii only

Answer:  A

Topic:  Income approach, wage income

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

27) Which of the following are included in interest income?

1. payments made for the use of land
2. income paid to households for loans they make

iii.   payments made by households for their borrowing

1. A) i, ii and iii
2. B) ii and iii only
3. C) i and ii only
4. D) ii only
5. E) iii only

Answer:  B

Topic:  Income approach, interest income

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

28) The category of “rent” in the income approach to GDP

1. A) includes the money paid to rent apartments only.
2. B) includes the money paid to rent machinery only.
3. C) includes the money paid to use land and other rented inputs.
4. D) does not have any connection to owner-occupied housing.
5. E) includes only the imputed rent for owner-occupied housing.

Answer:  C

Topic:  Income approach, rental income

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

 

29) Adding wages, interest, rent, and profits yields

1. A) gross domestic product.
2. B) gross domestic product at factor cost.
3. C) net domestic product at factor cost.
4. D) GNP.
5. E) total expenditure.

Answer:  C

Topic:  Net domestic product at factor cost

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

30) The sum of all the income categories listed in the National Income and Product Accounts adds up to

1. A) gross domestic product.
2. B) net national product.
3. C) disposable income after taxes.
4. D) net domestic product at factor cost.
5. E) gross national product.

Answer:  D

Topic:  Net domestic product at factor cost

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

31) Once the categories of income are totaled, the sum is called

1. A) “GDP measured by the income approach.”
2. B) “net domestic product at factor cost” and is not equal to GDP.
3. C) “net domestic product at factor cost” and is equal to GDP.
4. D) “total income earned” and is equal to GDP.
5. E) GNP and is not equal to GDP.

Answer:  B

Topic:  Net domestic product at factor cost

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

 

32) One reason the total sum of the income categories does not equal GDP is that

1. A) GDP values goods and services at market prices and the income approach values them at factor cost.
2. B) GDP values goods and services at retail prices and the income approach values them at wholesale cost.
3. C) taxes are generally larger than subsidies and the depreciation of capital is negligible.
4. D) GDP does not include depreciation, which is part of the income categories.
5. E) people do not spend all their income, so the value of consumption expenditure is less than the value of wages.

Answer:  A

Topic:  Income approach, adjustments

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

33) After calculating net domestic product at factor cost, to calculate GDP using the income approach, in part we must add

1. A) wages.
2. B) net operating surplus.
3. C) indirect taxes and depreciation.
4. D) interest, rent, and profit.
5. E) subsidies.

Answer:  C

Topic:  Income approach, adjustments

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

34) To measure GDP by using the income approach, we must add all incomes and then ________ depreciation and ________ net taxes less subsidies.

1. A) neither add nor subtract; add
2. B) add; neither add nor subtract
3. C) add; add
4. D) add; subtract
5. E) subtract; add

Answer:  C

Topic:  Income approach, adjustments

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

 

35) If the statistical discrepancy is zero, in order to calculate GDP from the value of net domestic product at factor cost, we must add

1. A) the value of intermediate goods and subtract the value of imports.
2. B) direct taxes, subtract corporate profit, and add investment.
3. C) indirect taxes, subtract subsidies, and add depreciation.
4. D) subsidies, subtract indirect taxes and depreciation.
5. E) indirect taxes, subsidies, and

Answer:  C

Topic:  Income approach, adjustments

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

36) To calculate GDP using the income approach, one of the adjustments made to net domestic product at factor cost is to

1. A) add depreciation.
2. B) add investment.
3. C) subtract investment.
4. D) add consumption expenditure.
5. E) subtract indirect taxes less subsidies.

Answer:  A

Topic:  Income approach, adjustments

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

37) Which adjustment(s) must be made to convert net domestic product to GDP?

1. add indirect taxes
2. subtract subsidies

iii.    add depreciation

1. A) i and iii only
2. B) i, ii and iii
3. C) ii only
4. D) iii only
5. E) i and ii

Answer:  B

Topic:  Income approach, adjustments

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

 

38) Last year in a nation to the south, net domestic product at factor cost equaled $3,300 billion. Indirect taxes minus subsidies equaled $200 billion, depreciation equaled $800 billion, the statistical discrepancy equaled zero, and net operating surplus equaled $150 billion. The country’s GDP was

1. A) $2,300 billion.
2. B) $3,500 billion.
3. C) $4,300 billion.
4. D) $4,450 billion.
5. E) $4,150 billion.

Answer:  C

Topic:  Income approach, adjustments

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

39) The table above has information about an economy. Using this information, GDP equals

1. A) $6,500 billion.
2. B) $7,800 billion.
3. C) $7,000 billion.
4. D) $8,500 billion.
5. E) some amount that cannot be calculated without information on the amount of government expenditures.

Answer:  B

Topic:  Income approach

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

 

 

40) Using the information in the table above, what does GDP equal?

1. A) $365 billion
2. B) $350 billion
3. C) $650 billion
4. D) $380 billion
5. E) GDP cannot be calculated without information on the amount of investment.

Answer:  D

Topic:  Income approach

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

41) The expenditure approach values ________ and the income approach values ________.

1. A) goods and services at market prices; services at factor prices
2. B) goods and services at market prices; goods and services at factor prices
3. C) only goods at market prices; only services at factor prices
4. D) services only at factor prices; goods only at market prices
5. E) goods and services at factor prices; goods and services at market prices

Answer:  B

Topic:  Expenditure approach and income approach

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

 

42) Which of the following would be included in Germany’s GNP?

1. A) the production of BMWs (made by a German-based company) in South Carolina
2. B) the production of Michelin tires made in Germany by a French company and then sold directly to French consumers
3. C) the production of BMWs in Germany
4. D) the production of Michelin tires made in France by a French company and then sold to BMW in Germany for use in BMW cars
5. E) Answers A and C are correct.

Answer:  E

Topic:  GNP

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

43) Real GDP measures the value of goods and services produced in a given year valued using

1. A) base year prices.
2. B) prices that prevail the same year.
3. C) no prices.
4. D) future prices.
5. E) real rather than nominal prices.

Answer:  A

Topic:  Real GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

44) Real GDP is the value of final goods and services produced in a year

1. A) expressed in the prices of that same year.
2. B) during a recession.
3. C) minus depreciation.
4. D) expressed in the prices of a base year.
5. E) minus the value of all the intermediate goods produced.

Answer:  D

Topic:  Real GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

 

45) Real GDP can increase if the

1. quantities of goods and services produced decrease and prices fall by a smaller percentage.
2. quantities of goods and services produced decrease and prices fall by a larger percentage.

iii.   quantities of goods and services produced decrease and prices do not change.

1. quantities of goods and services produced increase.
2. A) i only
3. B) iii only
4. C) iv only
5. D) i and iii
6. E) i, ii, and iii

Answer:  C

Topic:  Real GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

46) ________ is most likely to contribute to an improvement in our living standard.

1. A) An increase in real GDP
2. B) An increase in the price level
3. C) A decrease in nominal GDP
4. D) An increase in depreciation
5. E) An increase in the GDP deflator combined with a decrease in nominal GDP

Answer:  A

Topic:  Real GDP

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

47) Nominal GDP measures the value of goods and services produced in a given year valued using

1. A) constant prices.
2. B) prices of the same year.
3. C) no prices.
4. D) future prices.
5. E) base year prices.

Answer:  B

Topic:  Nominal GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

 

48) Nominal GDP is GDP

1. A) using current market values.
2. B) during a recession.
3. C) minus depreciation.
4. D) after adjusting for any price changes.
5. E) that ignores depreciation.

Answer:  A

Topic:  Nominal GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

49) An increase in nominal GDP could result from an increase in

1. production.
2. prices.

iii.   subsidies.

1. A) i only
2. B) ii only
3. C) i and ii
4. D) i and iii
5. E) i, ii, and iii

Answer:  C

Topic:  Nominal GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

50) Nominal GDP increases

1. A) only if total production increases.
2. B) only if prices increase.
3. C) if either prices and/or total production increase.
4. D) only if the productivity of resources increase.
5. E) only if depreciation decreases.

Answer:  C

Topic:  Nominal GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

 

51) When the value of nominal GDP increases from one year to the next, we know that one or two things must have happened during that time:

1. A) The nation produced fewer goods and services and/or prices fell for goods and services.
2. B) Consumption expenditure increased and/or corporate profits increased.
3. C) Investment increased and/or payments to employees increased.
4. D) The nation produced more goods and services and/or prices rose for goods and services.
5. E) the value of real GDP must have increased and/or the price level must have decreased.

Answer:  D

Topic:  Nominal GDP

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

52) If nominal GDP increases from one year to the next, then

1. A) production must have increased.
2. B) production could have increased, decreased, or stayed the same.
3. C) prices must have increased.
4. D) prices and production must both have increased.
5. E) prices and production must both have decreased.

Answer:  B

Topic:  Nominal GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

53) Which of the following statement is correct?

1. A) If nominal GDP increases, then real GDP must increase.
2. B) If nominal GDP decreases, then real GDP must increase.
3. C) If real GDP decreases, then nominal GDP must decrease.
4. D) Nominal and real GDP can change either in the same direction or the opposite direction.
5. E) If nominal GDP does not change, then real GDP cannot change.

Answer:  D

Topic:  Real GDP versus nominal GDP

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

 

54) If nominal GDP increases this year, then real GDP

1. A) must decrease.
2. B) must increase.
3. C) must not change.
4. D) could increase, decrease, or not change.
5. E) could either increase or not change but cannot decrease.

Answer:  D

Topic:  Real GDP versus nominal GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

55) Bobby was researching the economic growth of a country between 2006 and 2011. Using 2006 as the base year, he calculated a twelve percent increase for real GDP and a ten percent increase for nominal GDP. His results indicate that

1. A) he made an error when calculating nominal GDP.
2. B) the quantity of goods and services produced decreased over the period.
3. C) the quantity of goods and services produced increased and prices decreased over the period.
4. D) the quantity of goods and services produced and prices both decreased over the period.
5. E) the quantity of goods and services produced did not change and prices decreased over the period.

Answer:  C

Topic:  Real GDP versus nominal GDP

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

56) If real GDP is greater than nominal GDP for a particular year, then

1. A) production must have fallen between the current year and the base year.
2. B) production must have increased between the current year and the base year.
3. C) prices must have fallen between the current year and the base year.
4. D) prices must have risen between the current year and the base year.
5. E) prices must have fallen between the current year and the immediate past year.

Answer:  C

Topic:  Real GDP versus nominal GDP

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

 

57) During last year, a country produced 20,000 pizzas and 10,000 hamburgers and nothing else. The pizzas sold for $10.00 each and the hamburgers for $3.00 each. Nominal GDP was

1. A) $230,000.
2. B) $70,000.
3. C) $460,000.
4. D) $390,000.
5. E) $360,000.

Answer:  A

Topic:  Nominal GDP

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

58) The base year is 2010. A country only produces MP3 players. The price of an MP3 player in 2008 was $50. The price of an MP3 player was $30 in 2010. The quantity of MP3 players produced in 2008 was 10,000 units and in 2010 was 20,000 units. Nominal GDP in 2010 equals

1. A) $1,000,000.
2. B) $500,000.
3. C) $600,000.
4. D) $200,000.
5. E) an amount that cannot be determined without information about real GDP in 2010.

Answer:  C

Topic:  Nominal GDP

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

59) The base year is 2011. A country only produces Blu-ray players. The price of a Blu-ray player in 2011 was $100. The price of a Blu-ray player was $90 in 2012. The quantity of Blu-ray players produced in 2011 was 10,000 units and in 2012 was 10,500 units. Nominal GDP in 2012 equals

1. A) $900,000.
2. B) $945,000.
3. C) $1,000,000.
4. D) $1,050,000.
5. E) an amount that cannot be determined without information about nominal GDP in 2008.

Answer:  B

Topic:  Nominal GDP

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

 

60) The base year is 2012. A country only produces Blu-ray players. The price of a Blu-ray player in 2012 was $100. The price of a Blu-ray player was $90 in 2013. The quantity of Blu-ray players produced in 2012 was 10,000 units and in 2013 was 10,500 units. Real GDP in 2012 equals

1. A) $900,000.
2. B) $945,000.
3. C) $1,000,000.
4. D) $1,050,000.
5. E) an amount that cannot be determined without information about real GDP in 2007 .

Answer:  C

Topic:  Real GDP

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

61) Assume that a small country produces only green peppers and red peppers. Last year, it produced 100 green peppers and 50 red peppers and sold them at prices of $2 per green pepper and $3 per red pepper. This year, it produced 150 green peppers and 60 red peppers and sold them at prices of $2 per green pepper and $4 per red pepper. What is real GDP this year if the base year is last year?

1. A) $540
2. B) $400
3. C) $480
4. D) $350
5. E) $890

Answer:  C

Topic:  Real GDP

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  New

AACSB:  Analytical thinking

                Data for 2009           Data for 2010

 

 

62) The table above gives the production and prices for a small nation that produces only bread and soda. The base year is 2009. What is nominal GDP in 2009?

1. A) $410
2. B) $450
3. C) $900
4. D) $550
5. E) $460

Answer:  B

Topic:  Real GDP

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

63) The table above gives the production and prices for a small nation that produces only bread and soda. The base year is 2010. What is real GDP in 2010?

1. A) $530
2. B) $1080
3. C) $510
4. D) $210
5. E) $300

Answer:  C

Topic:  Real GDP

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

64) When calculating real GDP, the reference base year

1. A) allows us to account for changes in GNP compared to GDP.
2. B) always reduces the value of GDP compared to GNP.
3. C) allows us to calculate the value of the goods and services in terms of prices of that base year.
4. D) usually increases the value of GNP compared to GDP.
5. E) allows us to increase the value of goods and services.

Answer:  C

Topic:  Real GDP

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

65) In calculating GDP, economists

1. A) measure total expenditure as the only true measure.
2. B) can measure either total expenditure or total income.
3. C) measure total income as the only true measure.
4. D) measure total income minus total expenditure.
5. E) measure total income plus total expenditure.

Answer:  B

Topic:  Expenditure approach and income approach

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

 

66) The expenditure approach to measuring GDP is based on summing

1. A) wages, interest, rent, and profit.
2. B) each industry’s production.
3. C) the total values of final goods, intermediate goods and services, used goods, and financial assets.
4. D) consumption expenditure, investment, government expenditure on goods and services, and net exports of goods and services.
5. E) consumption expenditure, investment, government expenditure on goods and services, and net exports of goods and services minus wages, interest, rent, and profit.

Answer:  D

Topic:  Expenditure approach

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

67) Which of the following is NOT included in the expenditure approach to calculating GDP?

1. A) government expenditures on goods and services
2. B) investment
3. C) net exports of goods and services
4. D) wages
5. E) consumption expenditure

Answer:  D

Topic:  Expenditure approach

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

68) Suppose GDP is $10 billion, consumption expenditure is $7 billion, investment is $2 billion, and government expenditure on goods and services is $2 billion. Net exports of goods and services must be

1. A) $1 billion.
2. B) -$1 billion.
3. C) $2 billion.
4. D) -$2 billion.
5. E) $10 billion.

Answer:  B

Topic:  Expenditure approach

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

 

69) According to the expenditure approach to measuring GDP, in the United States , the largest component of GDP is

1. A) consumption expenditure.
2. B) investment.
3. C) government expenditure on goods and services.
4. D) net exports of goods and services.
5. E) wages.

Answer:  A

Topic:  Expenditure approach

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

70) Expenditures in GDP do not include

1. A) used goods or financial assets.
2. B) financial assets or investment.
3. C) used goods or investment.
4. D) investment, stocks, or bonds.
5. E) government expenditures on goods and services.

Answer:  A

Topic:  Expenditure approach

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

71) Which of the following is NOT part of the income used in the income approach to measuring GDP?

1. A) wages
2. B) rent
3. C) interest
4. D) taxes paid by persons
5. E) profit

Answer:  D

Topic:  Income approach

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

 

72) Which of the following is NOT included in the income approach to calculating GDP?

1. A) interest
2. B) wages
3. C) net exports of goods and services
4. D) profits
5. E) rent

Answer:  C

Topic:  Income approach

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

73) The sum of the components of incomes is called

1. A) net domestic product at market prices.
2. B) gross domestic product at market prices.
3. C) gross domestic product at factor cost.
4. D) net domestic product at factor cost.
5. E) GNP.

Answer:  D

Topic:  Net domestic product at factor cost

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

74) Nominal GDP can change

1. A) only if prices change.
2. B) only if the quantities of goods and services change.
3. C) only if prices increase.
4. D) if either prices or the quantities of goods and services change.
5. E) only if prices and the quantities of the goods and services change.

Answer:  D

Topic:  Nominal GDP

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

 

75) A south sea island produces only coconuts. In 2012, the price of a coconut is $1 and the quantity produced is 200. In 2013, the price of a coconut is $1.50 and the quantity produced is 250. 2012 is the base year. Real GDP in 2013 is ________.

1. A) $375
2. B) $350
3. C) $200
4. D) $250
5. E) $1.50

Answer:  D

Topic:  Real GDP

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

76) The difference between nominal GDP and real GDP is

1. A) the indirect taxes used in their calculations.
2. B) the prices used in their calculations.
3. C) that nominal GDP includes the depreciation of capital and real GDP does not.
4. D) that nominal GDP includes net exports of goods and services and real GDP includes net imports.
5. E) that real GDP includes the depreciation of capital and nominal GDP does not.

Answer:  B

Topic:  Real GDP versus nominal GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

5.3   The Use and Limitations of Real GDP

 

1) GDP is

1. A) a perfect measure of the standard of living.
2. B) a perfect measure of the value of production.
3. C) a measure which includes the value of all newly produced goods and services.
4. D) an imperfect measure of the standard of living.
5. E) the only factor that affects our standard of living.

Answer:  D

Topic:  Standard of living

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

2) Even though it is not a perfect measure, economists can use real GDP to

1. compare how the value of the goods and services produced in China have changed

over the past 10 years.

1. look at the length of recessions and expansions in the United States.

iii.   compare the standard of living in China versus the standard of living in Vietnam.

1. A) ii only
2. B) i, ii and iii
3. C) i and iii
4. D) i and ii
5. E) ii and iii

Answer:  B

Topic:  Standard of living

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

3) Although imperfect, which of the following is used as a measure of the standard of living?

1. A) real GDP ÷ population
2. B) real GDP × population
3. C) nominal GDP × population
4. D) nominal GNP ÷ population
5. E) nominal GNP × population

Answer:  A

Topic:  Standard of living

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

4) In the United States, between 1961 and 2011, there has been

1. a consistent , non-changing growth rate of potential GDP per person.
2. an increase in the standard of living based on real GDP per person.

iii.   fluctuations in real GDP per person around potential GDP per person.

1. A) ii only
2. B) i, ii and iii
3. C) i and ii only
4. D) ii and iii
5. E) i only

Answer:  D

Topic:  Standard of living

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

5) In 1961, real GDP totaled $575 billion and in 2011 it totaled $1,255 billion. Between 1961 and 2011, the population increased from 50 million to 100 million. Between 1961 and 2011, the standard of living based on real GDP per person

550. A) increased from $11,500 to $12,550.
551. B) increased by over 300 percent.
552. C) increased by about 118 percent.
553. D) decreased from $125,500 to $28,750.
554. E) decreased by 9 percent.

Answer:  A

Topic:  Real GDP and nominal GDP

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

 

6) If we use GDP to measure our standard of living, then our procedure is

1. A) inaccurate because our standard of living does not depend only on goods and services.
2. B) accurate because our standard of living depends solely on goods and services.
3. C) inaccurate because our standard of living has nothing to do with goods and services.
4. D) inaccurate because our standard of living only depends on used goods and services.
5. E) accurate only if we use nominal GDP rather than real GDP.

Answer:  A

Topic:  Standard of living

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

7) The business cycle describes

1. A) the change in potential GDP over time.
2. B) the change in the standard of living across countries.
3. C) the behavior of real GDP over time.
4. D) the behavior of nominal GDP over time.
5. E) the behavior of GNP over time.

Answer:  C

Topic:  Business cycle

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

8) The business cycle is defined as

1. A) changes in the stock market.
2. B) changes in financial markets.
3. C) persistent growth in potential GDP.
4. D) irregular ups and downs in production and jobs.
5. E) the period of time during which the unemployment rate is rising.

Answer:  D

Topic:  Business cycle

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

9) The relationship between real GDP and potential GDP over the business cycle can be best summarized by which of the following statements?

1. A) Real GDP fluctuates around potential GDP.
2. B) Real GDP is always equal to potential GDP.
3. C) Real GDP cannot be greater than potential GDP.
4. D) Real GDP cannot be less than potential GDP.
5. E) Real GDP cannot be equal to potential GDP.

Answer:  A

Topic:  Business cycle

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

10) Over the business cycle,

1. A) potential GDP fluctuates around its trend.
2. B) real GDP fluctuates around its trend.
3. C) only potential GDP fluctuates around its trend and real GDP remains equal to its trend.
4. D) only real GDP fluctuates around its trend and potential GDP remains equal to its trend.
5. E) neither real GDP nor potential GDP fluctuates because they just grow smoothly along their trends.

Answer:  B

Topic:  Business cycle

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

11) During the business cycle,

1. A) real GDP fluctuates around nominal GDP.
2. B) nominal GDP fluctuates around real GDP.
3. C) real GDP fluctuates around its trend.
4. D) trend GDP fluctuates around real GDP.
5. E) real GDP falls after the trough.

Answer:  C

Topic:  Business cycle

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

12) A business cycle has two turning points, which are the

1. A) recession and trough.
2. B) peak and recession.
3. C) trough and peak.
4. D) expansion and recession.
5. E) peak and expansion.

Answer:  C

Topic:  Business cycle

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

13) The business cycle has two phases,

1. A) expansion and peak.
2. B) recession and trough.
3. C) peak and trough.
4. D) recession and expansion.
5. E) expansion and trough.

Answer:  D

Topic:  Business cycle

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

14) Based on the figure above, in which quarter or quarters did a recession occur?

1. A) between 2012, 2nd quarter to 2013, 2nd quarter and also between 2014, 2nd quarter to the end of the figure
2. B) in 2013, 2nd quarter
3. C) between 2013, 2nd quarter to 2014, 2nd quarter
4. D) between 2014, 1st quarter to 2014 2nd quarter
5. E) after 2013, 2nd quarter

Answer:  C

Topic:  Business cycle

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Revised

AACSB:  Reflective thinking

15) Based on the figure above, in which quarter or quarters did an expansion occur?

1. A) between 2012, 2nd quarter to 2013, 2nd quarter and also between 2014, 2nd quarter to the end of the figure
2. B) in 2013, 2nd quarter
3. C) between 2013, 2nd quarter to 2014, 2nd quarter
4. D) in 2014, 2nd quarter
5. E) There are no expansions illustrated in the figure.

Answer:  A

Topic:  Business cycle

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

16) Based on the figure above, in which quarter or quarters did a trough occur?

1. A) between 2012, 2nd quarter to 2013, 2nd quarter and also between 2014, 2nd quarter to the end of the figure
2. B) in 2013, 2nd quarter
3. C) between 2013, 2nd quarter to 2014, 2nd quarter
4. D) in 2014, 2nd quarter
5. E) There are no troughs illustrated in the figure.

Answer:  D

Topic:  Business cycle

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

17) Based on the figure above, in which quarter or quarters did a peak occur?

1. A) between 2012, 2nd quarter to 2013, 2nd quarter and also between 2014, 2nd quarter to the end of the figure
2. B) in 2013, 2nd quarter
3. C) between 2013, 2nd quarter to 2014, 2nd quarter
4. D) in 2014, 2nd quarter
5. E) There are no peaks illustrated in the figure.

Answer:  B

Topic:  Business cycle

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

18) A standard definition of recession is

1. A) a period of expansion in many sectors of the economy.
2. B) an increase in GDP that lasts for at least 6 months.
3. C) a decrease in GDP that lasts for at least 6 months.
4. D) an increase in unemployment from one month to the next.
5. E) a period of time when the unemployment rate exceeds 6.5 percent.

Answer:  C

Topic:  Business cycle, recession

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

19) In order to be classified as a recession, a contraction of general economic activity must last at least

1. A) one year.
2. B) six months.
3. C) one period.
4. D) one quarter.
5. E) None of the above because recessions do not have a minimum length.

Answer:  B

Topic:  Business cycle, recession

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

20) A recession conventionally is defined as a decrease in

1. A) real GDP that lasts for at least six months.
2. B) the growth rate of real GDP that lasts for at least six months.
3. C) potential GDP that lasts for at least six months.
4. D) real GDP that lasts for at least three months.
5. E) the inflation rate that lasts for at least six months.

Answer:  A

Topic:  Business cycle, recession

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

21) A recession runs from the

1. A) peak of the business cycle to its trough.
2. B) peak of the business cycle to a recovery.
3. C) expansion of a business cycle to its peak.
4. D) trough of a business cycle to its peak.
5. E) trough of a business cycle to its expansion.

Answer:  A

Topic:  Business cycle, recession

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

22) The U.S. economy is experiencing falling output, falling employment, falling incomes and rising unemployment. These conditions best describe a business cycle ________.

1. A) expansion
2. B) peak
3. C) trend
4. D) recession
5. E) trough

Answer:  D

Topic:  Business cycle, recession

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

23) The U.S. economy is experiencing rising output, rising employment, rising incomes and falling unemployment. These conditions best describe a business cycle ________.

1. A) expansion
2. B) peak
3. C) trend
4. D) recession
5. E) trough

Answer:  A

Topic:  Business cycle, expansion

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

24) The NBER describes a recession as

1. A) “a period of significant decline in total output, income, employment, and trade, usually lasting from six months to a year.”
2. B) “a decrease in real GDP for two successive quarters.”
3. C) “a decrease in potential GDP for at least six months.”
4. D) “a decrease in the standard of living for at least one year.”
5. E) “a one year period with increases in the unemployment rate.”

Answer:  A

Topic:  Business cycle, NBER

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

25) The Great Moderation describes the period

2008. A) of relatively steady growth in real GDP between 1991 and 2008.
2009. B) of relatively steady growth in real GDP after the year 2000.
2010. C) between 2000 and 2008 when potential GDP did not increase.
2011. D) between 1990 and 2005 when real GDP grew significantly more slowly than did potential GDP.
2012. E) of very slow growth in real GDP after 1990.

Answer:  A

Topic:  Business cycle, history

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

26) Which of the following describe the United States economy in 2008 and and the start of 2009?

1. A) The economy was in an expansion.
2. B) The economy was in a recession.
3. C) Real GDP per person increased.
4. D) Real GDP reached a peak.
5. E) None of the above answers is correct.

Answer:  B

Topic:  Business cycle, recession

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

27) U.S. real GDP

1. A) precisely measures the improving standard of living in the United States.
2. B) measures the change in the price level over time.
3. C) excludes the value of underground production and leisure time.
4. D) is not as accurate as nominal GDP when measuring standard of living changes over time.
5. E) includes the value of underground production but excludes the value of leisure time.

Answer:  C

Topic:  Omissions from GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

28) As measured, GDP omits which of the following?

1. Illegal sales of goods and services
2. Changes in the amount of leisure time

iii.   Household production of goods and services

1. A) i only
2. B) i and ii
3. C) ii and iii
4. D) i and iii
5. E) i, ii, and iii

Answer:  E

Topic:  Omissions from GDP

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

29) Excluding household and underground production leads to

1. A) underestimation of real GDP but not nominal GDP.
2. B) overestimation of real GDP but not nominal GDP.
3. C) overestimation of both real GDP and nominal GDP.
4. D) underestimation of both real GDP and nominal GDP.
5. E) underestimation of real GDP an overestimation of nominal GDP.

Answer:  D

Topic:  Omissions from GDP

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

30) Goods and services such as environmental quality, leisure time, and household production are not included in GDP because they are not

1. A) productive activities.
2. B) for consumption.
3. C) bought in markets.
4. D) made for profit.
5. E) really durable goods.

Answer:  C

Topic:  Omissions from GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

31) Household production, such as baking bread at home, is not included in GDP because it

1. A) has better quality than the bread in the store.
2. B) has lower quality than the bread in the store.
3. C) does not add anything of value to GDP.
4. D) does not involve a market transaction.
5. E) is not really production.

Answer:  D

Topic:  Household production

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

32) The calculation of GDP excludes the value of

1. A) government expenditure on office supplies.
2. B) households’ purchases of shampoo.
3. C) businesses’ purchase of new machine tools.
4. D) a family member painting the family home.
5. E) expenditure on durable goods.

Answer:  D

Topic:  Household production

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

33) An example of household production excluded from GDP is

1. A) household cleaning services provided by Merry Maids Incorporated.
2. B) child care provided by a certified nanny.
3. C) tree trimming you provide at your parents’ home.
4. D) plumbing work completed by Joe Fix-it.
5. E) lawn care provided by a local lawn care company.

Answer:  C

Topic:  Household production

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

34) Babysitting services the oldest son provides his parents

1. A) counts as nominal GDP but not real GDP.
2. B) counts as real GDP but not nominal GDP.
3. C) counts as real GDP and nominal GDP.
4. D) does not count as real GDP nor nominal GDP.
5. E) counts in both real and nominal GDP only if the son is not paid.

Answer:  D

Topic:  Household production

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

35) As more women decide to work outside the home and therefore hire others to work around their home, GDP will increase by

1. A) only the value of the output produced by the newly working women.
2. B) the value of the output produced by the newly working women minus the value of the household work they were previously performing.
3. C) the value of the output produced by the newly working women plus the value of any household work they are now hiring someone to perform.
4. D) only the value of the household work they are now hiring someone to perform.
5. E) the value of the household work they were previously performing minus the value of the output produced by the newly working women.

Answer:  C

Topic:  Household production

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

36) Instead of taking the dirty laundry with you when you go back to visit your parents, you use a Laundromat. Your use of the Laundromat means that

1. A) GDP will decrease and the country’s standard of living will fall.
2. B) your parents’ contribution to GDP will increase.
3. C) GDP will remain the same.
4. D) what you paid for use of the Laundromat will be included in GDP.
5. E) real GDP does not change because the clothes are still being laundered but nominal GDP rises since you are now paying for the service.

Answer:  D

Topic:  Household production

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

37) If you mow the lawn yourself, the lawn mowing is considered household production. If you pay Larry’s Lawn Service to mow your lawn, the lawn mowing is considered

1. A) a leisure time activity.
2. B) a service, that will be counted as part of GDP.
3. C) a service, but is not counted as part of GDP because it simply replaces a service you used to perform.
4. D) rent, and therefore is counted as part of GDP.
5. E) underground production because it replaces the underground production of you mowing your lawn.

Answer:  B

Topic:  Household production

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

38) Pat gives up a $40,000 per year job to stay at home and take care of the house. By so doing, Pat saves $15,000 in child care and house cleaning services which he now performs himself. The direct effect on GDP from Pat’s decision is a decrease of

1. A) $40,000.
2. B) $55,000.
3. C) $25,000.
4. D) $15,000.
5. E) $30,000.

Answer:  B

Topic:  Household production

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

39) Which of the following is likely to be an unreported economic activity?

1. A) a $250,000 bonus paid to the CEO of a company
2. B) tips paid to a taxi driver
3. C) the minimum wage paid to a teenager working at a McDonald’s
4. D) the brokerage fees paid to a broker at Merrill Lynch
5. E) the purchase of shares of stock in Walgreen’s Pharmacy

Answer:  B

Topic:  Underground production

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

40) The measurement of GDP handles underground production by

1. A) including the amount produced in this sector of the economy in exactly the same way that all other production is included.
2. B) omitting it because underground production is unreported to the government by the people involved.
3. C) adding it at fixed prices that change only infrequently.
4. D) adding an estimate of it because it is difficult to precisely measure underground production.
5. E) omitting it because, being illegal, it has no effect on the nation’s total production.

Answer:  B

Topic:  Underground production

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

41) Leisure time is ignored when calculating GDP because leisure time

1. A) does not affect our standard of living.
2. B) has been declining over time.
3. C) is not an economic good.
4. D) is not bought in a market.
5. E) is not productive.

Answer:  D

Topic:  Leisure time

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

42) Which of the following is NOT included in measured U.S. GDP?

1. A) the value of the pizzas produced at Pizza Hut in Kansas City
2. B) the value of leisure time
3. C) the value of the goods produced at a French owned plant in Atlanta, Georgia
4. D) the value of the services produced by a lawyer in Tampa, Florida
5. E) the value of a plane produced by Boeing in Washington and sold to Air France

Answer:  B

Topic:  Leisure time

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

43) Which of the following is directly accounted for in the calculation of GDP?

1. A) the value of one hour of leisure as measured by the hourly wage one would otherwise earn by working
2. B) the value of repairing your own kitchen sink as measured by the average rates charged by local plumbers
3. C) cash earnings from an illegal poker game
4. D) improvements in quality of life from the reduction of pollution
5. E) None of the above items is accounted for in GDP.

Answer:  E

Topic:  Household production

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  New

AACSB:  Reflective thinking

 

44) Mexico City is notorious for its excessive pollution. Mexico’s measure of GDP is

1. A) decreased by the estimated value of the pollution’s harm.
2. B) not affected by the estimated value of the pollution’s harm.
3. C) increased by the estimated value of the pollution’s harm.
4. D) changed by the pollution only when comparing its GDP with the U.S. GDP.
5. E) None of the above answers is correct.

Answer:  B

Topic:  Environmental quality

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

45) A new technology is discovered which results in all new cars producing 50 percent less pollution. Which of the following is true?

1. A) GDP will increase to reflect the fact that the air we breathe is cleaner.
2. B) GDP will increase if there is an increase in the production cost and price of the car.
3. C) GDP increases anytime pollution is reduced.
4. D) GDP will decrease.
5. E) Real GDP increases because the air is cleaner, but nominal GDP does not change since air is free.

Answer:  B

Topic:  Environmental quality

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

46) The calculation of GDP using the income approach EXCLUDES

1. A) rent.
2. B) interest.
3. C) environment quality.
4. D) wages.
5. E) profit.

Answer:  C

Topic:  Environmental quality

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

47) The Human Development Index was proposed because

1. A) people confuse nominal GDP and real GDP.
2. B) nominal GDP and real GDP are subjective measures.
3. C) of the limitations of real GDP as a measure comparing the standard of living in different nations.
4. D) the GDP deflator changes if the base year is changed.
5. E) different nations have different populations.

Answer:  C

Topic:  Eye on the global economy, which country has the highest standard of living?

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

48) In the years after 1998, the most severe recession occurred during

1998. A) 1998.
1999. B) 2000-2001.
2000. C) 2008-2009.
2001. D) 1999-2001.
2002. E) 2005.

Answer:  C

Topic:  Business cycle

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

49) Which of the following is NOT part of the business cycle?

1. A) recession
2. B) peak
3. C) inflation
4. D) trough
5. E) expansion

Answer:  C

Topic:  Business cycle

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

50) In the business cycle, what immediately precedes the time when real GDP is falling?

1. A) recession
2. B) peak
3. C) depression
4. D) trough
5. E) expansion

Answer:  B

Topic:  Business cycle

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

51) Which of the following goods and services are omitted from GDP?

1. A) household production
2. B) capital goods
3. C) expenditure on resources used to protect the environment
4. D) government weather satellites
5. E) services such as hair styling

Answer:  A

Topic:  Household production

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

52) GDP handles household production by

1. A) estimating a dollar value of the goods purchased to do housework.
2. B) estimating a dollar value of the services provided.
3. C) ignoring it.
4. D) including it in exactly the same way that all other production is included.
5. E) including it in real GDP but not in nominal GDP because there are no prices paid for the work.

Answer:  C

Topic:  Household production

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

53) The underground economy

1. A) is measured by government officials through tax returns.
2. B) is difficult to describe but easy to measure.
3. C) includes production that uses illegal workers who are paid less than minimum wage.
4. D) includes mining production.
5. E) is estimated by the government and the estimate is part of official GDP.

Answer:  C

Topic:  Underground production

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

54) You hire some of your friends to help you move to a new house. You pay them a total of $200 and buy them dinner at Pizza Hut. Which of the following is true?

1. A) The $200 should be counted as part of GDP but not the dinner at Pizza Hut.
2. B) If your friends do not report the $200 on their tax forms, it becomes part of the underground economy.
3. C) The dinner at Pizza Hut should be counted as part of GDP, but not the $200.
4. D) Hiring your friends is an illegal activity and should not be counted in GDP.
5. E) Neither the $200 nor the dinner should be counted in GDP because both are household production.

Answer:  B

Topic:  Underground production

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

55) The value of leisure time is

1. A) included in GDP and, in recent years, has become an increasing large part of GDP.
2. B) excluded from GDP.
3. C) zero.
4. D) directly included in GDP but, in recent years, has become a decreasing large part of GDP.
5. E) directly included in GDP and, in recent years, has not changed much as a fraction of GDP.

Answer:  B

Topic:  Leisure time

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

56) Leisure time

1. A) is less valuable to us than the wage we earn for working.
2. B) has steadily decreased over the years.
3. C) is not valued as part of GDP.
4. D) is not an economic good.
5. E) is included in GDP and has become an increasingly large part of GDP.

Answer:  C

Topic:  Leisure time

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

57) When industrial activity increases,

1. A) GDP decreases because of pollution.
2. B) pollution does not necessarily increase.
3. C) health and life expectancy decrease.
4. D) and real GDP increases, it is the case that in all nations fewer resources are devoted to protecting the environment.
5. E) the increase in real GDP is partially offset by the increase in pollution.

Answer:  B

Topic:  Environmental quality

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

58) A new technology is discovered that results in all new cars producing 50 percent less pollution. The technology costs nothing to produce and cars do not change in price. As a result of the technology, there is a reduction in the number of visits people make to the doctor to complain of breathing difficulties. Which of the following is true?

1. A) Real GDP decreases as a result of fewer doctor services being provided.
2. B) Real GDP is not affected.
3. C) Nominal GDP increases to reflect the improvement in the health of the population.
4. D) Real GDP decreases to reflect the decrease in pollution.
5. E) Nominal GDP does not change and real GDP increases.

Answer:  A

Topic:  Environmental quality

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

59) A country with a real GDP per person similar to real GDP per person in the United States but with limited political freedom is generally considered to have

1. A) a lower standard of living than the United States.
2. B) a larger Human Development Index because the other country still needs to develop more political freedom.
3. C) the same standard of living as the United States.
4. D) an understated GDP.
5. E) an overstated nominal GDP.

Answer:  A

Topic:  Political freedom

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

5.4   Appendix: Measuring Real GDP

 

1) Using the chained-dollar method to calculate real GDP, real GDP is calculated by

1. A) valuing the current output at last year’s real GDP prices.
2. B) valuing the current output at current year prices.
3. C) averaging the growth of output from one year to the next when the growth rates are calculated using this year’s prices and using last year’s prices.
4. D) either A or C, depending which gives the larger value for real GDP.
5. E) averaging the value of current output valued using base year prices and current output valued using current year prices.

Answer:  C

Topic:  Real GDP

Skill:  Level 2: Using definitions

Section:  Chapter 5 Appendix

Status:  Old

AACSB:  Reflective thinking

2) Janet calculated the GDP growth rates for France between 2012 and 2013. Using 2012 prices for both years, GDP increased 5 percent. Using 2013 prices for both years, GDP increased 1 percent. Hence the chained-price method will calculate that between these years, real GDP increased by

1. A) 1 percent.
2. B) 3 percent.
3. C) 5 percent.
4. D) 6 percent.
5. E) 4 percent.

Answer:  B

Topic:  Real GDP

Skill:  Level 3: Using models

Section:  Chapter 5 Appendix

Status:  Old

AACSB:  Analytical thinking

 

 

3) The table above gives some data about GDP in a country for two years. Using these the chained-dollar method for calculating real GDP, real GDP increased by ________ percent between these two years.

1. A) 4
2. B) 5
3. C) 6
4. D) 10
5. E) 2

Answer:  B

Topic:  Real GDP

Skill:  Level 4: Applying models

Section:  Chapter 5 Appendix

Status:  Old

AACSB:  Analytical thinking

 

 

4) Bananaland produces only bananas and sunscreen and the quantities and prices for 2012 and 2013 are given in the table above. The base year is 2012. Nominal GDP in 2012 is equal to

500. A) $500.
501. B) $625.
502. C) $640.
503. D) $800.
504. E) $100.

Answer:  A

Topic:  Nominal GDP

Skill:  Level 3: Using models

Section:  Chapter 5 Appendix

Status:  Old

AACSB:  Analytical thinking

 

5) Bananaland produces only bananas and sunscreen and the quantities and prices for 2012 and 2013 are given in the table above. The base year is 2012. Nominal GDP in 2013 is equal to

500. A) $500.
501. B) $800.
502. C) $640.
503. D) $625.
504. E) $200.

Answer:  B

Topic:  Nominal GDP

Skill:  Level 3: Using models

Section:  Chapter 5 Appendix

Status:  Old

AACSB:  Analytical thinking

 

6) Bananaland produces only bananas and sunscreen and the quantities and prices for 2012 and 2013 are given in the table above. The base year is 2012. Real GDP in 2012 is equal to

800. A) $800.
801. B) $640.
802. C) $625.
803. D) $500.
804. E) $200.

Answer:  D

Topic:  Real GDP

Skill:  Level 3: Using models

Section:  Chapter 5 Appendix

Status:  Old

AACSB:  Analytical thinking

 

7) Bananaland produces only bananas and sunscreen and the quantities and prices for 2012 and 2013 are given in the table above. Between 2012 and 2013, which grew more rapidly, nominal GDP or real GDP?

1. A) Nominal GDP grew more rapidly.
2. B) Real GDP grew more rapidly.
3. C) Both grew at the same rate.
4. D) Because real GDP and nominal GDP use different prices, it is not possible to determine which grew most rapidly.
5. E) More information is needed to determine which grew more rapidly.

Answer:  A

Topic:  Real GDP

Skill:  Level 3: Using models

Section:  Chapter 5 Appendix

Status:  Old

AACSB:  Analytical thinking

 

8) Bananaland produces only bananas and sunscreen and the quantities and prices for 2012 and 2013 are given in the table above. The base year is 2012. In 2013, which is larger, nominal GDP or real GDP?

1. A) Nominal GDP is larger.
2. B) Real GDP is larger.
3. C) Both are the same size.
4. D) The answer is ambiguous.
5. E) More information is needed to determine which is larger.

Answer:  A

Topic:  Real GDP

Skill:  Level 3: Using models

Section:  Chapter 5 Appendix

Status:  Old

AACSB:  Analytical thinking

 

9) Real GDP measures the value of goods and services produced in a given year using

1. A) base year prices.
2. B) prices of that same year.
3. C) no prices.
4. D) future prices.
5. E) government approved prices.

Answer:  A

Topic:  Real GDP

Skill:  Level 1: Definition

Section:  Chapter 5 Appendix

Status:  Old

AACSB:  Reflective thinking

 

10) In a small country, using prices of 2012, GDP in 2012 was $100 and GDP in 2013 was $110. Using prices of 2013, GDP in 2012 was $200 and GDP in 2013 was $210. The country’s BEA will calculate ________ percent as the growth in real GDP between those years.

1. A) 10
2. B) 5
3. C) 15
4. D) 7.5
5. E) None of the above answers is correct.

Answer:  D

Topic:  Real GDP

Skill:  Level 3: Using models

Section:  Chapter 5 Appendix

Status:  Old

AACSB:  Analytical thinking

 

11) Using prices from 2012, GDP grew 10 percent between 2012 and 2013; using prices from 2013, GDP grew 8 percent between 2012 and 2013. For its link back to the base year, the BEA will use ________ percent as the growth in real GDP between 2012 and 2013.

1. A) 10
2. B) 8
3. C) 2
4. D) 18
5. E) 9

Answer:  E

Topic:  Real GDP

Skill:  Level 3: Using models

Section:  Chapter 5 Appendix

Status:  Old

AACSB:  Analytical thinking

 

5.5   Integrative Questions

 

1) Depreciation is

1. A) fall in the value of an exchange rate.
2. B) the decrease in the value of capital resulting from its use and obsolescence.
3. C) the decrease in the purchasing power of a dollar because of inflation.
4. D) part of consumption expenditure.
5. E) part of net domestic product at factor cost.

Answer:  B

Topic:  Integrative

Skill:  Level 2: Using definitions

Section:  Integrative

Status:  Old

AACSB:  Reflective thinking

 

2) Comparing nominal GDP of 2012 to nominal GDP of twenty years ago

1. A) is an inaccurate measure of the change in total production.
2. B) has no economic meaning.
3. C) will be an accurate measure of the change in total production.
4. D) determines the extent to which the cost of living changed.
5. E) cannot be done because the two GDP measures use different prices.

Answer:  A

Topic:  Integrative

Skill:  Level 2: Using definitions

Section:  Integrative

Status:  Old

AACSB:  Reflective thinking

 

3) If real GDP increases over time, the cost of living will

1. A) always remain constant.
2. B) always decrease.
3. C) always increase.
4. D) either remain constant or increase.
5. E) More information is needed to determine how the cost of living changes.

Answer:  E

Topic:  Integrative

Skill:  Level 3: Using models

Section:  Integrative

Status:  Old

AACSB:  Reflective thinking

 

4) If both the production of goods and services increase and prices rise, then the change in nominal GDP

1. A) definitely understates the change in production.
2. B) definitely accurately reflect the change in production.
3. C) definitely overstates the change in production.
4. D) either understates or might accurately reflect the change in production.
5. E) More information is needed to determine how the change in nominal GDP compares to the change in production.

Answer:  C

Topic:  Integrative

Skill:  Level 3: Using models

Section:  Integrative

Status:  Old

AACSB:  Analytical thinking

 

5) The nation’s supply of productive resources increases if

1. A) investment is greater than depreciation.
2. B) investment equals depreciation.
3. C) investment is less than depreciation.
4. D) Both answers A and B can be correct.
5. E) None of the above answers is correct because the relationship between investment and depreciation has no bearing on the amount of the nation’s productive resources.

Answer:  A

Topic:  Integrative

Skill:  Level 3: Using models

Section:  Integrative

Status:  Old

AACSB:  Analytical thinking

 

6) If a wealthy woman marries her butler, quits paying him and does not hire a new butler, then

1. A) GDP definitely decreases.
2. B) GDP definitely does not change.
3. C) GDP definitely increases.
4. D) GDP either does not change or increases.
5. E) There is not enough information given to reach a conclusion.

Answer:  A

Topic:  Integrative

Skill:  Level 2: Using definitions

Section:  Integrative

Status:  Old

AACSB:  Reflective thinking

 

5.6   Essay: GDP, Income, and Expenditure

 

1) Define and discuss GDP.

Answer:  GDP is the market value of all final goods and services produced within a country in a given time period. Only final goods and services are included. Goods produced as intermediate goods are excluded. The goods and services must be produced within the time period under consideration and so sales of used goods are excluded. The goods and services also are those produced within the country, so production by the country’s firms that takes place in a foreign nation is not included.

Topic:  GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Written and oral communication

 

2) Is every product produced in the United States included in U.S. gross domestic product?

Answer:  No, not every product produced is included in U.S. GDP. For instance, goods produced as intermediate goods are excluded. Only final goods and services are included. In addition, GDP counts only goods traded in markets, so goods and services that people produce for their own use are excluded.

Topic:  GDP

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Written and oral communication

 

3) Define and distinguish between final goods and intermediate goods.

Answer:  Final goods are those goods that are purchased by their final user. Essentially, these goods (and services) have been completed and do not need to go through further processes of completion. Examples of final goods include restaurant meals, lamps, railroad engines, and books. Intermediate goods and services are goods or services produced by one firm, bought by another, and then used as a component in the manufacture of another good or service. Basically, intermediate goods and services are used as a part of another good or service. Lumber used by a carpenter to build a table is an example of an intermediate good.

Topic:  Final and intermediate goods

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Written and oral communication

 

4) What are the categories of total expenditure?

Answer:  There are four categories: Consumption expenditure, spending by households; investment, spending by firms to buy new capital equipment or add to inventories; government expenditure on goods and services, spending by all levels of the government to buy goods and services; and net exports of goods and services, which equals the exports of goods and services minus the imports of goods and services.

Topic:  Expenditure

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Written and oral communication

 

5) Investment, as included in GDP, consists of what?

Answer:  Investment is the purchase of new capital goods such as tools, instruments, machines, buildings, and other constructions and additions to inventories. Investment does not include the purchase or sale of stocks and bonds.

Topic:  Investment

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Written and oral communication

 

6) “The amount of new stocks and bonds issued in a year adds to the country’s GDP.” Is this assertion correct or incorrect? Explain your answer.

Answer:  The assertion is incorrect. Stocks and bonds are not counted in the country’s GDP. GDP measures the production of final goods and services. Issuing new stocks or bonds does not produce a final good or service and so stocks and bonds are not included in GDP.

Topic:  Investment

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Written and oral communication

 

7) Are stocks and bonds considered part of the investment component of GDP?

Answer:  No, stocks and bonds are not part of the investment component of GDP. The investment component of GDP includes the purchase of new capital goods and changes in inventories. Stocks and bonds are not capital goods and are not changes in inventories, so they are not part of investment.

Topic:  Investment

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Written and oral communication

 

8) How are changes in inventory treated in GDP?

Answer:  Changes in inventory are part of the investment component of GDP. So, if Dell produces 100,000 computers this year and sells 95,000, the 5,000 unsold computers that are added to Dell’s inventory are part of the investment component of GDP for this year.

Topic:  Investment, inventory

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Written and oral communication

 

9) Use the idea of the circular flow diagram to explain why the value of production equals total income equals total expenditure.

Answer:  The basic point is that nothing escapes the system. Firms receive the value of their production in the form of revenue. With this revenue, they pay for the factors of production they hire and what is left over after paying their costs is profit. Thus the value of production equals total income. These incomes flow from firms to households. Households then allocate their income to taxes, saving, and consumption. Taxes are collected and spent by the government. Saving by households is spent as investment by firms after being cycled through the banking system. Thus total expenditure equals the value of total income, which equals the value of production by firms.

Topic:  Circular flow

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Written and oral communication

 

10) What is the relationship shown by the circular flow among income, total expenditure, and GDP?

Answer:  They are all equal. The value of production, which is GDP, equals income because firms pay factors (income) the revenue they receive from selling the goods and services they produce (GDP). Next, the revenue that firms receive from selling the goods and services they produce (GDP) is equal to what is spent as expenditures on the goods and services. (total expenditure).

Topic:  Circular flow

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Written and oral communication

 

5.7   Essay: Measuring U.S. GDP

 

1) “To calculate GDP, economists begin with total income earned and then subtract total expenditure by the four sectors of the economy.” Is the previous sentence true or false? Explain your answer.

Answer:  The sentence is false. To calculate GDP, economists can begin with total income and then make a few adjustments but they do not subtract total expenditure. Alternatively, economists can sum total expenditure by the economy’s four sectors, but this summation is GDP.

Topic:  Measuring GDP

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Written and oral communication

 

2) What are the categories of expenditure used in the expenditure approach to measuring GDP?

Answer:  There are four expenditure categories. The expenditure approach calculates the sum of consumption expenditure, investment, government expenditure on goods and services, and net exports of goods and services. Net exports of goods and services are the difference between exports of goods and services and imports of goods and services.

Topic:  Expenditure approach

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Written and oral communication

 

3) The purchase and sale of three types of legal items are not included in this year’s GDP. What are these three items?

Answer:  The three items are: used goods; financial assets; and, intermediate goods.

Topic:  Expenditures not in GDP

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

4) Are sales and purchases of used goods counted as part of GDP? Why or why not?

Answer:  Sales and purchases of used goods are not counted as part of GDP. GDP measures the production of final goods and services produced within a country in a given time period. So GDP for the United States for 2014 includes the goods and services produced within the United States during 2014. The point is that a used good has not been produced within the specified time period. In other words, a used automobile produced in 2012, then in 2014 traded in and resold within the United States was not produced in 2014. Because it was not produced in 2014, it is not a part of the GDP in 2014. (If the automobile was produced within the United States in 2012, the automobile was part of the U.S. GDP in 2012.)

Topic:  Expenditures not in GDP, used goods

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Written and oral communication

 

5) If you sell your textbook to your friend this year, does the sale count in this year’s GDP?

Answer:  No, the sale would not count in this year’s GDP because it is the sale of a used item. The sale of used items is not counted in GDP because GDP measures goods and services produced within a specified time frame. Unless your textbook was produced in this year, it will not count in this year’s GDP. And, even if was produced this year, it has already been included in this year’s GDP when it was initially sold as a new textbook.

Topic:  Expenditures not in GDP, used goods

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Written and oral communication

 

6) Explain how the purchases of used goods and of financial assets affect GDP.

Answer:  Used goods count in GDP for the year in which they were produced. Hence the purchase of a used good is not included in GDP. Purchases of financial assets, such as stocks, are a transfer of funds and not the purchase of a newly produced good or service. When the firm uses the funds it acquires from selling the stocks or bonds to purchase capital, the purchase of the capital will count as investment, but the initial purchase (and sale) of the financial asset itself does not count in GDP.

Topic:  Expenditures not in GDP, used goods and financial assets

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Written and oral communication

 

7) Explain why the purchase and sale of used goods and of financial assets are not included in the calculation of GDP even though transactions in these items amount to billions of dollars daily.

Answer:  GDP measures the value of the goods and services produced in a given year. The key phrase in the definition is “produced in a given year.” Used goods are counted in the GDP of the year in which they are produced and so they are not counted if they are bought and sold again. Financial assets, such as buying and selling stocks and bonds, are not production. These transactions are purely financial and are simply the changing of the ownership of assets. Hence neither the purchase nor the sale of used goods nor of financial assets are included in GDP.

Topic:  Expenditures not in GDP, used goods and financial assets

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Written and oral communication

 

8) “When you purchase $1,000 of stock in Microsoft, your purchase is an investment and hence is part of GDP.” Is this assertion correct? Explain your answer.

Answer:  The assertion is incorrect. Your purchase of $1,000 of Microsoft stock does not increase GDP because it is the purchase of a financial asset. The investment component of GDP is the purchase of new capital goods. Your purchase of stock is not the purchase of a new capital good and hence, as a purely financial transaction, it is not included in GDP.

Topic:  Expenditures not in GDP, financial assets

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Written and oral communication

9) What must be done to net domestic product at factor cost in order to transform it to gross domestic product? Explain why these adjustments are necessary.

Answer:  Several adjustments must be made to net domestic product at factor cost in order to set it equal to GDP. First, indirect taxes must be added and subsidies must be subtracted. These changes are necessary because GDP is measured using market prices whereas net domestic product at factor cost measures what the goods and services cost to produce. The price can be different than the cost when there are taxes and subsidies present. Thus taxes must be added to the cost and subsidies subtracted in order to determine the price that was actually paid. (For instance, a DVD might cost $20 but a $1 sales tax makes the price $21.) Then, the second adjustment is that depreciation also needs to be added. Depreciation is the wear and tear on capital when it is used and when it becomes obsolete. GDP includes expenditure on investment and some investment is used to replace the capital stock that has depreciated. So, when calculating GDP using the income approach, depreciation must be included. But depreciation is not included in net domestic product at factor cost because that amount includes only payments made (as income) to the inputs that helped produce the products and no payment is made for the depreciation of capital. So the addition of depreciation (as well as the adjustments for taxes and subsidies) is necessary in order to convert net domestic product at factor cost into GDP. Finally, because records cannot be 100 percent complete, any statistical discrepancy needs to be added (or subtracted).

Topic:  Income approach, adjustments

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Written and oral communication

 

10) Several adjustments must be made to net domestic product at factor cost in order to calculate GDP. One of these adjustments is adding depreciation. What is depreciation and why must it be added?

Answer:  Depreciation is the wear and tear of capital when it is used and when it becomes obsolete. GDP includes expenditure on investment and some investment is used to replace the capital stock that has depreciated. So, when calculating GDP using the income approach, depreciation must be included. But depreciation is not included in net domestic product at factor cost because that includes only payments made (as income) to the inputs that helped produce the products and no payment is made for the depreciation of capital. Hence depreciation must be added to net domestic product at factor cost in order to calculate GDP.

Topic:  Income approach, adjustments

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Written and oral communication

11) Explain how GDP is measured according to the expenditure and income approaches.

Answer:  GDP can be measured using the expenditure approach or the income approach. The expenditure approach uses the streams of spending and adds together the total expenditure, or spending, on final goods and services. Thus the expenditure approach calculates the sum of consumption expenditure, investment, government expenditure on goods and services, and net exports. The income approach uses another of the circular flows to calculate GDP. The income approach adds together all sources of income and then incorporates a few additional adjustments. Thus the income approach calculates the sum of wages (which is the compensation of employees) plus the net operating surplus (which is the sum of interest, rent, and profit). The sum is “net domestic product at factor cost.” To change this sum to GDP, which is calculated at market prices rather than factor costs, and which is the gross product rather than net product, indirect taxes are added and subsidies subtracted, then depreciation is added, and finally any statistical discrepancy is added.

Topic:  Expenditure approach and income approach

Skill:  Level 4: Applying models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Written and oral communication

 

12) Assume a small nation has the following statistics: its consumption expenditure is $15 million, investment is $2 million, government expenditure on goods and services is $1 million, exports of goods and services to foreigners is $1 million, and imports of goods and services from foreigners is $1.5 million. Calculate this nation’s GDP.

Answer:  The nation’s GDP equals the sum of consumption expenditure, investment, government expenditure on goods and services, and net exports of goods and services, where net exports of goods and services equals of goods and services exports minus imports of goods and services. So, GDP = $15 million + $2 million + $1 million + $1 million – $1.5 million = $17.5 million.

Topic:  Expenditure approach

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

13) The table above gives the values of different expenditures in the United States during 1999. Answer the following questions about the United States.

1. What was the value of net exports of goods and services in 1999?
2. What was (nominal) GDP equal to in 1999?
3. What was the (nominal) value of total production equal to in 1999?

Answer:

1. Net exports of goods and services equals the value of exports of goods and services, $998 billion, minus the value of imports of goods and services, $1,252 billion, or -$254 billion.
2. GDP equals the sum of consumption expenditure, $6,258, plus investment, $1,623, plus government expenditure on goods and services, $1,630, plus net exports, -$254, or $9,257 billion.
3. The value of total production equals the value of GDP, so total production was $9,257 billion in 1999.

Topic:  Expenditure approach

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

14) What is the difference between real and nominal GDP, and why do economists make this distinction?

Answer:  Real GDP is a measure of the final goods and services produced in a year valued at constant prices. Nominal GDP is the final goods and services produced in a year valued at the prices that existed during the year. Economists make the distinction between real GDP and nominal GDP because nominal GDP changes for two reasons: When the production of goods and services changes and when the prices of the goods and services change. Economists want to be able to distinguish between changes brought about by production changes and changes brought about by price changes. Real GDP allows economists to make this distinction. In particular, by using prices that are constant, a change in real GDP represents a change in the production of goods and services and factors out the change in prices. Thus real GDP removes the effect from changes in prices and thereby reveals the change in the underlying production of goods and services.

Topic:  Real GDP versus nominal GDP

Skill:  Level 4: Applying models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Written and oral communication

 

15) Is it possible for nominal GDP to increase while real GDP does not change?

Answer:  Yes, it is possible for nominal GDP to increase while real GDP does not change. Nominal GDP changes if either prices or production change, while real GDP changes only if production changes. If production does not change while the prices of the goods and services increase, real GDP does not change while nominal GDP increases.

Topic:  Real GDP versus nominal GDP

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Written and oral communication

 

16) Can nominal GDP ever be less than real GDP?

Answer:  Yes, nominal GDP can be less than real GDP. If prices generally fall from one period to the next, then nominal GDP is less than real GDP. However, in the U.S. economy, because prices generally rise, nominal GDP typically is greater than real GDP (except in the base period.) But, there is no economic law that states that prices must generally rise and so there is no necessity for nominal GDP to be larger than real GDP.

Topic:  Real GDP versus nominal GDP

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Written and oral communication

 

5.8   Essay: The Use and Limitations of Real GDP

 

1) Explain how our standard of living depends upon our level of real GDP per person, but there might not be a one-to-one relationship between the standard of living and real GDP per person. Give examples of things that can affect one, but not the other.

Answer:  Although GDP has a significant impact on our standard of living, it is not a perfect measure of the standard of living. GDP omits some factors that affect our standard of living. GDP does not include household production, all the tasks performed around the house. It omits underground production, the part of the economy hidden from the government. Real GDP does not include the value of people’s leisure time. And, GDP does not make allowances for environmental quality, health and life expectancy, or political freedom and social justice. All of these factors influence the quality of our life and hence our standard of living. Indeed, occasionally a change will affect GDP and the standard of living in different directions. For instance, if people decide they want more leisure and hence retire early, GDP will decrease because fewer people are working, but the standard of living will increase. Or, if there is an increase in production that creates massive amounts of pollution, GDP increases even though the standard of living likely decreases.

Topic:  Real GDP and the standard of living

Skill:  Level 4: Applying models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Written and oral communication

 

2) “If country A has a higher level of real GDP per person than country B, then people in Country A must enjoy a higher standard of living than people in Country B.” Is this statement true or false and explain your answer.

Answer:  The statement is false. Factors other than real GDP per person affect the standard of living. For instance, factors such as household production, underground production, leisure time, and environmental quality all affect the standard of living and all are omitted from real GDP per person. In addition, the standard of living is influenced by health and life expectancy as well as by the nation’s political freedom and social justice, none of which is measured by real GDP per person. Although real GDP per person is an important factor in determining a country’s standard of living, it is not the only factor.

Topic:  Real GDP and the standard of living

Skill:  Level 4: Applying models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Written and oral communication

 

3) What is a business cycle? What are its phases and turning points?

Answer:  A business cycle is the periodic but irregular up-and-down movement in production and jobs. It has two phases and two turning points. As the economy slows and the growth in real GDP turns negative, the economy enters the recession phase of the business cycle. At the bottom of the recession phase is one turning point, the trough. As the economy moves through the trough, it enters the expansion part of the business cycle during which real GDP grows. Finally, as the economy reaches its high point and swings from an expansion to a recession, the economy passes through the other turning point, the peak.

Topic:  Business cycle

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Written and oral communication

 

4) When total output, income, employment, and trade decline for 6 to 12 months, the economy is in what part of the business cycle?

Answer:  When these real variables decline, the economy is in the recession phase of the business cycle.

Topic:  Business cycle

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Written and oral communication

 

5) List and discuss various types of goods and services omitted from measured GDP.

Answer:  Household production, such as preparing meals and taking care of children, includes productive activities but does not involve market transactions. Therefore, household production is omitted as part of GDP. Underground production, such as working for cash to avoid taxes or engaging in illegal activities, is not reported to the government and hence is not counted as part of GDP. Leisure time and preserving and improving the natural environment are not production per se but are clearly economic goods. They are not counted as part of GDP because it is hard to quantify and put a monetary value on them.

Topic:  Omissions from GDP

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Written and oral communication

 

6) What would happen to measured GDP if more people started hiring workers to do household chores such as cooking and cleaning?

Answer:  GDP is the value of the final goods and services that are produced in an economy over a specified time period. However, GDP, as measured, does not include the value of household production people do for themselves around their homes. Therefore if you wash your car at your home or apartment, the value of the car washing is not included in GDP. However if you hired someone to wash your car at your home or apartment, the value of the car washing would be included in GDP. Thus if more people started hiring workers to do household chores, measured GDP would increase.

Topic:  Household production

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Written and oral communication

 

7) What is “underground production”? Is it included in GDP?

Answer:  Underground production is the production of goods and services that remain hidden from the government. Underground production includes the production of illegal goods and services and the production of legal goods and services but in a way that avoids taxes or regulations. Underground production is not included in GDP.

Topic:  Underground production

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Written and oral communication

 

8) While studying with your friend, your friend states, “Our leisure time increases GDP but lowers our standard of living because it reduces the amount of goods and services we can consume.” Is your friend’s statement correct?

Answer:  Your friend’s assertion is incorrect on two counts. First, leisure time does not increase GDP. Indeed, by taking time away from production, leisure time decreases GDP. Second, leisure time increases our standard of living. People enjoy their leisure time and therefore having more leisure time raises their standard of living.

Topic:  Leisure time

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Written and oral communication

 

9) You buy new water skis and other new equipment for $2,500 and take a week off of your job, where you earn $1,000 a week, to go water skiing. The equipment you purchased was all produced in the United States. You think that the week was worth $4,000. As a result of your vacation, GDP changes by how much?

Answer:  GDP changes by only the $2,500 you spent on the water skis and other equipment.

Topic:  Leisure time

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

10) What is the Human Development Index?

Answer:  The Human Development Index, or HDI, has been developed by the United Nations. The HDI attempts to measure the well-being of people in a given country. This index takes into account the country’s material well-being by looking at real GDP per person and also considers other key factors, such as life expectancy, health, and education levels.

Topic:  Eye on the global economy, which country has the highest standard of living?

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Written and oral communication

 

11) Explain how the United Nations uses the Human Development Index (HDI) to better measure the standard of living around the globe.

Answer:  Economists have long realized that the level of real GDP per person is not a total measure of a country’s standard of living. The United Nations has constructed an index, referred to as HDI, that attempts to measure the well-being of people in a given country. This index takes into account the country’s level of real GDP per person as well as also other key factors, such as life expectancy, health, and education levels.

Topic:  Eye on the global economy, which country has the highest standard of living?

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Written and oral communication

5.9   Essay: Appendix: Measuring Real GDP

 

 

1) The table gives data on the production and prices in a small economy. Use 2012 as the base period.

1. What does nominal GDP equal in 2012?
2. What does real GDP equal in 2012?
3. What does nominal GDP equal in 2013?
4. Using the chained-price method, what does real GDP equal in 2013?

Answer:

8. Nominal GDP in 2012 equals $8.00. Nominal GDP equals the sum of the market value of hot dogs ($6.00) plus the market value of Pepsi ($2.00).
9. Real GDP in 2012 equals $8.00. Real GDP equals nominal GDP in the base period.
10. Nominal GDP in 2013 equals $14.25. Nominal GDP equals the sum of the market value of hot dogs ($10.50) plus the market value of Pepsi ($3.75).
11. Real GDP in 2013 equals $12.00. To calculate real GDP in 2013, we need the percentage change in production between 2012 and 2013 valuing the production at 2012 prices and at 2013 prices. Both percentage changes are 50 percent. (For example, using 2012 prices, production in 2012 is $8.00 and in 2013 is $12.00, a 50 percent increase.) Because both percentage changes are 50 percent, the average production change is 50 percent. Therefore real GDP in 2013 equals real GDP in 2012 multiplied by 150 percent, or ($8.00 × 1.50) = $12.00.

Topic:  Real GDP and nominal GDP

Skill:  Level 4: Applying models

Section:  Chapter 5 Appendix

Status:  Old

AACSB:  Analytical thinking

 

 

2) The table gives data on the production and prices in a small economy. Use 2012 as the base period. Using the chained-price method, what is the growth rate of real GDP from 2012 to 2013?

Answer:  To calculate the growth rate, it is necessary to calculate the growth rates using first 2012 and then 2013 prices and then take the average of the two rates. This procedure gives:

Real GDP in 2012 using 2012 prices = 150

Real GDP 2013 using 2012 prices = 350

Real GDP 2012 using 2013 prices = 250

Real GDP 2013 using 2013 prices = 600

Growth rate using 2012 prices = 133.3 percent

Growth rate using 2013 prices = 140.0 percent

Hence the growth rate equals 136.7 percent, the average of 133.3 percent and 140.0 percent.

Topic:  Real GDP and nominal GDP

Skill:  Level 4: Applying models

Section:  Chapter 5 Appendix

Status:  Old

AACSB:  Analytical thinking

 

Foundations of Microeconomics, 7e (Bade/Parkin)

Chapter 5   Elasticities of Demand and Supply

 

5.1   The Price Elasticity of Demand

 

1) The price elasticity of demand is a measure of

1. A) the equilibrium price of a product.
2. B) buyers’ responsiveness to changes in the price of a product.
3. C) the amount of a product purchased when income increases.
4. D) whether a product is a substitute or a complement.
5. E) how much a change in demand affects the equilibrium price.

Answer:  B

Topic:  Price elasticity of demand

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

2) The price elasticity of demand measures which of the following?

1. A) the slope of the demand curve
2. B) the rate at which demand changes when price changes
3. C) how responsive the quantity demanded is to changes in price
4. D) the percentage-slope of the demand curve
5. E) None of these correctly defines what price elasticity of demand measures.

Answer:  C

Topic:  Price elasticity of demand

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

3) The price elasticity of demand measures the extent to which the quantity demanded changes when

1. A) the price of the good changes.
2. B) the price of a related good changes.
3. C) the expected future price of a good changes.
4. D) consumer preferences change.
5. E) both the demand and supply of the good change.

Answer:  A

Topic:  Price elasticity of demand

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

4) The price elasticity of demand measures the ________ that results from a ________.

1. A) change in quantity demanded; change in price
2. B) change in price; change in the quantity demanded
3. C) percentage change in price; percentage change in the quantity demanded
4. D) percentage change in the quantity demanded; percentage change in price
5. E) percentage change in the quantity demanded; change in price

Answer:  D

Topic:  Price elasticity of demand

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

5) The elasticity of demand is used to

1. A) determine if consumers will or will not buy a product.
2. B) measure how responsive consumers are to a change in price.
3. C) determine in what direction the demand curve shifts if income changes.
4. D) find the market equilibrium.
5. E) determine if a change in price results in a shortage or a surplus.

Answer:  B

Topic:  Price elasticity of demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

6) To determine the price elasticity of demand, we

1. A) need information on consumers’ incomes.
2. B) need to know how much is available.
3. C) compare the percentage change in the quantity demanded to the percentage change in the price.
4. D) compare the change in the quantity to the change in price.
5. E) divide the quantity by the price.

Answer:  C

Topic:  Price elasticity of demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

7) If the price of a good rises, then moving along a demand curve the percentage change in the quantity demanded will be

1. A) positive.
2. B) negative.
3. C) zero.
4. D) either positive, negative, or zero depending on how the demand curve shifted.
5. E) undefined.

Answer:  B

Topic:  Percentage change

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

8) If we ignore the negative or positive sign, the midpoint method of calculating a percentage change in price between two points on a demand curve results in

1. A) a smaller percentage change if the price rises than if it falls.
2. B) the same percentage, regardless of whether the price increases or decreases.
3. C) the price elasticity of demand.
4. D) the price elasticity of supply.
5. E) a higher percentage change if the price rises than if it falls.

Answer:  B

Topic:  Midpoint formula

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

9) Suppose the price of a box of cereal rises from $4 to $6. Using the midpoint method, what is the percentage change in price?

1. A) 50 percent
2. B) 40 percent
3. C) 33 percent
4. D) 67 percent
5. E) None of the above answers is correct.

Answer:  B

Topic:  Midpoint formula

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

10) Suppose the price of a DVD rose from $15 to $17 and the quantity demanded decreased from 1,000 per month to 900 per month. Using the midpoint formula, the ________ percent change in price lead to a ________ percent change in the quantity demanded.

12. A) 12.5; 10.5
13. B) 13.3; 10.0
14. C) 11.8; 11.1
15. D) 8.0; 9.5
16. E) None of the above answers is correct.

Answer:  A

Topic:  Midpoint formula

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

11) Suppose the local university charges $85 per credit hour. If tuition increases from $85 to $93 per credit hour, using the midpoint method, what is the percentage change in price?

8. A) 8.99 percent
9. B) 8.00 percent
10. C) 9.41 percent
11. D) 8.62 percent
12. E) 9.12 percent

Answer:  A

Topic:  Midpoint formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

12) Using the midpoint method, if the price of an airline ticket from Orlando to Pittsburgh falls from $275 to $238, the percentage change in price is

1. A) 1442 percent.
2. B) 14.42 percent.
3. C) 15.54 percent.
4. D) 13.45 percent.
5. E) 68.00 percent.

Answer:  B

Topic:  Midpoint formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

13) If the demand for a good is elastic, then

1. A) people do not change the quantity they demand when the price of the good changes.
2. B) a change in price leads to a smaller percentage change in the quantity demanded.
3. C) people substantially decrease the quantity of the good they buy if its price increases by a small percentage.
4. D) a change in the quantity demanded is smaller than the change in price.
5. E) the quantity demanded divided by the price exceeds 1.00.

Answer:  C

Topic:  Elastic demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

14) When the percentage change in the quantity demanded exceeds the percentage change in price, then demand is

1. A) inelastic.
2. B) unit elastic.
3. C) elastic.
4. D) irrelevant.
5. E) undefined.

Answer:  C

Topic:  Elastic demand

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

15) If the percentage change in price is 10 percent and the demand is elastic, then the percentage change in the quantity demanded

1. A) is greater than 0 percent but less than 10 percent.
2. B) is larger than 10 percent.
3. C) equals 0 percent.
4. D) equals 10 percent.
5. E) More information is needed to determine the magnitude of the change in the quantity demanded.

Answer:  B

Topic:  Elastic demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

16) If the price of a six-pack of Pepsi falls from $4 to $3 and the quantity purchased increases 80 percent, then demand is

1. A) inelastic.
2. B) elastic.
3. C) unit elastic.
4. D) perfectly inelastic.
5. E) perfectly elastic.

Answer:  B

Topic:  Elastic demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

17) Suppose the Chicago Bears football team raises ticket prices by 13 percent and as a result the quantity of tickets demanded decreases by 21 percent. This response means that the demand for Bears tickets is

1. A) inelastic.
2. B) elastic.
3. C) unit elastic.
4. D) perfectly inelastic.
5. E) perfectly elastic.

Answer:  B

Topic:  Elastic demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

18) If the price elasticity of demand for moose hunting lessons is 4.23, then the demand for moose hunting lessons is

1. A) elastic.
2. B) unit elastic.
3. C) inelastic.
4. D) perfectly unit elastic.
5. E) perfectly elastic.

Answer:  A

Topic:  Elastic demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

19) Suppose the demand for peaches sold from one roadside stand in Georgia is perfectly elastic. As a result, a 7 percent increase in the price charged by the owner of this stand leads to

1. A) zero peaches sold by this stand.
2. B) no change in the quantity demanded at this stand.
3. C) a 7 percent decrease in the quantity demanded at this stand.
4. D) a 7 percent decrease in demand at this stand.
5. E) a virtually infinite increase in the quantity demanded at this stand.

Answer:  A

Topic:  Perfectly elastic demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

20) When the percentage change in the quantity demanded is less than the percentage change in price, then demand is

1. A) inelastic.
2. B) unit elastic.
3. C) elastic.
4. D) irrelevant.
5. E) undefined.

Answer:  A

Topic:  Inelastic demand

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

21) Suppose the San Francisco 49ers lower ticket prices by 15 percent and as a result the quantity of tickets demanded increases by 10 percent. This set of results shows that San Francisco 49ers tickets have

1. A) an inelastic demand.
2. B) an elastic demand.
3. C) a unit elastic demand.
4. D) an inelastic supply.
5. E) an elastic supply.

Answer:  A

Topic:  Price elasticity of demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

22) If the percentage change in the quantity demanded is not zero but is less than the percentage change in the price, demand is

1. A) elastic.
2. B) inelastic.
3. C) unit elastic.
4. D) perfectly elastic.
5. E) perfectly inelastic.

Answer:  B

Topic:  Inelastic demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

23) If the price elasticity of demand for razors is 0.32, the demand for razors is

1. A) elastic.
2. B) unit elastic.
3. C) inelastic.
4. D) perfectly inelastic.
5. E) perfectly elastic.

Answer:  C

Topic:  Inelastic demand

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

24) Perfectly inelastic demand means that consumers

1. A) are willing to buy any quantity of the good at a given price, but none at higher prices.
2. B) decrease their consumption as price rises.
3. C) increase their consumption as price rises.
4. D) will buy a certain quantity, regardless of price.
5. E) will buy a huge, almost infinite amount more, if the price falls just a little.

Answer:  D

Topic:  Perfectly inelastic demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

25) Suppose the demand for rescue services in our national parks is perfectly inelastic. This fact would mean that a 31 percent increase in rescue fees leads to

1. A) a 31 percent decrease in the quantity demanded.
2. B) a 31 percent increase in demand.
3. C) a 31 percent decrease in demand.
4. D) no change in the quantity demanded.
5. E) a decrease in the quantity demanded to 0 rescues.

Answer:  D

Topic:  Perfectly inelastic demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

26) When the percentage change in the quantity demanded equals the percentage change in price, then demand is

1. A) inelastic.
2. B) unit elastic.
3. C) elastic.
4. D) irrelevant.
5. E) undefined.

Answer:  B

Topic:  Unit elastic demand

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

27) If the price elasticity of demand for opera tickets in Orlando is 1.00, then the demand for opera tickets in Orlando is

1. A) unit elastic.
2. B) elastic.
3. C) perfectly inelastic.
4. D) inelastic.
5. E) perfectly elastic.

Answer:  A

Topic:  Unit elastic demand

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

28) Suppose a local photographer increases his prices by 8 percent and quantity demanded decreases by the same percentage. This set of facts indicates that the demand for his services is

1. A) inelastic.
2. B) elastic.
3. C) unit elastic.
4. D) perfectly elastic.
5. E) perfectly inelastic.

Answer:  C

Topic:  Unit elastic demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

29) Which of the following does NOT influence the price elasticity of demand?

1. A) the amount by which the demand curve shifts when the price of another good changes
2. B) the number of substitutes available to consumers
3. C) the price of the good relative to total income
4. D) the time period buyers have to respond to a price change
5. E) whether the good is a necessity or a luxury

Answer:  A

Topic:  Factors that influence the price elasticity of demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

30) If a substitute good is easy to find, then demand for a good is

1. A) elastic.
2. B) inelastic.
3. C) unit elastic.
4. D) perfectly inelastic.
5. E) Substitutes don’t have any effect on elasticity.

Answer:  A

Topic:  Elasticity, substitutes

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

31) The demand for a good is more elastic if the

1. A) good is a necessity.
2. B) good has few substitutes.
3. C) good is narrowly defined.
4. D) supply of the good is plentiful.
5. E) Both answers B and C are correct.

Answer:  C

Topic:  Elasticity, substitutes

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

32) If a good has many close substitutes, then its demand is most likely

1. A) elastic.
2. B) inelastic.
3. C) unit elastic.
4. D) perfectly inelastic.
5. E) elastic or inelastic depending on whether the price of the good is increasing or decreasing.

Answer:  A

Topic:  Elasticity, substitutes

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

33) If a product is narrowly defined, it is likely to

1. A) have many substitutes and therefore its demand is elastic.
2. B) have few substitutes, and therefore its demand is less elastic.
3. C) be unique, and therefore its demand is inelastic.
4. D) be unique and have many substitutes.
5. E) have a larger proportion of income spent on it.

Answer:  A

Topic:  Elasticity, substitutes

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

 

34) Of the following, which good has the most elastic demand?

1. A) food
2. B) breakfast food
3. C) cereal
4. D) Post Raisin Bran
5. E) Post Raisin Brand purchased at a Safeway grocery store

Answer:  E

Topic:  Elasticity, substitutes

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

35) All of the following statements are true EXCEPT

1. A) the demand for food is less elastic than the demand for a Hawaiian vacation.
2. B) the demand for clothing is less elastic than the demand for blue jeans.
3. C) the demand for gasoline is more elastic the longer the time elapsed.
4. D) the smaller the proportion of income spent on a good, the more inelastic demand will be.
5. E) the demand for Nike running shoes is less elastic than the demand for shoes.

Answer:  E

Topic:  Price elasticity of demand

Skill:  Level 5: Critical thinking

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

36) The price elasticity of demand for Red Delicious apples, a certain type of apple, is likely

1. A) elastic.
2. B) inelastic.
3. C) perfectly elastic.
4. D) perfectly inelastic.
5. E) unit elastic.

Answer:  A

Topic:  Elasticity, substitutes

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

 

37) Which of the following statements is correct?

1. A) The demand for New Balance shoes is more elastic than the demand for shoes in general.
2. B) The demand for salt is very elastic.
3. C) The demand for luxuries is less elastic than the demand for necessities.
4. D) The demand for a narrowly defined good is less elastic than the demand for a more broadly defined good.
5. E) The larger the proportion of income spent on a good, the smaller the elasticity of demand.

Answer:  A

Topic:  Elasticity, substitutes

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

38) One reason why the demand for gasoline is inelastic is because

1. A) substitutes for gas abound.
2. B) substitutes for gas are hard to find.
3. C) gasoline is a luxury item.
4. D) people have a long time to shop around for automobiles that use less gas.
5. E) buses run on diesel fuel rather than gasoline.

Answer:  B

Topic:  Elasticity, substitutes

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

39) The longer the time that has elapsed since the price of a good changed, the

1. A) more elastic the demand for that good.
2. B) steeper the demand curve.
3. C) less elastic the demand for that good.
4. D) smaller the amount of that good bought.
5. E) fewer substitutes available for the good.

Answer:  A

Topic:  Elasticity, time since the price changed

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

 

40) As more time passes, the price elasticity of gasoline

1. A) increases.
2. B) decreases.
3. C) stays the same.
4. D) becomes perfectly inelastic.
5. E) becomes perfectly elastic.

Answer:  A

Topic:  Elasticity, time since the price changed

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

41) Demand for a product tends to be more elastic the longer the time period considered because

1. A) sellers have more time to expand production.
2. B) buyers have more time to search for substitutes.
3. C) price increases over time make the price larger relative to buyers’ incomes.
4. D) the inverse relationship between the price and the quantity demanded weakens over time.
5. E) buyers get used to the new price.

Answer:  B

Topic:  Elasticity, time since the price changed

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

42) The long-run price elasticity of demand for electricity is ________ the short-run price elasticity of demand for electricity.

1. A) greater than
2. B) less than
3. C) equal to
4. D) not comparable to
5. E) unrelated to

Answer:  A

Topic:  Elasticity, time since the price changed

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

 

43) A product’s price elasticity of demand is likely to be greater

1. A) if it only has a few substitutes.
2. B) if consumers spend a small proportion of income on the product.
3. C) the less time consumers have to adjust to price changes.
4. D) if the product is a luxury good rather than a necessity.
5. E) Both answers C and D are correct.

Answer:  D

Topic:  Elasticity, luxury good

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

44) The demand for luxury suites at basketball games is more elastic if

1. A) these suites are a necessity.
2. B) these suites are a luxury item.
3. C) few close substitutes exist for these suites.
4. D) basketball fans have little time to look for alternative suites.
5. E) poorer fans cannot afford luxury suites.

Answer:  B

Topic:  Elasticity, luxury good

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

45) The demand for a necessity generally is

1. A) very elastic.
2. B) infinitely elastic.
3. C) unaffected by income.
4. D) inelastic.
5. E) unit elastic.

Answer:  D

Topic:  Elasticity, necessities

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

 

46) The demand for necessities generally is ________ the demand for luxury goods.

1. A) as elastic as
2. B) more elastic than
3. C) less elastic than
4. D) flatter than
5. E) not comparable to

Answer:  C

Topic:  Elasticity, necessities

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

47) If a good is a necessity, it has ________ substitutes and its demand is ________.

1. A) poor; elastic
2. B) poor; inelastic
3. C) many; elastic
4. D) many; inelastic
5. E) many; precisely unit elastic

Answer:  B

Topic:  Elasticity, necessities

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

48) You are more sensitive to a change in price if you

1. A) spend a lot of your income on the good.
2. B) spend a small percentage of your income on the good.
3. C) buy very little of the good.
4. D) do not buy the good regularly.
5. E) have a very inelastic demand for the good.

Answer:  A

Topic:  Elasticity, fraction of income

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

 

49) We calculate the price elasticity of demand as the

1. A) ratio of the percentage change in the quantity demanded to the percentage change in price.
2. B) change in quantity divided by the change in price.
3. C) ratio of the percentage change in the price to the percentage change in quantity.
4. D) percentage change in the quantity demanded divided by the percentage change in income.
5. E) equilibrium quantity divided by the equilibrium price.

Answer:  A

Topic:  Price elasticity of demand, formula

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

50) What is the formula for the price elasticity of demand? The percentage change in the

1. A) quantity demanded divided by the percentage change in the price of a substitute or complement.
2. B) quantity supplied divided by the percentage change in price.
3. C) quantity demanded divided by the percentage change in price.
4. D) quantity demanded divided by the percentage change in income.
5. E) equilibrium quantity demanded divided by the equilibrium price.

Answer:  C

Topic:  Price elasticity of demand, formula

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

51) Demand is price inelastic if ________ percentage change in the price leads to a ________ percentage change in the quantity demanded.

1. A) a small; large
2. B) a large; small
3. C) any; large
4. D) Both answers A and B are correct.
5. E) None of the above answers is correct.

Answer:  B

Topic:  Price elasticity of demand, formula

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

 

52) If a 10 percent price increase generates a 10 percent decrease in quantity demanded, then demand is

1. A) unit elastic.
2. B) elastic.
3. C) perfectly inelastic.
4. D) perfectly elastic.
5. E) inelastic.

Answer:  A

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

53) If a 10 percent price increase generates a 20 percent decrease in quantity demanded, then demand is

1. A) elastic.
2. B) perfectly inelastic.
3. C) perfectly elastic.
4. D) inelastic.
5. E) unit elastic.

Answer:  A

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

54) If a 30 percent price increase generates a 20 percent decrease in quantity demanded, then demand is

1. A) inelastic.
2. B) elastic.
3. C) unit elastic.
4. D) perfectly elastic.
5. E) perfectly inelastic.

Answer:  A

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

 

55) The price of furnace filters increased by 5 percent and the quantity demanded did not change. The price elasticity of demand for furnace filters is

1. A) perfectly inelastic.
2. B) inelastic.
3. C) elastic.
4. D) unit elastic.
5. E) perfectly elastic.

Answer:  A

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

56) If a 2 percent change in price leads to a ________ percent change in the quantity demanded, then demand is ________.

1. A) 2; elastic
2. B) 1; unit elastic
3. C) 3; inelastic
4. D) 1; inelastic
5. E) 0; perfectly elastic

Answer:  D

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

57) If a 2 percent change in price leads to a ________ percent change in the quantity demanded, then demand is ________.

1. A) 2; elastic
2. B) 1; unit elastic
3. C) 3; inelastic
4. D) 4; elastic
5. E) 0; perfectly elastic

Answer:  D

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

 

58) If the price elasticity of demand for a good is 2, then a 10 percent increase in the price of that good ________ the quantity demanded by ________ percent.

1. A) increases; 20
2. B) decreases; 2
3. C) decreases; 10
4. D) decreases; 20
5. E) increases; 8

Answer:  D

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

59) When the price of tacos rise 4 percent, the quantity demanded decreases 10 percent. What is the price elasticity of demand for tacos?

40. A) 40.0
41. B) 25.0
42. C) 0.4
43. D) 2.5
44. E) 10.0

Answer:  D

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

60) When we use the midpoint method to compute the price elasticity of demand we use

1. A) the original quantity and the average price.
2. B) the original price and the average quantity.
3. C) the average price and the average quantity.
4. D) either the original or new price, and the average quantity.
5. E) the average price and the original quantity.

Answer:  C

Topic:  Price elasticity of demand

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  New

AACSB:  Reflective thinking

 

 

61) Suppose the price of a ticket to a Lenny Kravitz concert is $41 and at that price, the quantity of tickets demanded is 17,000 per concert. Using the midpoint method of calculating percentage changes, if Mr. Kravitz raises the price to $48 and the quantity demanded decreases to 16,000, the price elasticity of demand for his concert tickets is

15. A) 15.73.
16. B) 6.06.
17. C) 1.00.
18. D) 0.39.
19. E) 0.93.

Answer:  D

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

62) When the price of a burrito increases from $2 to $4, the quantity demanded decreases from 50 to 40. Using the midpoint method, the price elasticity of demand equals

3. A) 1/3.
4. B) 3.
5. C) 2.
6. D) 1.
7. E) 1/2.

Answer:  A

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

63) When the price of Cosmopolitan magazine decreases from $5 to $3, the quantity demanded increases from 600,000 to 1,000,000 copies each month. Using the midpoint method, the price elasticity of demand equals

1. A) 1.
2. B) 3.
3. C) 2.
4. D) 1/3.
5. E) 1/2.

Answer:  A

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

 

64) If a 4 percent change in the price of a good leads to a 3 percent change in quantity demanded, the price elasticity of demand equals

1. A) 1.33.
2. B) 0.75.
3. C) 4.00.
4. D) 3.44.
5. E) None of the above answers is correct.

Answer:  B

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

65) A 10 percent increase in price leads to a 20 percent decrease in the quantity demanded. The price elasticity of demand is equal to

1. A) 0.5.
2. B) 1.0.
3. C) 2.0.
4. D) 20.0.
5. E) 10.0.

Answer:  C

Topic:  Price elasticity of demand, formula

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

66) A firm can sell 10 units if the price is $100 and can sell 8 units if the price is $125. Using the midpoint method, what is the price elasticity of demand?

1. A) 0.75
2. B) 1.00
3. C) 1.25
4. D) 0.50
5. E) 0.0

Answer:  B

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

 

67) When the price of a cup of coffee falls from $3.00 to $2.50, the quantity demanded increases from 1,000 per month to 1,150 per month. Using the midpoint method, the price elasticity of demand is

1. A) 0.77.
2. B) 1.30.
3. C) 0.07.
4. D) 3.00.
5. E) 2.50.

Answer:  A

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

68) During last year the price of regular unleaded gasoline in Oakland, California increased 11.0 percent. If the price elasticity of demand for gasoline was 0.13, the price hike means that the quantity demanded decreased by

1. A) 1.43 percent.
2. B) 8.46 percent.
3. C) 0.16 percent.
4. D) 31 percent.
5. E) 6.46 percent.

Answer:  A

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

69) If the price elasticity of demand for a product is 2.5, then a price increase of 1.5 percent decreases the quantity demanded by

1. A) 1.55 percent.
2. B) 3.50 percent.
3. C) 5.00 percent.
4. D) 3.75 percent.
5. E) 1.00 percent.

Answer:  D

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

 

70) Suppose the University of Oklahoma increases the price of student football tickets for the 2012 season by 30 percent. If the price elasticity of demand for student tickets is 1.22, the price increase leads to

36. A) a 36.6 percent decrease in the quantity demanded.
37. B) a 30 percent decrease in the quantity demanded.
38. C) a 1.22 percent decrease in the quantity demanded.
39. D) 28.78 percent decrease in the quantity demanded.
40. E) no change in the quantity demanded.

Answer:  A

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

 

71) Using the data in the table above, when the price of a skirt rises from $20 to $35, what is the price elasticity of demand? (Use the midpoint method.)

1. A) 0.33
2. B) 0.25
3. C) 1.00
4. D) 1.33
5. E) 3.00

Answer:  A

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

72) Using the data in the table above, the demand for skirts is

1. A) elastic.
2. B) unit elastic.
3. C) inelastic.
4. D) indeterminate.
5. E) perfectly inelastic.

Answer:  C

Topic:  Price elasticity of demand

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

 

73) The data in the table above give two points on the demand curve for pizza. Using the midpoint method, when the price of a pizza falls from $10 to $9, what is the percentage change in price?

8. A) 8.2 percent
9. B) 15.5 percent
10. C) 10.5 percent
11. D) 5.0 percent
12. E) 1.0 percent

Answer:  C

Topic:  Midpoint formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

74) The data in the table above give two points on the demand curve for pizza. Using the midpoint method, when the price of a pizza falls from $10 to $9, what is the percentage change in the quantity demanded?

22. A) 22.2 percent
23. B) 10.0 percent
24. C) 15.5 percent
25. D) 5.2 percent
26. E) 25 percent

Answer:  A

Topic:  Midpoint formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

75) The data in the table above give two points on the demand curve for pizza. Using the midpoint method, when the price of a pizza falls from $10 to $9, what is the price elasticity of demand?

1. A) 0.5
2. B) 0.6
3. C) 0.9
4. D) 2.1
5. E) 8.6

Answer:  D

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

 

Price (dollars)	Quantity
10	0
9	1
8	2
7	3
6	4
5	5
4	6
3	7
2	8
1	9

 

76) Using the table above, what is the elasticity of demand between the prices of $9 and $7?

1. A) 1/4
2. B) 1
3. C) 2
4. D) 4
5. E) 6

Answer:  D

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  New

AACSB:  Analytical thinking

77) Using the table above, what is the elasticity of demand between the prices of $6 and $4?

1. A) 1
2. B) 3/2
3. C) 2/3
4. D) 2
5. E) 4

Answer:  A

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  New

AACSB:  Analytical thinking

 

 

78) Using the table above, the elasticity of demand is equal to 1 at a price of

8. A) $8.
9. B) $6.
10. C) $5.
11. D) $3.
12. E) $1.

Answer:  C

Topic:  Price elasticity of demand, linear demand curve

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  New

AACSB:  Analytical thinking

79) In the figure above, using the midpoint method, the price elasticity of demand when the price falls from $8 to $7 is equal to

2. A) 2.50.
3. B) 1.63.
4. C) 0.40.
5. D) 0.62.
6. E) 1.00.

Answer:  A

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

 

80) In the figure above, using the midpoint method, the price elasticity of demand when the price falls from $7 to $6 is equal to

2. A) 2.50.
3. B) 1.63.
4. C) 0.40.
5. D) 0.62.
6. E) 1.00.

Answer:  B

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

81) In the figure above, using the midpoint method, the price elasticity of demand when the price falls from $6 to $5 is equal to

2. A) 2.50.
3. B) 1.63.
4. C) 1.10.
5. D) 0.91.
6. E) 1.00.

Answer:  C

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

82) In the mid-1970s, Newsweek magazine reported that the city of Atlanta lowered its city bus fares from 40 cents to 15 cents a passenger. The number of bus riders increased by 15 percent after the fare cut. This set of results indicates that the demand for bus rides in Atlanta at that time was

1. A) unit elastic.
2. B) perfectly inelastic.
3. C) elastic.
4. D) inelastic.
5. E) perfectly elastic.

Answer:  D

Topic:  Price elasticity of demand, formula

Skill:  Level 4: Applying models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

 

83) When hamburger is $3 per pound, Ms. Rush buys 6 pounds. When hamburger is $2 per pound, Ms. Rush buys 10 pounds. Describe Ms. Rush’s demand between these two prices.

1. A) elastic
2. B) unit elastic
3. C) inelastic
4. D) perfectly inelastic
5. E) perfectly elastic

Answer:  A

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

84) Economists use elasticity to measure the responsiveness of quantity to a change in price rather than the slope of the demand curve because elasticity is

1. A) independent of the units of measurement.
2. B) dependent on the units of measurement.
3. C) easier to calculate.
4. D) harder to calculate.
5. E) always negative whereas the slope is always positive.

Answer:  A

Topic:  Slope and elasticity

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

85) Which of the following is correct?

1. All linear demand curves have a constant slope and a constant price elasticity of demand.
2. The price elasticity of demand changes while moving along a downward-sloping linear demand curve.

iii.   The magnitude of the slope of all linear demand curves is equal to the price elasticity of demand.

1. A) i only
2. B) ii only
3. C) iii only
4. D) i and ii
5. E) i, ii, and iii

Answer:  B

Topic:  Price elasticity of demand, linear demand curve

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

 

86) Moving downward along a linear (straight-line) downward sloping demand curve, the

1. A) slope is constant.
2. B) price is constant.
3. C) quantity is constant.
4. D) elasticity is constant.
5. E) None of the above answers is correct.

Answer:  A

Topic:  Price elasticity of demand, linear demand curve

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

87) Moving downward along a linear (straight-line) downward-sloping demand curve, the

1. A) price elasticity of demand does not change.
2. B) quantity demanded decreases.
3. C) demand becomes more elastic.
4. D) demand becomes less elastic.
5. E) total revenue never changes.

Answer:  D

Topic:  Price elasticity of demand, linear demand curve

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

88) As you move up along a straight-line demand curve,

1. A) the price elasticity of demand decreases in size.
2. B) the price elasticity of demand increases in size.
3. C) total revenue always decreases.
4. D) total revenue always increases.
5. E) total revenue never changes.

Answer:  B

Topic:  Price elasticity of demand, linear demand curve

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

 

89) Which of the following statements is correct for the price elasticity of demand along a linear, downward-sloping demand curve?

1. A) The price elasticity of demand is constant because the slope is constant.
2. B) At low prices, demand is elastic but at high prices demand is inelastic.
3. C) At high prices, demand is elastic but at low prices demand is inelastic.
4. D) The price elasticity of demand is not defined for a linear demand curve because the slope is constant.
5. E) None of the above answers is correct.

Answer:  C

Topic:  Price elasticity of demand, linear demand curve

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

90) At the midpoint of a linear, downward-sloping demand curve, the price elasticity of demand is

1. A) greater than one.
2. B) equal to one.
3. C) less than one but greater than zero.
4. D) zero.
5. E) infinite.

Answer:  B

Topic:  Price elasticity of demand, linear demand curve

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

91) Along a linear (straight-line) downward-sloping demand curve, demand is unit elastic at

1. A) the highest price.
2. B) the lowest price.
3. C) the midpoint.
4. D) all points on the linear demand curve.
5. E) None of the above because linear demand curves are never unit elastic.

Answer:  C

Topic:  Price elasticity of demand, linear demand curve

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

 

92) The price of the good multiplied by the quantity sold is its

1. A) total revenue.
2. B) total cost.
3. C) total spending.
4. D) total income.
5. E) total quantity.

Answer:  A

Topic:  Total revenue

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

93) Total revenue equals

1. A) price × quantity sold.
2. B) profit – cost.
3. C) price.
4. D) quantity sold – cost.
5. E) cost × price.

Answer:  A

Topic:  Total revenue

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

94) The total revenue test says

1. i) Demand is elastic if a decrease in price results in an increase in total revenue.
2. ii) Total revenue is maximized when demand is elastic.

iii)   Total revenue is minimized when demand is unit elastic.

1. A) i only
2. B) i and ii
3. C) ii and iii
4. D) i, ii and iii
5. E) ii only

Answer:  A

Topic:  Elasticity and total revenue

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

 

95) If demand is price inelastic and the price is lowered, which of the following occurs?

1. A) The quantity sold decreases.
2. B) The total expenditure increases and the total revenue decreases.
3. C) The total revenue of the firms selling the product is unchanged.
4. D) The total revenue of the firms selling the product decreases.
5. E) The total expenditure decreases and the total revenue increases.

Answer:  D

Topic:  Elasticity and total revenue

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

96) If demand is inelastic and the price falls, the total revenue

1. A) rises.
2. B) falls.
3. C) remains constant.
4. D) might rise, fall, or remain constant.
5. E) becomes negative.

Answer:  B

Topic:  Elasticity and total revenue

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

97) Total revenue increases if the price of the good

1. A) rises and demand is elastic.
2. B) rises and demand is inelastic.
3. C) rises and demand is unit elastic.
4. D) falls and supply is inelastic.
5. E) falls and demand is unit elastic.

Answer:  B

Topic:  Elasticity and total revenue

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

 

98) If the supply of a good decreases and it causes total revenue to increase, this shows that the good has an

1. A) inelastic demand
2. B) elastic demand
3. C) unit elastic demand
4. D) inelastic supply
5. E) elastic supply

Answer:  A

Topic:  Elasticity and total revenue

Skill:  Level 5: Critical thinking

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

99) You own a small store. Your cashier thinks you should raise prices to increase your total revenue and your customer thinks you should lower prices to increase your total revenue. The cashier thinks the price elasticity of demand is ________ and the customer believes the price elasticity of demand is ________.

1. A) inelastic; elastic
2. B) elastic; inelastic
3. C) elastic; elastic
4. D) inelastic; inelastic
5. E) unit elastic; elastic

Answer:  A

Topic:  Elasticity and total revenue

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

100) Products X, Y, and Z have price elasticities of 3.0, 0.80, and 1.0 respectively. Total revenue decreases if the price of

1. A) product X falls.
2. B) product Y falls.
3. C) product Z falls.
4. D) product X or product Z falls.
5. E) product Y or product Z falls.

Answer:  B

Topic:  Elasticity and total revenue

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

 

101) If a 2 percent rise in price leads to a 4 percent decrease in quantity demanded, then demand is

1. A) elastic and total revenue decreases.
2. B) elastic and total revenue increases.
3. C) inelastic and total revenue decreases.
4. D) elastic, but we cannot tell what happens to total revenue without more information.
5. E) Total revenue decreases but we cannot tell if the demand is elastic or inelastic without more information.

Answer:  A

Topic:  Elasticity and total revenue

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

102) If the demand for insulin is inelastic, an increase in insulin prices leads to

1. A) less total revenue for insulin makers.
2. B) more total revenue for insulin makers.
3. C) no change in total revenue for insulin makers.
4. D) first a decrease, then an increase in total revenue for insulin makers.
5. E) Total revenue probably changes, but we need more information about the change in total expenditures on insulin to determine if the total revenue rises, falls, or stays the same.

Answer:  B

Topic:  Elasticity and total revenue

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

103) If the price elasticity of demand for gasoline equals 0.3, then an increase in the price of a gallon of gasoline from $3.70 to $3.90

1. A) decreases total revenue.
2. B) increases total revenue.
3. C) leads to no change in total revenue.
4. D) makes the demand for gasoline elastic.
5. E) Both answers B and D are correct.

Answer:  B

Topic:  Elasticity and total revenue

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

 

104) If a Pizza Hut raises the price of a slice of pizza from $3.00 to $3.25, the quantity demanded decreases from 1,500 slices per week to 1,300 slices per week. The demand for slices of pizza is ________ and the total revenue received by this Pizza Hut ________.

1. A) elastic; decreases
2. B) inelastic; decreases
3. C) elastic; increases
4. D) inelastic; increases
5. E) unit elastic; does not change

Answer:  A

Topic:  Elasticity and total revenue

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

105) If an Atlanta bakery raises the price of their rye bread by 11 percent and the quantity demanded decreases by 11 percent, then the demand for the rye bread is ________ and the bakery’s total revenue ________.

1. A) unit elastic; does not change
2. B) unit elastic; increases
3. C) unit elastic; decreases
4. D) elastic; does not change
5. E) inelastic; does not change

Answer:  A

Topic:  Elasticity and total revenue

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

106) Suppose the Oakland Raiders football team increases their season ticket prices and total revenue from ticket sales falls, but not to zero. This fact means that the demand for Raiders tickets is

1. A) inelastic.
2. B) elastic.
3. C) unit elastic.
4. D) perfectly elastic.
5. E) perfectly inelastic.

Answer:  B

Topic:  Elasticity and total revenue

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

 

107) After long hair for men became popular, barbers found that their incomes fell. In an attempt to boost their incomes, many barbers raised the price of a haircut and yet their total revenue fell even more. What can explain this result?

1. A) The demand for haircuts by barbers is elastic because of many substitutes.
2. B) The demand for haircuts by barbers became inelastic after the increase in price.
3. C) Haircuts are inferior products.
4. D) The demand for haircuts by barbers is inelastic because most people need haircuts.
5. E) None of the above can explain the phenomenon.

Answer:  A

Topic:  Elasticity and total revenue

Skill:  Level 4: Applying models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

108) Taco Bell firm raises the price of its tacos. The price elasticity of demand for Taco Bell tacos equals 5.0. What happens to the Taco Bell’s total revenue?

1. A) nothing
2. B) It increases.
3. C) It decreases.
4. D) It becomes negative.
5. E) It might change, but more information is needed to determine if it increases, decreases, or does not change.

Answer:  C

Topic:  Elasticity and total revenue

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

109) Pizza Hut lowers the price of its pizza. The price elasticity of demand for Pizza Hut pizza equals 0.3. What happens to the Pizza Hut’s total revenue?

1. A) nothing
2. B) It increases.
3. C) It decreases.
4. D) It becomes negative.
5. E) It might change, but more information is needed to determine if it increases, decreases, or does not change.

Answer:  C

Topic:  Elasticity and total revenue

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

 

110) KFC raises the price of its grilled chicken. The price elasticity of demand for KFC grilled chicken is 0.8. What happens to the KFC’s total revenue?

1. A) nothing
2. B) It increases.
3. C) It decreases.
4. D) It becomes negative.
5. E) It might change, but more information is needed to determine if it increases, decreases, or does not change.

Answer:  B

Topic:  Elasticity and total revenue

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

111) A Minnesota snowmobile dealer lowers its prices in February by 16 percent and the quantity demanded increases by 2 percent. Thus the demand for snowmobiles from this dealer is ________ and the dealer’s total revenue will ________.

1. A) elastic; increase
2. B) elastic; decrease
3. C) inelastic; increase
4. D) inelastic; decrease
5. E) unit elastic; decrease

Answer:  D

Topic:  Elasticity and total revenue

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

112) In the figure above, what is the total revenue at point A?

1. A) $20
2. B) $150
3. C) $170
4. D) $3,000
5. E) 150 quantity units

Answer:  D

Topic:  Total revenue

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

113) In the figure above, using the midpoint method, what is the price elasticity of demand between points A and B?

1. A) 0.05
2. B) 0.13
3. C) 0.43
4. D) 1.00
5. E) 2.33

Answer:  C

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

114) In the figure above, what happens to total revenue as we move from point A to point B?

1. A) It increases.
2. B) It decreases.
3. C) It remains constant.
4. D) It becomes negative.
5. E) More information about the elasticity of demand is needed to determine if it increases, decreases, or does not change.

Answer:  B

Topic:  Elasticity and total revenue

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

115) In the figure above, using the midpoint method, what is the price elasticity of demand when the price falls from $8 to $7?

4. A) 4.0
5. B) 5.0
6. C) 0.5
7. D) 0.4
8. E) 0.25

Answer:  B

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

116) In the figure above, if the price falls from $8 to $7, demand is

1. A) elastic.
2. B) inelastic.
3. C) unit elastic.
4. D) income elastic.
5. E) perfectly elastic.

Answer:  A

Topic:  Total revenue test

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

117) In the figure above, when the price falls from $8 to $7, total revenue

1. A) increases from $120 to $210 so demand is elastic.
2. B) decreases from $210 to $120 so demand is inelastic.
3. C) increases from $120 to $210 so demand is inelastic.
4. D) decreases from $210 to $120 so demand is elastic.
5. E) increases from $120 to $210, but more information is needed to determine whether demand is elastic, inelastic, or unit elastic.

Answer:  A

Topic:  Total revenue test

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

118) A firm raises the price it charges. The firm’s total revenue decreases. What can we conclude about the price elasticity of demand?

1. A) Demand is elastic.
2. B) Demand is unit elastic.
3. C) Demand is inelastic.
4. D) Demand is perfectly inelastic.
5. E) Not enough information is given to conclude anything about price elasticity of demand.

Answer:  A

Topic:  Total revenue test

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

119) A firm raises the price it charges. The firm’s total revenue does not change. What can we conclude about the price elasticity of demand?

1. A) Demand is elastic.
2. B) Demand is unit elastic.
3. C) Demand is inelastic.
4. D) Demand is perfectly elastic.
5. E) Not enough information is given to conclude anything about price elasticity of demand.

Answer:  B

Topic:  Total revenue test

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

120) A firm lowers the price it charges. The firm’s total revenue decreases. What can we conclude about the price elasticity of demand?

1. A) Demand is elastic.
2. B) Demand is unit elastic.
3. C) Demand is inelastic.
4. D) Demand is perfectly elastic.
5. E) Not enough information is given to conclude anything about price elasticity of demand.

Answer:  C

Topic:  Total revenue test

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

121) If, when the price falls, total revenue increases, demand is

1. A) elastic.
2. B) inelastic.
3. C) unit elastic.
4. D) perfectly inelastic.
5. E) None of the above answers is correct because total revenue always decreases when the price of the good falls.

Answer:  A

Topic:  Total revenue test

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

122) The price elasticity of demand for an agricultural product is 0.4. This value means that, when the quantity decreases 1 percent, the price

1. A) falls 4 percent.
2. B) rises 4 percent.
3. C) falls 2.5 percent.
4. D) rises 2.5 percent.
5. E) rises 0.25 percent.

Answer:  D

Topic:  Farm revenue and elasticity

Skill:  Level 4: Applying models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

123) The price elasticity of demand is a measure of the extent to which the quantity demanded of a good changes when ________ and all other influences on buyers’ plans remain the same.

1. A) income changes
2. B) the price of a related good changes
3. C) the price of the good changes
4. D) the demand alone changes
5. E) both the demand and the supply simultaneously change

Answer:  C

Topic:  Price elasticity of demand

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

124) Suppose the price of a movie falls from $9 to $7. Using the midpoint method, what is the percentage change in price?

1. A) 33 percent
2. B) -33 percent
3. C) 25 percent
4. D) -25 percent
5. E) -97 percent

Answer:  D

Topic:  Midpoint formula

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

125) Suppose the price of a tie rises from $45 to $55. Using the midpoint method, what is the percentage change in price?

1. A) 10 percent
2. B) -10 percent
3. C) 20 percent
4. D) -20 percent
5. E) 100 percent

Answer:  C

Topic:  Midpoint formula

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

126) Demand is elastic if

1. A) consumers respond strongly to changes in the product’s price.
2. B) a large percentage change in price brings about a small percentage change in quantity demanded.
3. C) a small percentage change in price brings about a small percentage change in quantity demanded.
4. D) the quantity demanded is not responsive to price changes.
5. E) the demand curve is vertical.

Answer:  A

Topic:  Elastic demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

127) During the winter of 2011-2012, the price of fuel oil increased enormously but the quantity demanded decreased only a little. This response indicates that the demand for fuel oil was

1. A) inelastic.
2. B) elastic.
3. C) unit elastic.
4. D) perfectly elastic.
5. E) perfectly inelastic.

Answer:  A

Topic:  Inelastic demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

128) If substitutes for a good are readily available, the demand for that good

1. A) does not change substantially if the price rises.
2. B) does not change substantially if the price falls.
3. C) is inelastic.
4. D) is elastic.
5. E) Both answers A and B are correct.

Answer:  D

Topic:  Elasticity, substitutes

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

129) If the price of a product increases by 5 percent and the quantity demanded decreases by 5 percent, then the elasticity of demand is

1. A) 0.
2. B) 1.
3. C) indeterminate.
4. D) 5.
5. E) 25.

Answer:  B

Topic:  Price elasticity of demand, formula

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

130) The price of a bag of pretzels rises from $2 to $3 and the quantity demanded decreases from 100 to 60. What is the price elasticity of demand?

1. A) 1.0
2. B) 1.25
3. C) 40.0
4. D) 20.0
5. E) 0.80

Answer:  B

Topic:  Price elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

131) When a firm raises the price of its product, what happens to its total revenue?

1. A) If demand is elastic, total revenue decreases.
2. B) If demand is unit elastic, total revenue increases.
3. C) If demand is inelastic, total revenue decreases.
4. D) If demand is elastic, total revenue increases.
5. E) If demand is unit elastic, total revenue decreases.

Answer:  A

Topic:  Elasticity and total revenue

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

5.2   The Price Elasticity of Supply

 

1) What is measured by the price elasticity of supply?

1. A) The price elasticity of supply measures how responsive producers are to changes in the price of other goods.
2. B) The price elasticity of supply measures how responsive producers are to changes in income.
3. C) The price elasticity of supply measures how responsive producers are to changes in the price of a product.
4. D) The price elasticity of supply is a measure of the slope of the supply curve.
5. E) The price elasticity of supply measures how responsive producers are to changes in the cost of producing a product.

Answer:  C

Topic:  Price elasticity of supply

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

2) The price elasticity of supply measures

1. A) the percentage change in supply from a percentage change in demand.
2. B) the extent to which the quantity supplied of a good changes when the price of a good changes, other things remaining the same.
3. C) the slope of the supply curve.
4. D) how the equilibrium price changes in response to a change in the equilibrium quantity supplied.
5. E) Both answers B and C are correct.

Answer:  B

Topic:  Price elasticity of supply

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

3) The price elasticity of supply is always a positive value because

1. there is a direct relationship between the price and the quantity supplied.
2. as the equilibrium price increases, the equilibrium quantity also always increases.

iii.   buyers are willing to pay a higher price for larger quantities.

1. A) i only
2. B) ii only
3. C) iii only
4. D) i and ii
5. E) ii and iii

Answer:  A

Topic:  Price elasticity of supply

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

4) If the percentage change in the price of a good exceeds the percentage change in the quantity supplied, then the supply is

1. A) elastic.
2. B) inelastic.
3. C) unit elastic.
4. D) perfectly elastic.
5. E) perfectly inelastic.

Answer:  B

Topic:  Price elasticity of supply, formula

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

5) When the percentage change in the quantity supplied equals the percentage change in price, the supply is

1. A) elastic.
2. B) inelastic.
3. C) unit elastic.
4. D) perfectly elastic.
5. E) perfectly inelastic.

Answer:  C

Topic:  Price elasticity of supply, unit elastic

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

6) When the percentage change in the quantity supplied is less than the percentage change in price, the supply is

1. A) elastic.
2. B) inelastic.
3. C) unit elastic.
4. D) perfectly unit elastic.
5. E) perfectly elastic.

Answer:  B

Topic:  Price elasticity of supply, inelastic

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

7) The figure above shows the supply curve for a good with

1. A) a perfectly elastic supply.
2. B) a perfectly inelastic supply.
3. C) an elastic supply.
4. D) an inelastic supply.
5. E) a unit elastic supply.

Answer:  B

Topic:  Price elasticity of supply

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

8) If a small percentage change in the price brings a very large percentage change in the quantity supplied, then the supply is almost perfectly ________ and the supply curve is almost ________.

1. A) elastic; vertical
2. B) elastic; horizontal
3. C) inelastic; horizontal
4. D) inelastic; vertical
5. E) elastic; 45 degrees

Answer:  B

Topic:  Price elasticity of supply, elastic

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

9) The figure above shows the supply curve for a good with

1. A) a perfectly elastic supply.
2. B) a perfectly inelastic supply.
3. C) an elastic supply.
4. D) an inelastic supply.
5. E) a unit elastic supply.

Answer:  A

Topic:  Price elasticity of supply, perfectly elastic

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

10) If the supply curve is ________, the elasticity of supply is ________.

1. A) vertical; infinite
2. B) vertical; 0
3. C) horizontal; 1
4. D) horizontal; 0
5. E) a straight, upward sloping line through the origin; 0

Answer:  B

Topic:  Price elasticity of supply, perfectly inelastic

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

11) The fact that there is a very limited amount of land in Hong Kong means the supply of new apartments in Hong Kong is

1. A) inelastic.
2. B) elastic.
3. C) unit elastic.
4. D) perfectly elastic.
5. E) limited by the demand.

Answer:  A

Topic:  Price elasticity of supply, production possibilities

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

12) The opportunity cost of producing a good rises only slightly as the quantity produced increases. This good has

1. A) an inelastic demand.
2. B) an elastic demand.
3. C) an elastic supply.
4. D) an inelastic supply.
5. E) a perfectly elastic supply.

Answer:  C

Topic:  Price elasticity of supply, production possibilities

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

13) For a product with a constant or gently increasing opportunity cost of producing additional units, as more is produced, we expect that

1. A) demand is price elastic.
2. B) supply is price elastic.
3. C) demand is price inelastic.
4. D) supply is price inelastic.
5. E) demand is unit elastic.

Answer:  B

Topic:  Price elasticity of supply, production possibilities

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

14) For which of the following would the supply likely be most inelastic?

1. A) aircraft carrier
2. B) canned soup
3. C) toy airplane
4. D) t-shirt
5. E) bottled water

Answer:  A

Topic:  Price elasticity of supply, production possibilities

Skill:  Level 5: Critical thinking

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

15) Suppose a good can be produced using commonly available resources. The elasticity of supply is

1. A) negative.
2. B) greater than zero but less than 1.
3. C) greater than 1.
4. D) zero.
5. E) More information is needed to make a determination about the size of the elasticity of supply.

Answer:  C

Topic:  Price elasticity of supply, production possibilities

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

16) If wheat can be produced at a constant opportunity cost, then the supply of wheat is

1. A) elastic.
2. B) inelastic.
3. C) unit elastic.
4. D) perfectly inelastic.
5. E) perfectly elastic.

Answer:  E

Topic:  Price elasticity of supply, production possibilities

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

17) Which of the following explains why supply is more elastic as more time passes?

1. A) It is difficult or impossible to increase the quantity produced in a short period of time.
2. B) Consumers have more time to search for substitutes.
3. C) Sellers try to take advantage of a high price in the short term.
4. D) The supply curve becomes generally steeper as more time passes.
5. E) There is no explanation for this phenomenon.

Answer:  A

Topic:  Factors that influence the price elasticity of supply

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

18) One reason why the price elasticity of supply for DVD players is greater than one is that

1. A) the cost of producing DVD players is small.
2. B) the storage of DVD players is not possible.
3. C) DVD players can be easily stored.
4. D) the demand for DVD players is fairly large.
5. E) DVD players require relatively advanced technology for their production.

Answer:  C

Topic:  Factors that influence the price elasticity of supply

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

19) If the price elasticity of supply for a good is 0.75, then

1. A) the percentage change in the quantity supplied is less than the percentage change in price.
2. B) the supply is elastic.
3. C) an increase in the price boosts the quantity supplied by a larger percentage.
4. D) the supply is inelastic so the demand must also be inelastic.
5. E) None of the above answers is correct.

Answer:  A

Topic:  Price elasticity of supply, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

20) It is very difficult for Gourmet Chocolatier to find inexpensive and available inputs for the business. Because of this, we predict that Gourmet Chocolatier’s supply to be

1. A) inelastic.
2. B) perfectly elastic.
3. C) elastic.
4. D) unit elastic.
5. E) nonexistent.

Answer:  A

Topic:  Price elasticity of supply, inelastic

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

21) The price of lumber increased by 10 percent and the quantity supplied increased by 20 percent. The supply of lumber is

1. A) inelastic.
2. B) perfectly elastic.
3. C) perfectly inelastic.
4. D) unit elastic.
5. E) elastic.

Answer:  E

Topic:  Price elasticity of supply, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

22) Suppose a 20 percent increase in the price of gasoline results in a 25 percent increase in the quantity supplied. This response means that gasoline has

1. A) an elastic supply.
2. B) an inelastic supply.
3. C) a unit elastic supply.
4. D) an inelastic demand.
5. E) an elastic demand.

Answer:  A

Topic:  Price elasticity of supply, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

23) The price of beef increased by 20 percent and the quantity supplied increased by 10 percent. The supply of beef is

1. A) elastic.
2. B) perfectly elastic.
3. C) perfectly inelastic.
4. D) inelastic.
5. E) unit elastic.

Answer:  D

Topic:  Price elasticity of supply, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

24) If the price of corn increases by 20 percent and the quantity supplied of corn increases by 30 percent, then supply is

1. A) elastic and the elasticity of supply equals 1.5.
2. B) inelastic and the elasticity of supply equals 1.5.
3. C) elastic and the elasticity of supply equals 0.66.
4. D) inelastic and the elasticity of supply equals 0.66.
5. E) either elastic or inelastic, but more information about the elasticity of demand is needed to determine which.

Answer:  A

Topic:  Price elasticity of supply, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

25) Suppose the current price of barley is $7 per bushel and at that price 100,000 bushels are grown by a Colorado farmer. If the price of barley rises to $8 and quantity supplied increases to 130,000 bushels, then using the midpoint method, the price elasticity of supply for barley equals

13. A) 13.33.
14. B) 26.78.
15. C) 1.96.
16. D) 0.51.
17. E) zero.

Answer:  C

Topic:  Price elasticity of supply, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

26) Jess owns a sandwich shop. The price of a sandwich recently increased from $5 to $7. Jess responded by increasing the quantity of sandwiches she supplied from 70 to 90 per day. Using the midpoint method, Jess’s price elasticity of supply is equal to

1. A) 1.33.
2. B) 0.75.
3. C) 3.00.
4. D) 4.00.
5. E) 1.50.

Answer:  B

Topic:  Price elasticity of supply, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

27) The price of one bedroom apartments in Cheyenne increased from $55,000 to $65,000 and the quantity of apartment for sale increased from 25 to 30. Using the midpoint method, the price elasticity of supply for apartments in Cheyenne is equal to

1. A) 0.916.
2. B) 0.75.
3. C) 1.09.
4. D) 2.18.
5. E) 0.08.

Answer:  A

Topic:  Price elasticity of supply, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

28) Suppose an increase in demand causes the price to increase from $2 to $4 and the quantity to increase from 1,000 to 1,800. Using the midpoint method, the elasticity of supply equals

1. A) 0.86.
2. B) 1.17.
3. C) 2.74.
4. D) 0.68.
5. E) None of the above answers is correct.

Answer:  A

Topic:  Price elasticity of supply, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

29) Suppose a decrease in demand causes the price to decrease from $4 to $3 and the quantity to decrease from 1,000 to 700. Using the midpoint method, the elasticity of supply equals

1. A) 0.81.
2. B) 1.24.
3. C) 2.83.
4. D) 0.18.
5. E) None of the above answers is correct.

Answer:  B

Topic:  Price elasticity of supply, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

30) When the price of a product increases from $35 to $45, the quantity supplied increases from 30 units to 40 units per week. Using the midpoint method, the price elasticity of supply is

1. A) 0.00.
2. B) -1.1.
3. C) 1.14.
4. D) 1.35.
5. E) 0.88.

Answer:  C

Topic:  Price elasticity of supply, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

31) If the price of a DVD falls from $20 to $12 and the quantity of DVDs supplied decreases from 118,000 per hour to 100,000 per hour, using the midpoint formula the elasticity of supply equals

1. A) 0.33.
2. B) 2.94.
3. C) 3.08.
4. D) 0.23.
5. E) -3.08.

Answer:  A

Topic:  Price elasticity of supply, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

32) If the price of a good decreases from $9 to $6 and the quantity supplied decreases from 1,500 to 1,300, using the midpoint formula the elasticity of supply equals

1. A) 0.20.
2. B) 2.80.
3. C) 0.36.
4. D) 0.40.
5. E) 3.20.

Answer:  C

Topic:  Price elasticity of supply, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

33) If the price doubles and the quantity supplied also doubles, the price elasticity of supply for the good is

1. A) -1.
2. B) 1.
3. C) -2.
4. D) 2.
5. E) 100 percent.

Answer:  B

Topic:  Price elasticity of supply, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

34) If the price elasticity of supply for a good is 10, then supply is

1. A) elastic.
2. B) inelastic.
3. C) unit elastic.
4. D) perfectly elastic.
5. E) perfectly inelastic.

Answer:  A

Topic:  Price elasticity of supply, elastic

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

35) If the quantity supplied and the price change by the same percentage, then supply is

1. A) elastic.
2. B) inelastic.
3. C) unit elastic.
4. D) perfectly elastic.
5. E) perfectly inelastic.

Answer:  C

Topic:  Price elasticity of supply, unit elastic

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

36) Because the price elasticity of supply for jumbo jets is 0.35, the supply of jumbo jets is

1. A) elastic.
2. B) unit elastic.
3. C) inelastic.
4. D) perfectly elastic.
5. E) perfectly inelastic.

Answer:  C

Topic:  Price elasticity of supply, inelastic

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

 

37) If a 20 percent increase in the price of a good does not change the quantity supplied, the

1. A) supply is perfectly inelastic.
2. B) supply is unit elastic.
3. C) supply is perfectly elastic.
4. D) supply is elastic.
5. E) None of the above answers is correct.

Answer:  A

Topic:  Price elasticity of supply, perfectly inelastic

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

38) The price elasticity of supply is a measure of the extent to which the quantity supplied of a good changes when the

1. A) cost of producing the product increases.
2. B) quantity of the good demanded increases.
3. C) supply increases.
4. D) price changes.
5. E) number of firms supplying the good changes.

Answer:  D

Topic:  Price elasticity of supply

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

39) When the percentage change in the quantity supplied is twice the percentage change in price, then supply is

1. A) elastic.
2. B) inelastic.
3. C) unit elastic.
4. D) perfectly inelastic.
5. E) perfectly elastic.

Answer:  A

Topic:  Price elasticity of supply, elastic

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

 

40) The supply of beach front property on St. Simon’s Island is

1. A) elastic.
2. B) unit elastic.
3. C) negative.
4. D) inelastic.
5. E) perfectly elastic.

Answer:  D

Topic:  Price elasticity of supply, production possibilities

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

41) Goods that can be produced at a constant or very gently rising opportunity cost have

1. A) an elastic demand.
2. B) an inelastic demand.
3. C) an inelastic supply.
4. D) an elastic supply.
5. E) a unit elastic demand.

Answer:  D

Topic:  Price elasticity of supply, production possibilities

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

42) For a product with a rapidly increasing opportunity cost of producing additional units,

1. A) demand is price elastic.
2. B) supply is price elastic.
3. C) demand is price inelastic.
4. D) supply is price inelastic.
5. E) the demand curve is vertical.

Answer:  D

Topic:  Price elasticity of supply, production possibilities

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

 

43) The greater the amount of time that passes after a price change, the

1. A) less elastic supply becomes.
2. B) more elastic supply becomes.
3. C) more negative supply becomes.
4. D) steeper the supply curve becomes.
5. E) None of the above answers is correct.

Answer:  B

Topic:  Price elasticity of supply, time elapsed after a price change

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

44) Many manufactured goods have an ________ supply if production plans have only a short period to change and as time passes and all production adjustments are made, the supply of the good ________ from the initial response.

1. A) inelastic; increases
2. B) elastic; decreases
3. C) elastic; increases
4. D) inelastic; decreases
5. E) inelastic; does not change

Answer:  A

Topic:  Price elasticity of supply, time elapsed after a price change

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

45) When the price of a textbook is $95, the quantity of textbooks supplied is 90 million a year and when the price rises to $105, the quantity of textbooks supplied is 110 million a year. The supply of textbooks is

1. A) elastic
2. B) perfectly elastic
3. C) inelastic
4. D) perfectly inelastic
5. E) unit elastic.

Answer:  A

Topic:  Price elasticity of supply, elastic

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

 

46) Supply is unit elastic when the

1. A) supply curve is upward sloping.
2. B) price elasticity of supply is positive.
3. C) percentage change in the quantity supplied equals the percentage change in price.
4. D) supply curve is horizontal.
5. E) supply curve is vertical.

Answer:  C

Topic:  Price elasticity of supply, unit elastic

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

47) When supply is perfectly inelastic, the supply curve is

1. A) upward sloping but not a straight line.
2. B) vertical.
3. C) downward sloping.
4. D) horizontal.
5. E) a straight line with a 45 degree slope that goes through the origin.

Answer:  B

Topic:  Price elasticity of supply, perfectly inelastic

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

48) The price elasticity of supply equals the percentage change in the

1. A) quantity demanded divided by the percentage change in the price of a substitute or complement.
2. B) quantity supplied divided by the percentage change in price.
3. C) quantity demanded divided by the percentage change in price.
4. D) supply divided by the percentage change in the demand.
5. E) quantity supplied divided by the percentage change in the quantity demanded.

Answer:  B

Topic:  Price elasticity of supply, formula

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

 

49) If a firm supplies 200 units at a price of $50 and 100 units at a price of $40, using the midpoint method, what is the price elasticity of supply?

1. A) 0.33
2. B) 1.00
3. C) 3.00
4. D) 5.00
5. E) 8.50

Answer:  C

Topic:  Price elasticity of supply, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

50) If the quantity supplied increases by 8 percent when the price rises by 2 percent, the price elasticity of supply is ________ .

10. A) 10.0
11. B) 6.0
12. C) 0.25
13. D) 16.0
14. E) 4.0

Answer:  E

Topic:  Price elasticity of supply, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

51) If the price of a a good increases by 10 percent and the quantity supplied increases by 5 percent, then the elasticity of supply is

1. A) greater than one and supply is elastic.
2. B) negative and supply is inelastic.
3. C) less than one and supply is elastic.
4. D) less than one and supply is inelastic.
5. E) greater than one and supply is inelastic.

Answer:  D

Topic:  Price elasticity of supply, formula

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

 

5.3   Cross Elasticity and Income Elasticity

 

1) The extent to which the demand for a good changes when the price of a substitute or complement changes, other things remaining the same, is measured as the

1. A) income elasticity of demand.
2. B) cross elasticity of demand.
3. C) price elasticity of demand.
4. D) price elasticity of supply.
5. E) cross income elasticity of demand.

Answer:  B

Topic:  Cross elasticity of demand

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

2) The cross elasticity of demand is a measure of how

1. A) responsive consumers are to changes in the price of a product.
2. B) responsive suppliers are to changes in the price of a product.
3. C) demand for a product changes when the price of a substitute or complement changes.
4. D) total revenue changes when the price of a product changes.
5. E) demand for a product changes when income changes.

Answer:  C

Topic:  Cross elasticity of demand

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

3) If we are trying to determine if two different products are substitutes, complements, or not related at all, we should find the value of the

1. A) price elasticity of demand for both goods.
2. B) price elasticity of supply for both goods.
3. C) income elasticity of demand for both goods.
4. D) cross elasticity of demand.
5. E) price elasticity of demand and the price elasticity of supply for both goods.

Answer:  D

Topic:  Cross elasticity of demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

4) If Microsoft wanted to prove to the Justice Department that its Windows software has many substitutes that personal computer owners can use, Microsoft hopes to find

1. A) that the demand for Windows’ is inelastic.
2. B) that the demand for Windows is elastic.
3. C) a large positive value for the cross elasticity of Windows and other software.
4. D) a negative income elasticity for Windows.
5. E) a positive income elasticity for Windows.

Answer:  C

Topic:  Cross elasticity of demand, substitutes

Skill:  Level 4: Applying models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

5) What is the formula for the cross elasticity of demand? The percentage change in the

1. A) quantity demanded divided by the percentage change in the price of a substitute or complement.
2. B) quantity supplied divided by the percentage change in price.
3. C) quantity demanded divided by the percentage change in price.
4. D) quantity demanded divided by the percentage change in income.
5. E) equilibrium quantity demanded divided by the equilibrium quantity supplied.

Answer:  A

Topic:  Cross elasticity of demand, formula

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

6) If a 1 percent increase in the price of X increases the quantity demanded of Y by 2 percent, then X and Y are

2. A) complements and the cross elasticity of demand equals 2.
3. B) substitutes and the cross elasticity of demand equals 1/2.
4. C) substitutes and the cross elasticity of demand equals 2.
5. D) complements and the income elasticity of demand equals 2.
6. E) normal goods and the income elasticity of demand of each equals 2.

Answer:  C

Topic:  Cross elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

 

 

7) The price of coffee rose 40 percent and the quantity of coffee demanded fell by 20 percent. The quantity of doughnuts demanded also fell by 20 percent. From this information, we can conclude that

1. A) the demand for coffee is elastic.
2. B) the demand for coffee is unit elastic.
3. C) coffee is an inferior good.
4. D) the cross elasticity demand between coffee and doughnuts is -0.5.
5. E) the income elasticity of demand for coffee is 2.

Answer:  D

Topic:  Cross elasticity of demand, formula

Skill:  Level 4: Applying models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

8) If the price of a movie rises 3 percent and, as a result, the quantity demanded of video rentals increases 6 percent, then the cross elasticity of demand is

2. A) 2.
3. B) 1/2.
4. C) -1/2.
5. D) -2.
6. E) 9.

Answer:  A

Topic:  Cross elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

 

 

 

9) Based on data in the table above, use the midpoint method to determine the cross elasticity of demand for ice cream and cake.

1. A) The cross elasticity is -0.75.
2. B) The cross elasticity is -1.75.
3. C) The cross elasticity is -0.83.
4. D) The cross elasticity is -4.0.
5. E) The cross elasticity is -1.33.

Answer:  A

Topic:  Cross elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

 

 

10) Based on the data in the table above, ice cream and cake are ________ goods.

1. A) inferior
2. B) normal
3. C) substitute
4. D) complementary
5. E) Both answers B and D are correct.

Answer:  D

Topic:  Cross elasticity of demand, complements

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

11) Goods are ________ when the income elasticity of demand is positive.

1. A) complements
2. B) elastic
3. C) inferior
4. D) substitutes
5. E) normal

Answer:  D

Topic:  Cross elasticity of demand, substitutes

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

12) If the price of a Brita water filtration system increases and the quantity demanded of bottled water increases, then these two goods are

1. A) substitutes.
2. B) complements.
3. C) normal goods.
4. D) inferior goods.
5. E) inelastic goods.

Answer:  A

Topic:  Cross elasticity of demand, substitutes

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

13) The cross elasticity of demand for butter and margarine is likely to be

1. A) positive because they are substitutes.
2. B) positive because they are complements.
3. C) negative because they are substitutes.
4. D) negative because they are complements.
5. E) positive because they are normal goods.

Answer:  A

Topic:  Cross elasticity of demand, substitutes

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

14) Which of the following is correct?

1. A) The cross elasticity of demand for substitute goods is positive.
2. B) The cross elasticity of demand for substitute goods is negative.
3. C) The cross elasticity of demand equals the percentage change in demand divided by the percentage change in income.
4. D) The income elasticity of demand for a normal good is negative.
5. E) The cross elasticity of demand for normal goods is positive.

Answer:  A

Topic:  Cross elasticity of demand, substitutes

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

15) If the cross elasticity of demand between good A and good B is negative, then a decrease in the price of good A results in

1. A) an increase in the demand for good B.
2. B) a decrease in the demand for good B.
3. C) a movement downward along the demand curve for good B.
4. D) an increase in the supply of good B.
5. E) a decrease in the supply of good B.

Answer:  A

Topic:  Cross elasticity of demand, substitutes

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  New

AACSB:  Analytical thinking

 

 

16) Patrick lives near two gas stations, Exxon and Shell. If Exxon decreases the price of gas, we predict that the quantity of gasoline demanded at Shell will

1. A) decrease because Exxon and Shell gas are complements.
2. B) decrease because Exxon and Shell gas are substitutes.
3. C) increase because Exxon and Shell gas are substitutes.
4. D) increase because Exxon and Shell gas are complements.
5. E) not change Exxon and Shell are different brands of gasoline.

Answer:  B

Topic:  Cross elasticity of demand, substitutes

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

17) The cross elasticity of demand for strawberry jelly and grape jelly is likely to be

1. A) positive because they are substitutes.
2. B) positive because they are complements.
3. C) negative because they are substitutes.
4. D) negative because they are complements.
5. E) negative because they are inferior goods.

Answer:  A

Topic:  Cross elasticity of demand, substitutes

Skill:  Level 5: Critical thinking

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

 

18) If a lower price for a Pepsi decreases the demand for a Coke, the cross elasticity value for Pepsi and Coke is

1. A) definitely negative.
2. B) definitely equal to zero.
3. C) definitely positive.
4. D) definitely greater than one.
5. E) possibly negative, positive, or zero, but there is not enough information to decide.

Answer:  C

Topic:  Cross elasticity of demand, substitutes

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

19) If the cross elasticity of demand between Coke and Pepsi is 2.02, then Coke and Pepsi are

1. A) complements.
2. B) substitutes.
3. C) normal goods.
4. D) inferior goods.
5. E) Both answers B and C are correct.

Answer:  B

Topic:  Cross elasticity of demand, substitutes

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

20) If Pepsi goes on sale and decreases its price by 10 percent, and as a result, the quantity demanded of Coca Cola decreases by 5 percent, then Pepsi and Coke are ________ goods.

1. A) inferior
2. B) normal
3. C) substitute
4. D) complementary
5. E) unrelated

Answer:  C

Topic:  Cross elasticity of demand, substitutes

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

21) Tacos and pizza are substitutes. If a 2 percent change in the price of a taco leads to a 4 percent change in the demand for pizza, the cross elasticity of demand equals

2. A) -1/2.
3. B) 1/2.
4. C) 2.
5. D) -2.
6. E) 4.

Answer:  C

Topic:  Cross elasticity of demand, substitutes

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

 

 

22) Pete feeds his dog 100 percent more Pup-Peronis when Zuke’s treats increase in price by 50 percent. For Pete, Pup-Peronis and Zuke’s are ________ and the cross-price elasticity of demand is ________.

1. A) complements; -1/2
2. B) substitutes; 2
3. C) substitutes; -2
4. D) complements; 2
5. E) substitutes; 1/2

Answer:  B

Topic:  Cross elasticity of demand, substitutes

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

23) The cross elasticity between computers and software is

1. A) negative because they are substitutes.
2. B) positive because they are substitutes.
3. C) negative because they are complements.
4. D) positive because they are complements.
5. E) positive because they are normal goods.

Answer:  C

Topic:  Cross elasticity of demand, complements

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

24) If you know the cross elasticity between two goods is negative, then you know the goods are

1. A) substitutes.
2. B) normal goods.
3. C) complements.
4. D) inferior goods.
5. E) inelastic goods.

Answer:  C

Topic:  Cross elasticity of demand, complements

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

25) If the price of a one good increases and the quantity demanded of a different good decreases, then these two goods are

1. A) substitutes.
2. B) normal goods.
3. C) inferior goods.
4. D) inelastic goods.
5. E) complements.

Answer:  E

Topic:  Cross elasticity of demand, complements

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

26) If the cross elasticity of demand is negative, that means the goods

1. A) have elastic demands.
2. B) have inelastic demands.
3. C) are complements.
4. D) are substitutes.
5. E) are inferior.

Answer:  C

Topic:  Cross elasticity of demand, complements

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

27) When two goods are related such that an increase in the price of one good decreases the quantity demanded of the other good, these goods are definitely

1. A) normal goods.
2. B) luxury goods.
3. C) complements.
4. D) substitutes.
5. E) inferior goods.

Answer:  C

Topic:  Cross elasticity of demand, complements

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

28) If a lower price for good X increases the demand for good Y, the cross elasticity value for the two goods is

1. A) negative.
2. B) equal to zero.
3. C) positive and less than one.
4. D) positive and greater than one.
5. E) possibly negative, positive, or zero, but there is not enough information to decide.

Answer:  A

Topic:  Cross elasticity of demand, complements

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

29) If two goods are ________, then an increase in the price of one leads to ________ in the quantity demanded of the other.

1. A) complements; a decrease
2. B) complements; no change
3. C) substitutes; a decrease
4. D) substitutes; no change
5. E) normal; an increase

Answer:  A

Topic:  Cross elasticity of demand, complements

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

30) The cross elasticity of demand for blank DVDs and DVD burners is likely to be

1. A) positive because they are substitutes.
2. B) positive because they are complements.
3. C) negative because they are substitutes.
4. D) negative because they are complements.
5. E) negative because with the advent of digital cameras, film and film cameras are inferior goods.

Answer:  D

Topic:  Cross elasticity of demand, complements

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

31) If the cross elasticity of demand between car insurance and new cars is -0.41, then car insurance and new cars are

1. A) complements.
2. B) substitutes.
3. C) normal goods.
4. D) inferior goods.
5. E) unrelated goods.

Answer:  A

Topic:  Cross elasticity of demand, complements

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

32) If the cross elasticity of demand for DVD players and DVDs equals -2, then the products are

1. A) unrelated.
2. B) complements.
3. C) inferior goods.
4. D) substitutes.
5. E) normal goods.

Answer:  B

Topic:  Cross elasticity of demand, complements

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

33) Tennis balls and tennis rackets are complements. If a 3 percent change in the price of a tennis racket leads to a 9 change in the quantity of tennis balls demanded, the cross elasticity of demand equals

3. A) 3.
4. B) -3.
5. C) 1/3.
6. D) -1/3.
7. E) 9.

Answer:  B

Topic:  Cross elasticity of demand, complements

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

 

 

34) The income elasticity of demand is a measure of

1. A) how demand for a product changes when the price of a substitute or complement product changes.
2. B) how responsive consumers are to changes in the price of a product.
3. C) how responsive suppliers are to changes in the price of a product.
4. D) the extent to which the demand for a good changes when income changes.
5. E) the extent to which the supply of a good changes when the demand changes as a result of a change in income.

Answer:  D

Topic:  Income elasticity of demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

35) If the income elasticity of demand for a good is 2, then when income rises 10 percent, the quantity demanded

1. A) increases 2 percent.
2. B) increases 20 percent.
3. C) decreases 2 percent.
4. D) decreases 20 percent.
5. E) increases 12 percent.

Answer:  B

Topic:  Income elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

 

36) The income elasticity of demand is

1. A) positive for a normal good.
2. B) zero for an inferior good.
3. C) less than one for an income elastic normal good.
4. D) Only answers A and B are correct.
5. E) Answers A, B, and C are correct.

Answer:  A

Topic:  Income elasticity of demand, normal good

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

37) The income elasticity of demand is ________ if the good is ________ good.

1. A) positive; a normal
2. B) positive; an inferior
3. C) negative; a normal
4. D) less than one; an inferior
5. E) positive; a substitute

Answer:  A

Topic:  Income elasticity of demand, normal good

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

38) Assume that it is predicted that for the years after you graduate from college, the entire economy will experience a long period of prosperity when incomes grow rapidly. What type of industry would be the best for you to find employment if this prediction is correct? An industry that produces a product that is

1. A) income elastic.
2. B) income inelastic.
3. C) inferior.
4. D) a substitute good.
5. E) none of these industries

Answer:  A

Topic:  Income elasticity, normal good

Skill:  Level 4: Applying models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

39) Which of the following statements is correct?

1. A) The income elasticity of demand for inferior goods is positive.
2. B) The cross elasticity of demand for substitutes is negative.
3. C) The income elasticity of demand for normal goods is positive.
4. D) The cross elasticity of demand for complements is positive.
5. E) The income elasticity of demand for inferior goods is zero.

Answer:  C

Topic:  Income elasticity of demand, normal good

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

40) The income elasticity of demand for skiing trips to Vermont is greater than one. Thus a trip to Vermont for skiing is ________ good.

1. A) a normal
2. B) an inferior
3. C) a unit elastic
4. D) a price elastic
5. E) a price inelastic

Answer:  A

Topic:  Income elasticity of demand, normal good

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

41) People eat at restaurants less often when their incomes fall because of a recession. Eating at restaurants must be

1. A) an inferior good.
2. B) a normal good.
3. C) a complement to other goods.
4. D) a substitute for other goods.
5. E) an inelastic good.

Answer:  B

Topic:  Income elasticity of demand, normal good

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

42) People take fewer trips by airplane when their incomes fall because of a recession. Trips by airplane must be

1. A) a normal good.
2. B) an inferior good.
3. C) a substitute for other goods.
4. D) a complement to other goods.
5. E) an inelastic good.

Answer:  A

Topic:  Income elasticity of demand, normal good

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

43) Sergio’s rentals of Blu-ray movies increase by 10 percent when her income increases by 30 percent. Based on this information, we know that for Sergio Blu-ray movies

1. A) are complements.
2. B) are substitutes.
3. C) are inferior goods.
4. D) have an inelastic demand.
5. E) are normal goods.

Answer:  E

Topic:  Income elasticity of demand, normal good

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

44) Alan purchases 10 percent fewer bags of chips when his income decreases by 5 percent. Based on only this information, we know that for Alan

1. A) chips are a normal good.
2. B) chips are a complement to salsa.
3. C) chips are a substitute for pretzels.
4. D) chips are an inferior good.
5. E) the price of chips fell.

Answer:  A

Topic:  Income elasticity of demand, normal good

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

45) For a good such as food, the income elasticity is likely

1. A) negative.
2. B) equal to zero.
3. C) positive and less than one.
4. D) positive and greater than one.
5. E) undefined because people always buy the same amount of food.

Answer:  C

Topic:  Income elasticity of demand

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

46) For a good such as a large screen HD television set, the income elasticity would likely be

1. A) negative.
2. B) equal to zero.
3. C) positive and less than one.
4. D) positive and greater than one.
5. E) undefined because large screen, HD TVs are bought by many consumers.

Answer:  D

Topic:  Income elasticity of demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

47) Assume that it is predicted that for the years after you graduate from college, the entire economy will experience a long period of recession during which people’s incomes decrease. What type of industry would be the best for you to find employment if this prediction is correct? An industry that produces a product that

1. A) is income elastic.
2. B) is income inelastic.
3. C) is inferior.
4. D) is a complement.
5. E) none of these industries

Answer:  C

Topic:  Income elasticity of demand, inferior good

Skill:  Level 4: Applying models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

48) What is an inferior good?

1. A) a product of low quality that we do not want to purchase
2. B) a product for which demand increases when income increases, and demand decreases when income decreases
3. C) a product for which demand increases when income decreases, and demand decreases when income increases
4. D) a product that is complementary
5. E) a product that is a substitute for another, better good

Answer:  C

Topic:  Income elasticity of demand, inferior good

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

49) A product that has a negative income elasticity of demand is ________ good.

1. A) a complementary
2. B) a substitute
3. C) a normal
4. D) an inferior
5. E) a negative

Answer:  D

Topic:  Income elasticity, inferior good

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

50) Goods are ________ when the income elasticity of demand is less than zero.

1. A) substitutes
2. B) complements
3. C) inferior
4. D) elastic
5. E) normal

Answer:  C

Topic:  Income elasticity of demand, inferior good

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

51) If a product is an inferior good, then its income elasticity of demand is

1. A) zero.
2. B) positive.
3. C) negative.
4. D) indeterminate.
5. E) undefined.

Answer:  C

Topic:  Income elasticity of demand, inferior good

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

52) If a good is inferior, then it has an income elasticity of demand that is

1. A) equal to zero.
2. B) greater than zero.
3. C) less than zero.
4. D) greater than one.
5. E) undefined.

Answer:  C

Topic:  Income elasticity of demand, inferior good

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

53) If a 5 percent increase in income brings about a 10 percent decrease in the demand for a good, then the

1. A) good is a normal good.
2. B) good is an inferior good.
3. C) income elasticity of demand is 0.5.
4. D) income elasticity of demand is 2.0.
5. E) income elasticity of demand is 5.0.

Answer:  B

Topic:  Income elasticity of demand, inferior good

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

54) If a 10 percent increase in income leads to a 5 percent decrease in the demand for a good, the income elasticity of demand equals ________ and the good is ________ good.

1. A) 1/2; a normal
2. B) -1/2; an inferior
3. C) 2; a normal
4. D) -2; a normal
5. E) -5; an inferior

Answer:  B

Topic:  Income elasticity of demand, inferior good

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

 

 

55) Joe receives a 20 percent increase in his income from his part time job and as a consequence decreases his consumption of Ramen noodles by 10 percent. Hence to Joe, Ramen noodles are

1. A) a normal good with a price elasticity of demand of 0.5.
2. B) a substitute good with a cross elasticity of 0.5.
3. C) a good with a price elasticity of supply of -0.5.
4. D) an inferior good with an income elasticity of -0.5.
5. E) an inferior good with an income elasticity of -2.0.

Answer:  D

Topic:  Income elasticity, inferior good

Skill:  Level 4: Applying models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

56) If a 5 percent decrease in income leads to a 15 percent decrease in the demand for a good, the income elasticity of demand equals

1. A) -1/3 and the good is an inferior good.
2. B) 1/3 and demand for the good is income elastic.
3. C) 3 and the good is a normal good.
4. D) -3 and the demand for the good is income inelastic.
5. E) 3 and the good is an inferior good.

Answer:  C

Topic:  Income elasticity of demand, inferior good

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

 

57) When income increases from $20,000 to $30,000 the quantity of inter-city bus trips taken per year decreases from 10 to 8. Hence

1. A) inter-city bus trips are a normal good.
2. B) the income elasticity of demand for inter-city bus trips is -1.8.
3. C) the income elasticity of demand for inter-city bus trips is -0.56.
4. D) Both answers A and B are correct.
5. E) Both answers A and C are correct.

Answer:  C

Topic:  Income elasticity of demand, inferior good

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

 

 

58) The income elasticity of demand for foreign travel

1. A) is likely to be smaller than the income elasticity of demand for food.
2. B) is likely to be larger than the income elasticity of demand for food.
3. C) cannot be compared to the income elasticity of demand for food.
4. D) is likely to be inelastic.
5. E) is likely to be negative.

Answer:  B

Topic:  Income elasticity of demand

Skill:  Level 4: Applying models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

59) The lower the level of income in a country, the

1. A) less income elastic is the demand for food.
2. B) more income elastic is the demand for food.
3. C) more negative the income elasticity of the demand for food.
4. D) Both answers A and C are correct.
5. E) None of the above is correct.

Answer:  B

Topic:  Eye on the global economy, income elasticities of demand

Skill:  Level 4: Applying models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

60) The measure used to determine whether two products are complements or substitutes is called the

1. A) price elasticity of supply.
2. B) cross elasticity of demand.
3. C) price elasticity of demand.
4. D) income elasticity.
5. E) substitute elasticity of demand.

Answer:  B

Topic:  Cross elasticity of demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

61) If beef and pork are substitutes for consumers, the cross elasticity of demand between the two products must be

1. A) negative.
2. B) positive.
3. C) indeterminate.
4. D) elastic.
5. E) greater than 1.

Answer:  B

Topic:  Cross elasticity of demand, substitutes

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

62) When the price of a pizza is $10, the quantity of soda demanded is 300 drinks. When the price of a pizza is $15, the quantity soda demanded is 100 drinks. The cross elasticity of demand is equal to

1. A) -0.25.
2. B) -0.40.
3. C) -2.50.
4. D) -25.00.
5. E) 4.00.

Answer:  C

Topic:  Cross elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

 

63) When the price of going to a movie rises 5 percent, the quantity of DVDs demanded increases 10 percent. The cross elasticity of demand equals

10. A) 10.0.
11. B) 0.50.
12. C) -0.50.
13. D) -2.0.
14. E) 2.0.

Answer:  E

Topic:  Cross elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

 

 

64) If two goods have a cross elasticity of demand of -2, then when the price of one good increases, the demand curve of the other good

1. A) shifts rightward.
2. B) shifts leftward.
3. C) remains unchanged and the supply curve also remains unchanged.
4. D) might shift rightward, leftward, or remain unchanged.
5. E) remains unchanged but the supply curve shifts leftward.

Answer:  B

Topic:  Cross elasticity of demand, complements

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

65) The income elasticity of demand is the percentage change in the ________ divided by the percentage change in ________.

1. A) quantity demanded; the price of a substitute or complement
2. B) quantity supplied; price
3. C) quantity demanded; price
4. D) quantity demanded; income
5. E) quantity demanded when income changes; the quantity supplied

Answer:  D

Topic:  Income elasticity of demand, formula

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

66) When income increases from $20,000 to $30,000 the number of home delivered pizzas per year increases from 22 to 40. The income elasticity of demand for home delivered pizza equals

1. A) 1.45.
2. B) 0.69.
3. C) 0.58.
4. D) 0.40.
5. E) 2.86.

Answer:  A

Topic:  Income elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

 

 

67) When income increases by 6 percent, the demand for potatoes decreases by 2 percent. The income elasticity of demand for potatoes equals

2. A) -2.00.
3. B) 3.00.
4. C) -3.00.
5. D) 0.33.
6. E) -0.33.

Answer:  E

Topic:  Income elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

68) When income increases from $30,000 a year to $40,000 a year, the quantity demanded of weekend vacations by Sara increases from 2 a year to 5 a year. For Sara, the income elasticity of demand of weekend vacations is ________ and weekend vacations are ________ good.

1. A) 3; a normal
2. B) 4.5 a normal
3. C) 1/3; an inferior
4. D) -4.5; an inferior
5. E) 1/3; a normal

Answer:  A

Topic:  Income elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

 

69) If a product is a normal good, then its income elasticity of demand is

1. A) zero.
2. B) positive.
3. C) negative.
4. D) indeterminate.
5. E) greater than 1.

Answer:  B

Topic:  Income elasticity of demand, normal good

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

 

70) The income elasticity of demand for used cars is less than zero. So, used cars are

1. A) an inferior good.
2. B) a normal good.
3. C) an inelastic good.
4. D) a perfectly inelastic good.
5. E) a substitute good.

Answer:  A

Topic:  Income elasticity of demand, inferior good

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

71) An inferior good has a ________ elasticity of demand.

1. A) positive income
2. B) negative income
3. C) negative cross
4. D) positive cross
5. E) negative price

Answer:  B

Topic:  Income elasticity of demand, inferior good

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

72) Which of the following is most likely to have an income elasticity of demand that exceeds 1?

1. A) tobacco
2. B) alcoholic beverages
3. C) airline travel
4. D) food
5. E) telephone

Answer:  C

Topic:  Income elasticity of demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  New

AACSB:  Reflective thinking

 

 

73) Which of the following is most likely to have an income elasticity of demand that is less than 1?

1. A) movies
2. B) airline travel
3. C) foreign travel
4. D) food
5. E) restaurant meals

Answer:  D

Topic:  Income elasticity of demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  New

AACSB:  Reflective thinking

5.4   Chapter Figures

 

 

1) The demand curve shown in the figure above reflects demand that is

1. A) perfectly elastic.
2. B) perfectly inelastic.
3. C) unit elastic.
4. D) elastic but not perfectly elastic.
5. E) inelastic but not perfectly inelastic.

Answer:  A

Topic:  Perfectly elastic demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

2) The demand curve shown in the figure above reflects demand that is

1. A) perfectly elastic.
2. B) perfectly inelastic.
3. C) unit elastic.
4. D) elastic but not perfectly elastic.
5. E) inelastic but not perfectly inelastic.

Answer:  B

Topic:  Perfectly inelastic demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

 

3) The demand curve shown in the figure above is ________ over the price range from $95 to $105 per trip.

1. A) perfectly elastic
2. B) perfectly inelastic
3. C) unit elastic
4. D) elastic but not perfectly elastic
5. E) inelastic but not perfectly inelastic

Answer:  C

Topic:  Unit elastic demand

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

 

4) The demand curve shown in the figure above is ________ over the price range from $0.90 to $1.10 per pack.

1. A) perfectly elastic
2. B) perfectly inelastic
3. C) unit elastic
4. D) elastic but not perfectly elastic
5. E) inelastic but not perfectly inelastic

Answer:  E

Topic:  Inelastic demand

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

 

5) The demand curve shown in the figure above is ________ over the price range from $95 to $105 per unit.

1. A) perfectly elastic
2. B) perfectly inelastic
3. C) unit elastic
4. D) elastic but not perfectly elastic
5. E) inelastic but not perfectly inelastic

Answer:  D

Topic:  Elastic demand

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

The figure above shows the demand curve for Starbucks latte.

 

6) Using the figure above, suppose Starbucks charges $4.50 per cup for its latte. Which of the following is true?

1. At this price, the demand for Starbucks latte is elastic.
2. If Starbucks lowers the price of its latte, its revenue will decrease.

iii.   If Starbucks raises the price of its latte, the demand for it will become less elastic.

1. A) Only iii
2. B) Only i
3. C) Only ii
4. D) i and ii
5. E) i and iii

Answer:  B

Topic:  Elastic demand

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

7) In the figure above, at the point where the price is $4 per cup the price elasticity of demand is

2. A) 2.
3. B) 0.5.
4. C) 1.
5. D) 1.5.
6. E) 0.

Answer:  A

Topic:  Midpoint formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

8) In the figure above, when the price falls from $5 to $4, the price elasticity of demand is

2. A) 2.
3. B) 3.
4. C) 0.75.
5. D) 1.5.
6. E) 0.33.

Answer:  B

Topic:  Midpoint formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

9) In the figure above, when the price rises from $3 to $4, the price elasticity of demand is

1. A) 1.4.
2. B) 2.
3. C) 0.71.
4. D) 0.4.
5. E) 1.

Answer:  A

Topic:  Midpoint formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

10) Refer to the figure above. Suppose Starbucks charges $3.50 per cup for its latte. Which of the following is true?

1. At this price, the demand for Starbucks latte is inelastic.
2. If Starbucks raises the price of its latte, its revenue will increase.

iii.   If Starbucks lowers the price of its latte, it will increase its revenue.

1. A) Only iii
2. B) Only i
3. C) Only ii
4. D) i and ii
5. E) i and iii

Answer:  A

Topic:  Elasticity and total revenue

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

The figure above shows the demand curve for Starbucks latte.

 

11) In the figure above, the demand is elastic in the range of prices between

3. A) $3.50 and $4.50 per cup.
4. B) $2.50 and $3.50 per cup.
5. C) $1.00 and $2.00 per cup.
6. D) $2.00 and $4.00 per cup.
7. E) $1.75 and $2.75 per cup.

Answer:  A

Topic:  Midpoint formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

12) In the figure above, the demand is unit elastic

3. A) at the point where the price is $3.00 per cup.
4. B) at the point where the price is $2.00 per cup.
5. C) at the point where the price is $4.00 per cup.
6. D) at the point where the price is $2.50 per cup.
7. E) at all points along the demand curve.

Answer:  A

Topic:  Midpoint formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

13) In the figure above, the demand is inelastic in the range of prices between

3. A) $3.50 and $4.50 per cup.
4. B) $2.50 and $3.50 per cup.
5. C) $1.00 and $2.00 per cup.
6. D) $2.25 and $4.50 per cup.
7. E) $2.75 and $3.75 per cup.

Answer:  C

Topic:  Midpoint formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

14) Suppose Starbucks currently charges $3.25 per cup for its latte. If Starbucks lowers the price to $3.00 per cup, based on the demand curve in the figure above, its total revenue will ________ because the demand for Starbucks latte is ________ over this price range.

1. A) increase; elastic
2. B) decrease; elastic
3. C) increase; inelastic
4. D) increase; unit elastic
5. E) not change; unit elastic

Answer:  A

Topic:  Elasticity and total revenue

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

15) Suppose Starbucks currently charges $2.50 per cup for its latte. If Starbucks raises the price to $3.00 per cup, based on the demand curve in the figure above, its total revenue will ________ because the demand for Starbucks latte is ________ over this price range.

1. A) increase; elastic
2. B) decrease; elastic
3. C) increase; inelastic
4. D) increase; unit elastic
5. E) not change; unit elastic

Answer:  C

Topic:  Elasticity and total revenue

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

The figure above shows the supply curve for roses.

 

16) In the figure above, at the point where the price is $60 per bunch, the price elasticity of supply is

1. A) 1.8.
2. B) 0.56.
3. C) 1.
4. D) 1.5.
5. E) 0.

Answer:  A

Topic:  Price elasticity of supply

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

17) In the figure above, at the point where the price is $50 per bunch, the price elasticity of supply is

2. A) 2.14.
3. B) 0.47.
4. C) 1.
5. D) 3.
6. E) 0.33.

Answer:  A

Topic:  Price elasticity of supply

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

5.5   Integrative Questions

 

1) Suppose an increase in supply lowers the price from $10 to $8 and increases the quantity demanded from 100 units to 130 units. Using the midpoint method, the elasticity of demand equals

1. A) 1.17.
2. B) 0.85.
3. C) 0.26.
4. D) 1.56.
5. E) None of the above answers is correct.

Answer:  A

Topic:  Integrative

Skill:  Level 3: Using models

Section:  Integrative

Status:  Old

AACSB:  Analytical thinking

 

2) Suppose a decrease in supply raises the price from $4.00 to $5.50 and decreases the quantity demanded from 2,000 to 1,500. Using the midpoint method, the elasticity of demand equals

2. A) 2.10.
3. B) 1.11.
4. C) 0.90.
5. D) 0.72.
6. E) None of the above answers is correct.

Answer:  C

Topic:  Integrative

Skill:  Level 3: Using models

Section:  Integrative

Status:  Old

AACSB:  Analytical thinking

3) The total revenue test says that if a price decrease leads to

1. A) an increase in total revenue, demand is income elastic.
2. B) a decrease in total revenue, demand is income inelastic.
3. C) a decrease in total revenue, demand is price inelastic.
4. D) a decrease in total revenue, supply is price inelastic.
5. E) a decrease in total revenue, supply is price elastic.

Answer:  C

Topic:  Integrative

Skill:  Level 3: Using models

Section:  Integrative

Status:  Old

AACSB:  Reflective thinking

 

 

4) The total revenue test says that if a price decrease leads to

1. A) an increase in total revenue, supply is elastic.
2. B) a decrease in total revenue, supply is unit elastic.
3. C) a decrease in total revenue, supply is inelastic.
4. D) an increase in total revenue, supply is inelastic.
5. E) None of the above answers is correct.

Answer:  E

Topic:  Integrative

Skill:  Level 3: Using models

Section:  Integrative

Status:  Old

AACSB:  Reflective thinking

 

5) If demand is ________, a price cut ________ the total revenue.

1. A) elastic; increases
2. B) unit elastic; decreases
3. C) inelastic; increases
4. D) inelastic; does not change
5. E) normal; decreases

Answer:  A

Topic:  Integrative

Skill:  Level 3: Using models

Section:  Integrative

Status:  Old

AACSB:  Reflective thinking

6) If you spend a large portion of your income on a good,

1. A) supply of that good would be price elastic.
2. B) demand for that good is more elastic than if you spent a smaller portion of your income on the good.
3. C) supply of that good is price inelastic.
4. D) demand for that good is less elastic than if you spent a smaller portion of your income on the good.
5. E) the good must be able to be produced at a constant (or gently rising) opportunity cost.

Answer:  B

Topic:  Integrative

Skill:  Level 3: Using models

Section:  Integrative

Status:  Old

AACSB:  Reflective thinking

 

 

7) A ________ curve means that ________.

1. A) horizontal demand; a change in price does not change total revenue
2. B) horizontal demand; the elasticity of demand is less than 1
3. C) horizontal supply; the elasticity of supply is infinite
4. D) horizontal supply; the elasticity of demand is infinite
5. E) vertical demand; a change in price does not change total revenue

Answer:  C

Topic:  Integrative

Skill:  Level 3: Using models

Section:  Integrative

Status:  Old

AACSB:  Reflective thinking

 

8) The cross elasticity of demand

1. A) means that an increase in the demand for one good leads to a decrease in demand for another good.
2. B) measures how a change in the price of one good impacts the demand for another good.
3. C) measures how a change in supply impacts the demand for the good.
4. D) means that an increase in the price of one good leads to an increase in the price of another good.
5. E) measures how a change in income impacts the demand for the good.

Answer:  B

Topic:  Integrative

Skill:  Level 2: Using definitions

Section:  Integrative

Status:  Old

AACSB:  Reflective thinking

9) Which of the following is true?

1. The demand for a good is elastic if when its price changes, the percentage change in the quantity demanded exceeds the percentage change in price.
2. Price elasticity of demand equals the percentage change in price divided by the percentage change in the quantity demanded.

iii.   If demand is price inelastic, a rise in price leads to a decrease in total revenue.

1. A) only i
2. B) only ii
3. C) only iii
4. D) i and ii
5. E) ii and iii

Answer:  A

Topic:  Integrative

Skill:  Level 2: Using definitions

Section:  Integrative

Status:  Old

AACSB:  Reflective thinking

 

 

10) Which of the following is true?

1. The supply of a good is inelastic if when its price changes, the percentage change in the quantity supplied exceeds the percentage change in price.
2. Price elasticity of supply equals the percentage change in the quantity supplied divided by the percentage change in price.

iii.   If demand is price elastic, a rise in price leads to a decrease in total revenue.

1. A) only i
2. B) only ii
3. C) only iii
4. D) i and ii
5. E) ii and iii

Answer:  E

Topic:  Integrative

Skill:  Level 2: Using definitions

Section:  Integrative

Status:  Old

AACSB:  Reflective thinking

11) Which of the following is true?

1. The easier it is to find substitutes for a good, the more price elastic the demand for the good is.
2. The demand for a good is more price elastic the smaller the proportion of income spent on it.

iii.   If demand is price elastic, lowering the price leads to a decrease in total revenue.

1. A) only i
2. B) only ii
3. C) only iii
4. D) i and ii
5. E) i and iii

Answer:  A

Topic:  Integrative

Skill:  Level 2: Using definitions

Section:  Integrative

Status:  Old

AACSB:  Reflective thinking

 

5.6   Essay: The Price Elasticity of Demand

 

1) “The price elasticity of demand is a measure of how sensitive demanders are to changes in the price of a product.” Is this statement true or false?

Answer:  The assertion is true. All elasticities measure the sensitivity, or responsiveness, of some variable to a change in an influence. The price elasticity of demand measures how strongly demanders respond to a change in the price of the good or service.

Topic:  Price elasticity of demand

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

 

2) What is the price elasticity of demand? In terms of percentage changes, what is its formula?

Answer:  The price elasticity of demand is a measure of the responsiveness of quantity demanded to a change in price. The formula for the price elasticity of demand is the absolute value of the percentage change in quantity demanded divided by the percentage change in price.

Topic:  Price elasticity of demand

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

3) When does a decrease in supply raise the price more: When demand is elastic or when demand is inelastic? When OPEC decreases the supply of oil, the price of gasoline skyrockets. Hence is the demand for gasoline elastic or inelastic?

Answer:  A decrease in supply raises the price more when demand is inelastic. The skyrocketing price of gasoline indicates that the demand for gasoline is inelastic.

Topic:  Price elasticity of demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

4) What does a horizontal demand curve indicate about the price elasticity of demand?

Answer:  If the demand curve for a good is horizontal, the demand for the good is perfectly elastic. Hence the price elasticity of demand is infinite.

Topic:  Perfectly elastic demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

5) What are the three cases for the price elasticity of demand? Briefly define each.

Answer:  Demand can be elastic, inelastic, or unit elastic. Elastic demand occurs when the percentage change in quantity demanded exceeds the percentage change in price. Inelastic demand occurs when the percentage change in quantity demanded is less than the percentage change in price. Unit elasticity occurs when the percentage change in price equals the percentage change in demand.

Topic:  Elastic, inelastic, and unit elastic demand

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Written and oral communication

 

 

6) In a study session, your friend says, “Demand is elastic if the percentage change in the price exceeds the percentage change in quantity demanded.” Is your friend correct?

Answer:  No, your friend is incorrect. Demand is elastic if the percentage change in the price is less than the percentage change in the quantity demanded.

Topic:  Elastic demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

7) If the percentage change in quantity demanded is greater than the percentage change in price, can you determine if the demand is elastic, unit elastic, or inelastic? Explain your answer.

Answer:  The demand is elastic. The formula for the price elasticity of demand is the percentage change in the quantity demanded divided by the percentage change in the price. And, if the elasticity of demand exceeds one, then the demand is elastic. In this case, the percentage change in the quantity demanded is larger than the percentage change in the price, so the elasticity of demand will be greater than one. Hence the demand is elastic.

Topic:  Elastic demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Written and oral communication

 

8) Does the fact that the price elasticity of demand for a good is inelastic violate the law of demand?

Answer:  No, if the demand is inelastic, when the price falls, the quantity demanded increases, but by a smaller percentage than the percentage fall in price. Thus the negative relationship between the price and the quantity demanded remains, and the demand curve still slopes downward, which is the law of demand.

Topic:  Inelastic demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Written and oral communication

 

 

9) What factors determine the size of the price elasticity of demand?

Answer:  The factors that determine the size of the elasticity of demand can be classified into the availability of substitutes for the good and the proportion of income spent on the good. The more substitutes for a good, the more elastic its demand. Luxuries have more substitutes than necessities, and so the elasticity of demand for luxuries exceeds that for necessities; narrowly defined goods have more substitutes than broadly defined goods, and so the elasticity of demand for narrowly defined goods exceeds that for broadly defined goods; and, the more time that has elapsed since a price change, the more substitutes consumers can find, and so the elasticity of demand is larger the more time passes. Income also plays a role because the larger the proportion of consumers’ incomes spent on a good, the larger is its elasticity of demand.

Topic:  Factors that influence the price elasticity of demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Written and oral communication

10) Explain why the number of substitutes influences the price elasticity of demand.

Answer:  The price elasticity of demand is a measure of how responsive the quantity demanded is to a change in price. If a good has many substitutes, it is easy to switch away from it when its price rises. Hence a rise in price will substantially decrease the quantity demanded. Similarly, when its price falls, consumers can switch into it and away from many other (substitute) products. Hence a fall in price will substantially increase the quantity demanded. Because changes in price have major effects on the quantity demanded, the demand is elastic.

Topic:  Elasticity, substitutes

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Written and oral communication

 

11) “The fewer the number of substitutes for a product, the more elastic the demand for that product.” Is the previous statement true or false?

Answer:  The statement is false. The greater the number of substitutes, the more elastic the demand for that product. Conversely, the fewer the number of substitutes, the less elastic (the more inelastic) the demand for that product.

Topic:  Elasticity, substitutes

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

12) If a good has only a few, poor substitutes, is its demand elastic or inelastic?

Answer:  The demand is inelastic. The fewer substitutes for a good, the more inelastic (less elastic) its demand.

Topic:  Elasticity, substitutes

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

13) Which is larger: The price elasticity of demand for food or the price elasticity of demand for oranges? Why?

Answer:  The price elasticity of demand for oranges is larger than the price elasticity of demand for food. The elasticity of demand for oranges is larger because there are many more substitutes for oranges (apples, grapefruit, lemons, and so forth) than there are substitutes for food.

Topic:  Elasticity, substitutes

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

14) Water is considered a necessity. So, is the demand for water elastic or inelastic?

Answer:  The demand for necessities is inelastic, so the demand for water is inelastic.

Topic:  Elasticity, necessities

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Reflective thinking

 

15) Studies have shown that the price elasticity of demand for necessities, such as food, are higher in developing countries and lower in developed countries. What is the reason for this difference in elasticity?

Answer:  One of the determinants of elasticity is the proportion of income spent on a good or service. The higher the proportion of income spent on a good, the larger the price elasticity of demand for that good. People in developing countries have low incomes and therefore spend a large part of it on food. For example, in Tanzania 62 percent of income is spent on food. On the other hand, in United States only 12 percent of income is spent on food. The price elasticity of demand for food therefore will be larger in developing countries as compared to developed countries.

Topic:  Elasticity, fraction of income

Skill:  Level 4: Applying models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Written and oral communication

 

16) What happens to the price elasticity of demand moving down along a downward-sloping, linear demand curve?

Answer:  Moving down along a downward-sloping, linear demand curve, the elasticity of demand falls in value. Demand changes from elastic to inelastic at the midpoint of the demand curve and then changes to inelastic as the quantity demanded increases moving along demand curve.

Topic:  Price elasticity of demand, linear demand curve

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Written and oral communication

 

 

17) What effect does a price hike have on the total revenue of the producers?

Answer:  The effect of a price hike on total revenue depends on the elasticity of demand. If the demand is elastic, then total revenue will decrease because the decrease in the quantity demanded will outweigh the effect of the higher price. If the demand is inelastic, then total revenue will increase. In this case, the decrease in the quantity demanded is proportionally less than the increase in price and so the higher price leads to increased total revenue. Finally, if the demand is unit elastic, then the higher price does not change the total revenue. The percentage decrease in the quantity demanded just equals the percentage increase in the price and so the two effects just offset each other. The total revenue does not change.

Topic:  Elasticity and total revenue

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Written and oral communication

18) The demand for oil is inelastic. So, does an increase in the price of oil mean an increase in total revenue or a decrease in total revenue for oil producers?

Answer:  Because the demand is inelastic, an increase in price increases the total revenue of the oil producers.

Topic:  Elasticity and total revenue

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

19) Anna owns the Sweet Alps Chocolate store. She charges $10 per pound for her hand made chocolate. You, the economist, have calculated the elasticity of demand for chocolate in her town to be 2.5. If she wants to increase her total revenue, what advice will you give her?

Answer:  You should tell her to lower her price. Because demand is elastic, lowering the price will increase the total revenue.

Topic:  Elasticity and total revenue

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

20) You are the brand manager of Crest toothpaste and you observe that when you increase the price of Crest, your total revenue increases. How is that possible?

Answer:  The demand for Crest toothpaste must be inelastic, so that the percentage increase in price is greater than the percentage decrease in quantity demanded, thereby increasing the total revenue.

Topic:  Elasticity and total revenue

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

 

21) Explain the total revenue test.

Answer:  The total revenue test estimates whether demand for the good is elastic, unit elastic or inelastic based on what happens to total revenue when the price of a good changes. If price and total revenue move in opposite directions, demand is elastic. If price and total revenue move in the same direction, demand is inelastic. If a price change does not change total revenue, demand is unit elastic.

Topic:  Total revenue test

Skill:  Level 1: Definition

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

22) If a decrease in price increases total revenue, what can you determine about the elasticity of demand for the good?

Answer:  If a decrease in price increases total revenue, the demand for the good is elastic, that is, the elasticity of demand exceeds 1.00.

Topic:  Total revenue test

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

23) “If the price falls and, as a result, the total revenue decreases, demand is elastic.” Is the previous assertion correct?

Answer:  No, the assertion is incorrect. If the demand is elastic, a fall in price increases the quantity demanded enough so that total revenue increases.

Topic:  Total revenue test

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

 

24) Recently the governor of Vermont proposed that cigarette taxes in Vermont should be increased substantially, from 44 cents a pack to 66 cents a pack. He estimates that Vermont can raise $20 million in revenue from this tax hike. He also pointed out that the neighboring state of New Hampshire was considering an increase in cigarette taxes.

1. How can it be that an increase in cigarette taxes will increase tax revenue, because, after all, a higher tax will increase cigarette prices and thereby decrease the quantity demanded?
2. If New Hampshire chooses not to increase cigarette taxes, is it likely that Vermont can still raise $20 million in tax revenue? Why or why not? Explain

Answer:

1. The governor knows that cigarettes have an inelastic demand. If the price of cigarettes increases because of a tax, smokers will not decrease their consumption of cigarettes substantially. The percentage change in the quantity will be less than the percentage change in the price and the total tax revenue will increase.
2. If New Hampshire does not increase its taxes, it is less likely that Vermont will be able to raise the $20 million in tax revenue. The reason is because for many people cigarettes from New Hampshire are a good substitute for cigarettes from Vermont. Thus many people from Vermont will buy their cigarettes in New Hampshire, thereby decreasing the total increase in tax revenue in Vermont.

Topic:  Addiction and elasticity

Skill:  Level 4: Applying models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

25) Suppose the price of flour increases from $0.80 to $1.00 a pound and the quantity demanded decreases from 100 pounds to 95 pounds. Using the midpoint method, what is the price elasticity of demand for flour? Is the demand for flour elastic or inelastic?

Answer:  The price elasticity of demand is 0.23. (The price elasticity is calculated from
[(100 pounds – 95 pounds) ÷ 97.5 pounds] ÷ [($0.80 – $1.00) ÷ $0.90] = 0.23.) Because the elasticity is less than one, the demand is inelastic.

Topic:  Elasticity formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

26) If the price of suntan lotion increases from $6 to $8 per bottle and quantity demanded decreases from 900,000 bottles to 845,000 bottles, using the midpoint method, what is the price elasticity of demand for suntan lotion?

Answer:  The price elasticity of demand = (percentage change in the quantity demanded) ÷ (percentage change in the price). Use the midpoint method to calculate the percentages. Thus the percentage change in the quantity demanded = (900,000 – 845,000) ÷ (872,500) = 6.3 percent and the percentage change in the price is ($8 – $6) ÷ ($7) = 28.6 percent. Therefore the elasticity of demand equals
(6.3 percent) ÷ (28.6 percent) = 0.22.

Topic:  Elasticity formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

27) If the price of a magazine increases from $5 to $7 and the quantity demanded of the magazines decreases from 10 million per month to 8 million per month, using the midpoint method, what is the price elasticity of demand? Show your work. Is the demand elastic, inelastic, or unit elastic?

Answer:  The price elasticity of demand = (percentage change in the quantity demanded) ÷ (percentage change in the price). Use the midpoint method to calculate the percentages. So the percentage change in the quantity demanded is (10 million – 8 million) ÷ (9 million) = 22 percent and the percentage change in the price is ($7 – $5) ÷ ($6) = 33 percent. Therefore the elasticity of demand equals
(22 percent) ÷ (33 percent) = 0.67. Demand is inelastic because the price elasticity of demand is less than 1.

Topic:  Elasticity formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

28) Suppose the price elasticity of demand for bouquets of flowers is 4.0. You are charging $8 per bouquet. If you want to increase the quantity of bouquets you sell by 20 percent, what price should you charge?

Answer:  The price elasticity of demand = (percentage change in the quantity demanded) ÷ (percentage change in price). Using the numbers in the problem gives 4.0 = (20 percent) ÷ (percentage change in price), where 20 percent is the desired increase in the quantity of bouquets demanded. Therefore, rearranging the formula shows that (percentage change in price) = (20 percent) ÷ 4.0 = 5 percent. In order to increase the quantity demanded, the price needs to be decreased, so the price needs to be decreased by 5 percent. Next, 5 percent of $8 is ($8) × (5 percent) = $0.40. Thus the price needs to be decreased to $7.60 per bouquet.

Topic:  Elasticity formula

Skill:  Level 4: Applying models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

 

29) The table above gives the demand schedule for a good. Using the midpoint method, find the price elasticity of demand between points A and B, between B and C, between C and D, and between D and E.

Answer:  The price elasticity of demand between points A and B is 1.80. Between points B and C, the elasticity of demand is 1.00. Between points C and D, the elasticity of demand is 0.56. And, between points D and E, the elasticity of demand is 0.27.

Topic:  Elasticity formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

30) The figure above shows the demand curve for pizza. Using the midpoint method and moving from point A to point B, calculate the

1. percentage change in price.
2. percentage change in quantity demanded.
3. price elasticity of demand.

Answer:

1. Between points A and B, the price falls 40 percent.
2. Between points A and B, the quantity increases 10 percent.
3. The price elasticity of demand is 0.25.

Topic:  Elasticity formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

31) In the figure above, at which point (a, b, or c) along the linear demand curve illustrated would demand be

1. most elastic?
2. most inelastic?

Answer:

1. The demand would be most elastic at point a.
2. The demand would be most inelastic at point c.

Topic:  Price elasticity of demand, linear demand curve

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

 

32) The table above gives the demand schedule for a good. What is the total revenue at point A? At point B? At point C? At point D? At point E?

Answer:  The total revenue is the price multiplied by the quantity demanded. Hence at point A, the total revenue is $4,000. At point B it is $4,800. At point C it is $4,800. At point D it is $4,000. And at point E it is $2,400.

Topic:  Total revenue

Skill:  Level 3: Using models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

33) The table above gives the demand schedule for museum visits.

1. You, as the resident economist, have been given the task of maximizing the museum’s total revenue. What admission price should you charge?
2. What is the elasticity of demand between $6 and $4?
3. Moving along the demand schedule from $10 to $8 to $6 and ultimately to $4, how does the price elasticity of demand change in size?

Answer:

6. The admission price you should charge is $6. The total number of visits will be 300,000 and total revenue is $6 × 300,000 = $1,800,000. No other price gives you this much total revenue.
7. The price elasticity of demand equals
   [(300 visits – 400 visits) ÷ 350 visits] ÷ [($6 – $4) ÷ $5] = (0.29) ÷ (0.4) = 0.71.
8. Moving along the demand schedule to lower prices, the elasticity of demand falls in size.

Topic:  Elasticity and total revenue

Skill:  Level 4: Applying models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

 

34) Steve sells hotdogs from a vending cart downtown. The table above shows his daily total revenues at four different prices. Between which two prices is the demand for hotdogs

1. elastic?
2. unit elastic?
3. inelastic?

Answer:

1. Steve’s demand is elastic between $1.50 and $1.75. In this range, when Steve raises his price from $1.50 to $1.75 per hot dog, his total revenue falls, which means that the demand is elastic.
2. Steve’s demand is unit elastic between $1.25 and $1.50. In this range, when Steve raises his price from $1.25 to $1.50 per hot dog, his total revenue does not change, which means that the demand is unit elastic.
3. Steve’s demand is inelastic between $1.00 and $1.25. In this range, when Steve raises his price from $1.00 to $1.25 per hot dog, his total revenue rises, which means that the demand is inelastic.

Topic:  Total revenue test

Skill:  Level 4: Applying models

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

35) Suppose bad weather decreases the quantity of wheat by 12 percent. If the price elasticity of demand for wheat is 0.6, how would the crop failure affect the price of wheat? Would the crop decrease benefit or harm wheat farmers?

Answer:  When the price elasticity of demand is 0.6, a 12 percent decrease in quantity brings about a 20 percent increase in the price. Wheat farmers’ total revenue increases since the demand is inelastic because, with inelastic demand and taken as a group, wheat farmers’ total revenue increases. However, the benefit is distributed unequally. Those farmers whose crop was destroyed because of the bad weather are harmed whereas those farmers whose crop was spared the bad weather, benefited.

Topic:  Farm revenue and elasticity

Skill:  Level 5: Critical thinking

Section:  Checkpoint 5.1

Status:  Old

AACSB:  Analytical thinking

 

5.7   Essay: The Price Elasticity of Supply

 

1) What is the price elasticity of supply? List and briefly define three cases of the price elasticity of supply.

Answer:  The price elasticity of supply measures how responsive quantity supplied is to a change in the price of the good. Supply can be price elastic, if the percentage change in the quantity supplied exceeds the percentage change in the price, price inelastic, if the percentage change in the quantity supplied is less than the percentage change in the price, or unit elastic, if the percentage change in the quantity supplied equals the percentage change in the price.

Topic:  Elasticity of supply

Skill:  Level 1: Definition

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Written and oral communication

 

2) If the price elasticity of supply of corn is 3.12, then is the supply of corn elastic or inelastic?

Answer:  Because the price elasticity of supply exceeds one, the supply of corn is elastic.

Topic:  Elasticity of supply

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

3) List factors that increase the price elasticity of supply.

Answer:  Factors that increase the price elasticity of supply are:

• The good has a constant or very gently rising opportunity cost of production.
• More time has passed since the price of the good changed.
• The good can be stored.

Topic:  Factors that influence the price elasticity of supply

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Written and oral communication

 

4) How does elasticity of supply differ for a product that can be stored, compared to a product that cannot be stored?

Answer:  A product that can be stored can be withheld from the market for a time when the price falls and can be quickly supplied to the market from the inventory when the price rises. Hence the quantity supplied of the product can be quickly and markedly changed and so the supply is elastic. A product that cannot be stored, especially if it is perishable, cannot be withheld from the market when the price falls because it will spoil. In addition, when the price rises it cannot be supplied from the inventory because there is no inventory. Hence the quantity supplied of the product that cannot be stored cannot change much and is therefore less elastic.

Topic:  Elasticity, storage

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Written and oral communication

5) Natural gas is difficult to store. What implication does this fact have for the elasticity of supply of natural gas?

Answer:  Because natural gas is difficult to store, the supply of natural gas is inelastic. With few storage facilities, it is very difficult (at least in the short run) to increase the quantity supplied by much even when prices rise substantially.

Topic:  Elasticity, storage

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

6) Is supply more elastic or less elastic as more time passes after a price change? Explain your answer.

Answer:  Supply becomes elastic as more time passes after a price change. Consider the case of an increase in price. As more time passes, producers have time to gather more resources, such as building additional factories, and to implement new production techniques. Hence as time passes, the quantity supplied increases.

Topic:  Elasticity, time since the price changed

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Reflective thinking

 

7) If the price increases by 20 percent and the quantity supplied increases by 40 percent, what does the elasticity of supply equal?

Answer:  The price elasticity of supply = (percentage change in the quantity supplied) ÷ (percentage change in price) = (40 percent) ÷ (20 percent) = 2.00.

Topic:  Price elasticity of supply, formula

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

8) Suppose the quantity supplied of computers increases from 2 million to 4 million units as the price of a computer increases from $600 to $700. What does the price elasticity of supply equal?

Answer:

The price elasticity of supply = (percentage change in the quantity supplied) ÷ (percentage change in the price). Use the midpoint method to calculate the percentages. Thus the percentage change in the quantity supplied = (4,000,000 – 2,000,000) ÷ (3,000,000) = 66.7 percent and the percentage change in the price is ($700 – $600) ÷ ($650) = 15.4 percent. Therefore the elasticity of supply equals
(66.7 percent) ÷ (15.4 percent) = 4.33.

Topic:  Price elasticity of supply, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

9) The table above gives the supply schedule for a product. Using the midpoint method, find the price elasticity of supply between points A and B, between B and C, between C and D, and between D and E.

Answer:  Between A and B, the elasticity of supply is 0.82. Between B and C, the elasticity of supply is 0.78. Between C and D, the elasticity of supply is 0.71. Between D and E, the elasticity of supply is 0.60.

Topic:  Price elasticity of supply, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

 

10) June makes holiday wreaths and sells them during the holiday season. The figure above shows her supply curve of wreaths per week. Use the midpoint method in this problem.

1. Calculate the percentage change in quantity between points A and B.
2. Calculate the percentage change in price between points A and B.
3. Calculate the price elasticity of supply between points A and B.

Answer:

1. The percentage change in quantity is 20 percent.
2. The percentage change in price is 20 percent.
3. The price elasticity of supply is 1.0.

Topic:  Price elasticity of supply, formula

Skill:  Level 4: Applying models

Section:  Checkpoint 5.2

Status:  Old

AACSB:  Analytical thinking

5.8   Essay: Cross Elasticity and Income Elasticity

 

1) The price elasticity of demand is always positive, as is the price elasticity of supply. Is the cross elasticity of demand always positive? Explain your answer.

Answer:  No, the cross elasticity of demand is not always positive. The cross elasticity of demand is positive for goods that are substitutes and negative for goods that are complements. Hence the sign of the cross elasticity of demand indicates whether the goods are substitutes or complements.

Topic:  Cross elasticity of demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Written and oral communication

 

2) Explain why the cross elasticity of demand for substitute goods is positive and the cross elasticity of demand for complements is negative.

Answer:  The formula for the cross elasticity of demand is the percentage change in quantity demanded of good A divided by the percentage change in price of another good, B. Consider the case in which A and B are substitutes. In this case, when the price of B falls, the quantity of A demanded decreases and when the price of B rises, the quantity of A demanded increases. Because the quantity demanded of product A is in the numerator, then the decrease in the quantity of A demanded when the price of the other product falls means, that the cross elasticity will be positive. (There is a negative number in the numerator and also a negative number in the denominator, so the fraction, the cross elasticity, is positive.) For a price increase, there are positive numbers in both the numerator and denominator, so again the fraction is positive. In either case, the result will be a positive number, that is, the cross elasticity of demand is positive.

Next, consider the case in which A and B are complements. In this case, an increase in the price of B decreases the quantity demanded of A and a decrease in the price of B increases the quantity demanded of A. Here, the change in quantity in the numerator always has the opposite sign from the change in the price in the denominator, so the resulting cross elasticity of demand will be negative.

Topic:  Cross elasticity of demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Written and oral communication

 

3) If the cross elasticity of demand between two goods is negative, are the goods substitutes or complements?

Answer:  If the cross elasticity of demand is negative, then the goods are complements.

Topic:  Cross elasticity of demand, complements

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

4) If the cross elasticity of demand between peanut butter and milk is -1.11, then are peanut butter and milk substitutes or complements?

Answer:  Because the cross elasticity of demand is negative, peanut butter and milk are complements.

Topic:  Cross elasticity of demand, complements

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Reflective thinking

 

5) How are the cross elasticity of demand and income elasticity of demand similar and how are they different from the price elasticity of demand?

Answer:  The cross and income elasticities are similar to the price elasticity of demand because all examine how strongly demanders respond to a change in a relevant factor. The price elasticity of demand examines how strongly demanders respond to a change in the price of the product. The cross elasticity of demand studies how strongly demanders respond to a change in the price of a related product. And the income elasticity of demand examines how strongly demanders respond to a change in income. The formulas for all three elasticities also are similar. All three use percentage changes and all three divide the percentage change in the quantity demanded of the good by the percentage change in the relevant factor.

The elasticities also differ. For instance, as outlined above, all three concentrate on a different factor: the good’s price (for the price elasticity of demand); the price of a related good (for the cross elasticity of demand); and income (for the income elasticity of demand.) The price elasticity of demand is always positive (because we use the magnitudes of the percentage changes or, equivalently, we take the absolute value of the percentage changes) whereas the cross and income elasticities of demand can be either positive or negative.

Topic:  Cross elasticity of demand and income elasticity of demand

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Written and oral communication

 

6) If the income elasticity of demand for a Miami Dolphin season ticket is 2.34, then are Dolphin season tickets a normal or an inferior good?

Answer:  Because the income elasticity of demand is positive, Dolphin season tickets are a normal good.

Topic:  Income elasticity of demand, normal good

Skill:  Level 1: Definition

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Written and oral communication

 

7) The income elasticity of demand for store brands of soda (that is, non-name brands) is negative. What does this fact indicate about consumers’ perceptions about the store brands?

Answer:  The negative income elasticity indicates that the store brands of soda are considered by many consumers to be an inferior good. Hence as income increases, consumption of these sodas decreases as consumers opt for name brand sodas, such as Pepsi and Coke.

Topic:  Income elasticity of demand, inferior good

Skill:  Level 2: Using definitions

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Written and oral communication

 

8) When the price of Ford pickup trucks rises from $18,000 to $19,000, the quantity of Chevy trucks demanded increases from 112,000 to 144,000. What does the cross elasticity of demand between Ford and Chevy trucks equal?

Answer:  In this case, the cross elasticity of demand = (percentage change in the quantity of Chevy trucks demanded) ÷ (percentage change in the price of a Ford truck). Use the midpoint method to calculate the percentages. Thus the percentage change in the quantity of Chevy trucks demanded = (144,000 – 112,000) ÷ (128,000) = 25 percent and the percentage change in the price of a Ford truck is ($19,000 – $18,000) ÷ ($18,500) = 5.4 percent. Thus the cross elasticity of demand equals (25 percent) ÷ (5.4 percent) = 4.625.

Topic:  Cross elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

 

9) When the price of bananas rises 2 percent, the quantity demanded of peanut butter falls 4 percent.

1. What is the cross elasticity of demand between these two goods?
2. How are these goods related?
3. If the price of bananas rises, how will that affect the demand curve for peanut butter?

Answer:

2. The cross elasticity of demand equals -2.
3. Because the cross elasticity of demand is negative, the cross elasticity indicates that the two goods are complements.
4. If the price of bananas rises, the demand for peanut butter decreases and the demand curve for peanut butter shifts leftward.

Topic:  Cross elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

 

10) Consider two goods: peanut butter and jelly. If the price of jelly increases from $2 a jar to $3 per jar and the quantity demanded of peanut butter decreases from 50 jars to 45 jars, what is the cross elasticity of demand? Are the goods substitutes or complements?

Answer:  The cross elasticity of demand equals -0.275. The value is negative so the goods are complements.

Topic:  Cross elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

 

11) A 10 percent increase in income brings about a 15 percent decrease in the demand for a good. What is the income elasticity of demand and is the good a normal good or an inferior good?

Answer:  The income elasticity of demand is -1.5. The good is an inferior good.

Topic:  Income elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

 

12) If income increases from $50,000 to $60,000 while the demand for a good increases from 100 units to 125 units, what is the income elasticity of demand? Is the good a normal good or an inferior good?

Answer:  The income elasticity equals 1.22. Because the income elasticity of demand is positive, the good is a normal good.

Topic:  Income elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

 

13) The income elasticity of demand for movies in the United States is 3.41. If people’s incomes decrease by 1 percent, what is the decrease in the quantity of movies demanded?

Answer:  The income elasticity of demand = (percentage change in quantity demanded) ÷ (percentage change in income). Using the numbers in the problem gives 3.41 = (percentage change in quantity demanded) ÷ (1 percent). Rearranging the formula shows (percentage change in quantity demanded) =
(1 percent) × 3.41 = 3.41 percent. Therefore the quantity of movies demanded decreases by 3.41 percent.

Topic:  Income elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking

 

 

14) The table above gives Sharon’s demand for ground beef at two different income levels. Use the midpoint method in this problem.

1. What is the percentage change in Sharon’s income?
2. What is the percentage change in the quantity demanded?
3. What is Sharon’s income elasticity of demand for ground beef?
4. Is ground beef a normal or an inferior good for Sharon?

Answer:

1. The percentage change in Sharon’s income is 20 percent.
2. The percentage change in the quantity of ground beef demanded is 80 percent.
3. Sharon’s income elasticity of demand for ground beef is 4.00.
4. Because the income elasticity is positive, ground beef is a normal good for Sharon.

Topic:  Income elasticity of demand, formula

Skill:  Level 3: Using models

Section:  Checkpoint 5.3

Status:  Old

AACSB:  Analytical thinking