Essentials of Economics International Edition 5th Edition N. Gregory Mankiw - Test Bank

Essentials of Economics International Edition 5th Edition N. Gregory Mankiw – Test Bank

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Chapter 5

Elasticity and Its Application

TRUE/FALSE

Elasticity measures how responsive quantity is to changes in price.

ANS: T DIF: 1 REF: 5-0 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Definitional

Measures of elasticity enhance our ability to study the magnitudes of changes.

ANS: T DIF: 1 REF: 5-0 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Definitional

The demand for bread is likely to be more elastic than the demand for solid-gold bread plates.

ANS: F DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive

In general, demand curves for necessities tend to be price elastic.

ANS: F DIF: 1 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive

In general, demand curves for luxuries tend to be price elastic.

ANS: T DIF: 1 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive

Necessities tend to have inelastic demands, whereas luxuries have elastic demands.

ANS: T DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive

Goods with close substitutes tend to have more elastic demands than do goods without close substitutes.

ANS: T DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive

The demand for Rice Krispies is more elastic than the demand for cereal in general.

ANS: T DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive

The demand for soap is more elastic than the demand for Dove soap.

ANS: F DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive

The demand for gasoline will respond more to a change in price over a period of five weeks than over a period of five years.

ANS: F DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive

Even the demand for a necessity such as gasoline will respond to a change in price, especially over a longer time horizon.

ANS: T DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive

The price elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price.

ANS: T DIF: 1 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Definitional

The price elasticity of demand is defined as the percentage change in price divided by the percentage change in quantity demanded.

ANS: F DIF: 1 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Definitional

Suppose that when the price rises by 20% for a particular good, the quantity demanded of that good falls by 10%. The price elasticity of demand for this good is equal to 2.0.

ANS: F DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Analytical

Suppose that when the price rises by 10% for a particular good, the quantity demanded of that good falls by 20%. The price elasticity of demand for this good is equal to 2.0.

ANS: T DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Analytical

If the price of calculators increases by 15 percent and the quantity demanded per week falls by 45 percent as a result, then the price elasticity of demand is 3.

ANS: T DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative

Demand is inelastic if the price elasticity of demand is greater than 1.

ANS: F DIF: 1 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Inelastic demand MSC: Definitional

A linear, downward-sloping demand curve has a constant elasticity but a changing slope.

ANS: F DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive

Price elasticity of demand along a linear, downward-sloping demand curve increases as price falls.

ANS: F DIF: 3 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive

If the price elasticity of demand is equal to 0, then demand is unit elastic.

ANS: F DIF: 1 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Definitional

If the price elasticity of demand is equal to 1, then demand is unit elastic.

ANS: T DIF: 1 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Definitional

Demand for a good is said to be inelastic if the quantity demanded increases substantially when the price falls by a small amount.

ANS: F DIF: 1 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Inelastic demand MSC: Definitional

The midpoint method is used to calculate elasticity between two points because it gives the same answer regardless of the direction of the change.

ANS: T DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Midpoint method MSC: Interpretive

The flatter the demand curve that passes through a given point, the more inelastic the demand.

ANS: F DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive

The flatter the demand curve that passes through a given point, the more elastic the demand.

ANS: T DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive

If demand is perfectly inelastic, the demand curve is vertical, and the price elasticity of demand equals 0.

ANS: T DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Perfectly inelastic demand MSC: Interpretive

If demand is perfectly elastic, the demand curve is horizontal, and the price elasticity of demand equals 1.

ANS: F DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Perfectly elastic demand MSC: Interpretive

Along the elastic portion of a linear demand curve, total revenue rises as price rises.

ANS: F DIF: 3 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Interpretive

If a firm is facing elastic demand, then the firm should decrease price to increase revenue.

ANS: T DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

If a firm is facing inelastic demand, then the firm should decrease price to increase revenue.

ANS: F DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

When demand is inelastic, a decrease in price increases total revenue.

ANS: F DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Inelastic demand | Total revenue MSC: Interpretive

The income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in income.

ANS: T DIF: 1 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Income elasticity of demand MSC: Definitional

The income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price.

ANS: F DIF: 1 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Income elasticity of demand MSC: Definitional

Normal goods have negative income elasticities of demand, while inferior goods have positive income elasticities of demand.

ANS: F DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Income elasticity of demand MSC: Interpretive

If the income elasticity of demand for a good is negative, then the good must be an inferior good.

ANS: T DIF: 1 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Income elasticity of demand MSC: Interpretive

If the cross-price elasticity of demand for two goods is negative, then the two goods are substitutes.

ANS: F DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Interpretive

If the cross-price elasticity of demand for two goods is negative, then the two goods are complements.

ANS: T DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Interpretive

Cross-price elasticity of demand measures how the quantity demanded of one good changes as the price of another good changes.

ANS: T DIF: 1 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Definitional

Cross-price elasticity is used to determine whether goods are inferior or normal goods.

ANS: F DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Interpretive

Cross-price elasticity is used to determine whether goods are substitutes or complements.

ANS: T DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Interpretive

The cross-price elasticity of garlic salt and onion salt is -2, which indicates that garlic salt and onion salt are substitutes.

ANS: F DIF: 2 REF: 5-1 NAT: Analytic

LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Interpretive

Price elasticity of supply measures how much the quantity supplied responds to changes in the price.

ANS: T DIF: 1 REF: 5-2 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of supply MSC: Definitional

Supply and demand both tend to be more elastic in the long run and more inelastic in the short run.

ANS: T DIF: 2 REF: 5-1 | 5-2 NAT: Analytic

LOC: Elasticity TOP: Price elasticities of demand and supply

MSC: Interpretive

If the price elasticity of supply is 2 and the quantity supplied decreases by 6%, then the price must have decreased by 3%.

ANS: T DIF: 2 REF: 5-2 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of supply MSC: Applicative

Supply is said to be inelastic if the quantity supplied responds substantially to changes in the price, and elastic if the quantity supplied responds only slightly to price.

ANS: F DIF: 1 REF: 5-2 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of supply MSC: Definitional

Supply tends to be more elastic in the short run and more inelastic in the long run.

ANS: F DIF: 2 REF: 5-2 NAT: Analytic

TOP: Price elasticity of supply MSC: Interpretive

When the price of knee braces increased by 25 percent, the Brace Yourself Company increased its quantity supplied of knee braces per week by 75 percent. BYC’s price elasticity of supply of knee braces is 0.33.

ANS: F DIF: 2 REF: 5-2 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of supply MSC: Applicative

If a supply curve is horizontal, then supply is said to be perfectly elastic, and the price elasticity of supply approaches infinity.

ANS: T DIF: 2 REF: 5-2 NAT: Analytic

LOC: Elasticity TOP: Perfectly elastic supply MSC: Interpretive

A government program that reduces land under cultivation hurts farmers but helps consumers.

ANS: F DIF: 2 REF: 5-3 NAT: Analytic

LOC: Elasticity TOP: Total revenue MSC: Applicative

OPEC failed to maintain a high price of oil in the long run, partly because both the supply of oil and the demand for oil are more elastic in the long run than in the short run.

ANS: T DIF: 2 REF: 5-3 NAT: Analytic

LOC: Elasticity TOP: OPEC | Price elasticity of demand | Price elasticity of supply

MSC: Applicative

Drug interdiction, which reduces the supply of drugs, may decrease drug-related crime because the demand for drugs is inelastic.

ANS: F DIF: 2 REF: 5-3 NAT: Analytic

LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative

SHORT ANSWER

Consider the following pairs of goods. For which of the two goods would you expect the demand to be more price elastic? Why?

a.	water or diamonds
b.	insulin or nasal decongestant spray
c.	food in general or breakfast cereal
d.	gasoline over the course of a week or gasoline over the course of a year
e.	personal computers or IBM personal computers

ANS:

a.	Diamonds are luxuries, and water is a necessity. Therefore, diamonds have the more elastic demand.
b.	Insulin has no close substitutes, but decongestant spray does. Therefore, nasal decongestant spray has the more elastic demand.
c.	Breakfast cereal has more substitutes than does food in general. Therefore, breakfast cereal has the more elastic demand.
d.	The longer the time period, the more elastic demand is. Therefore, gasoline over the course of a year has the more elastic demand.
e.	There are more substitutes for IBM personal computers than there are for personal computers. Therefore, IBM personal computers have the more elastic demand.

DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity

TOP: Price elasticity of demand MSC: Applicative

You own a small town movie theatre. You currently charge $5 per ticket for everyone who comes to your movies. Your friend who took an economics course in college tells you that there may be a way to increase your total revenue. Given the demand curves shown, answer the following questions.

a.	What is your current total revenue for both groups?
b.	The elasticity of demand is more elastic in which market?
c.	Which market has the more inelastic demand?
d.	What is the elasticity of demand between the prices of $5 and $2 in the adult market? Is this elastic or inelastic?
e.	What is the elasticity of demand between $5 and $2 in the children’s market? Is this elastic or inelastic?
f.	Given the graphs and what your friend knows about economics, he recommends you increase the price of adult tickets to $8 each and lower the price of a child’s ticket to $3. How much could you increase total revenue if you take his advice?

ANS:

a.	Total revenue from children’s tickets is $100 and from adult tickets is $250. Total revenue from all sales would be $350.
b.	The demand for children’s tickets is more elastic.
c.	The adult ticket market has the more inelastic demand.
d.	The elasticity of demand between $5 and $2 is 0.26, which is inelastic.
e.	The elasticity of demand between $5 and $2 is 1.0, which is unit elastic.
f.	Total revenue in the adult market would be $320. Total revenue in the children’s market would be $120, so total revenue for both groups would be $440. $440 – $350 is an increase in total revenue of $90.

DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity

TOP: Price elasticity of demand | Total revenue MSC: Applicative

Use the graph shown to answer the following questions. Put the correct letter(s) in the blank.

a.	The elastic section of the graph is represented by section from _______.
b.	The inelastic section of the graph is represented by section from _______.
c.	The unit elastic section of the graph is represented by section _______.
d.	The portion of the graph in which a decrease in price would cause total revenue to fall would be from _________.
e.	The portion of the graph in which a decrease in price would cause total revenue to rise would be from _________.
f.	The portion of the graph in which a decrease in price would not cause a change in total revenue would be _________.
g.	The section of the graph in which total revenue would be at a maximum would be _______.
h.	The section of the graph in which elasticity is greater than 1 is _______.
i.	The section of the graph in which elasticity is equal to 1 is ______.
j.	The section of the graph in which elasticity is less than 1 is _______.

ANS:

a.	A to B
b.	B to C
c.	B
d.	B to C
e.	A to B
f.	B
g.	B
h.	A to B
i.	B
j.	B to C

DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity

TOP: Price elasticity of demand | Total revenue MSC: Applicative

Using the midpoint method, compute the elasticity of demand between points A and B. Is demand along this portion of the curve elastic or inelastic? Interpret your answer with regard to price and quantity demanded. Now compute the elasticity of demand between points B and C. Is demand along this portion of the curve elastic or inelastic?

ANS:

In the section of the demand curve from A to B, the elasticity of demand would be 2.5. This would be an elastic portion of the curve. This would mean that for every 1 percent change in price, quantity demanded would change by 2.5 percent.

In the section of the demand curve from B to C, the elasticity of demand would be .75. This would be an inelastic portion of the curve. This would mean that for every 1 percent change in price, quantity demanded would change by 0.75 percent.

DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity

TOP: Price elasticity of demand MSC: Applicative

When the Shaffers had a monthly income of $4,000, they usually ate out 8 times a month. Now that the couple makes $4,500 a month, they eat out 10 times a month. Compute the couple’s income elasticity of demand using the midpoint method. Explain your answer. (Is a restaurant meal a normal or inferior good to the couple?)

ANS:

The income elasticity of demand for the Shaffers is 1.89. Since the income elasticity of demand is positive, eating out would be interpreted as a normal good.

DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity

TOP: Income elasticity of demand MSC: Applicative

Recently, in Smalltown, the price of Twinkies fell from $0.80 to $0.70. As a result, the quantity demanded of Ho-Ho’s decreased from 120 to 100. What would be the appropriate elasticity to compute? Using the midpoint method, compute this elasticity. What does your answer tell you?

ANS:

The appropriate elasticity to compute would be cross-price elasticity. The cross-price elasticity for this example would be 1.36. The two goods are substitutes because the cross-price elasticity is positive.

DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity

TOP: Cross-price elasticity of demand MSC: Applicative

Sec00 – Elasticity and Its Application

MULTIPLE CHOICE

In general, elasticity is a measure of

a.	the extent to which advances in technology are adopted by producers.
b.	the extent to which a market is competitive.
c.	how firms’ profits respond to changes in market prices.
d.	how much buyers and sellers respond to changes in market conditions.

ANS: D DIF: 1 REF: 5-0

NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Definitional

Elasticity is

a.	a measure of how much buyers and sellers respond to changes in market conditions.
b.	the study of how the allocation of resources affects economic well-being.
c.	the maximum amount that a buyer will pay for a good.
d.	the value of everything a seller must give up to produce a good.

ANS: A DIF: 1 REF: 5-0

NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Definitional

When studying how some event or policy affects a market, elasticity provides information on the

a.	equity effects on the market by identifying the winners and losers.
b.	magnitude of the effect on the market.
c.	speed of adjustment of the market in response to the event or policy.
d.	number of market participants who are directly affected by the event or policy.

ANS: B DIF: 2 REF: 5-0

NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Interpretive

How does the concept of elasticity allow us to improve upon our understanding of supply and demand?

a.	Elasticity allows us to analyze supply and demand with greater precision than would be the case in the absence of the elasticity concept.
b.	Elasticity provides us with a better rationale for statements such as “an increase in x will lead to a decrease in y” than we would have in the absence of the elasticity concept.
c.	Without elasticity, we would not be able to address the direction in which price is likely to move in response to a surplus or a shortage.
d.	Without elasticity, it is very difficult to assess the degree of competition within a market.

ANS: A DIF: 2 REF: 5-0

NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Interpretive

When consumers face rising gasoline prices, they typically

a.	reduce their quantity demanded more in the long run than in the short run.
b.	reduce their quantity demanded more in the short run than in the long run.
c.	do not reduce their quantity demanded in the short run or the long run.
d.	increase their quantity demanded in the short run but reduce their quantity demanded in the long run.

ANS: A DIF: 2 REF: 5-0

NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Applicative

A 10 percent increase in gasoline prices reduces gasoline consumption by about

a.	6 percent after one year and 2.5 percent after five years.
b.	2.5 percent after one year and 6 percent after five years.
c.	10 percent after one year and 20 percent after five years.
d.	0 percent after one year and 1 percent after five years.

ANS: B DIF: 2 REF: 5-0

NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Applicative

Which of the following statements about the consumers’ responses to rising gasoline prices is correct?

a.	About 10 percent of the long-run reduction in quantity demanded arises because people drive less and about 90 percent arises because they switch to more fuel-efficient cars.
b.	About 90 percent of the long-run reduction in quantity demanded arises because people drive less and about 10 percent arises because they switch to more fuel-efficient cars.
c.	About half of the long-run reduction in quantity demanded arises because people drive less and about half arises because they switch to more fuel-efficient cars.
d.	Because gasoline is a necessity, consumers do not decrease their quantity demanded in either the short run or the long run.

ANS: C DIF: 2 REF: 5-0

NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Applicative

Sec01 – Elasticity and Its Application – The Elasticity of Demand

MULTIPLE CHOICE

The price elasticity of demand measures how much

a.	quantity demanded responds to a change in price.
b.	quantity demanded responds to a change in income.
c.	price responds to a change in demand.
d.	demand responds to a change in supply.

ANS: A DIF: 1 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Definitional

The price elasticity of demand measures

a.	buyers’ responsiveness to a change in the price of a good.
b.	the extent to which demand increases as additional buyers enter the market.
c.	how much more of a good consumers will demand when incomes rise.
d.	the movement along a supply curve when there is a change in demand.

ANS: A DIF: 1 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Definitional

The price elasticity of demand for a good measures the willingness of

a.	consumers to buy less of the good as price rises.
b.	consumers to avoid monopolistic markets in favor of competitive markets.
c.	firms to produce more of a good as price rises.
d.	firms to cater to the tastes of consumers.

ANS: A DIF: 1 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

Which of the following statements about the price elasticity of demand is correct?

a.	The price elasticity of demand for a good measures the willingness of buyers of the good to buy less of the good as its price increases.
b.	Price elasticity of demand reflects the many economic, psychological, and social forces that shape consumer tastes.
c.	Other things equal, if good x has close substitutes and good y does not have close substitutes, then the demand for good x will be more elastic than the demand for good y.
d.	All of the above are correct.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

For a good that is a necessity,

a.	quantity demanded tends to respond substantially to a change in price.
b.	demand tends to be inelastic.
c.	the law of demand does not apply.
d.	All of the above are correct.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

Goods with many close substitutes tend to have

a.	more elastic demands.
b.	less elastic demands.
c.	price elasticities of demand that are unit elastic.
d.	income elasticities of demand that are negative.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

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

a.	mint-flavored toothpaste
b.	toothpaste
c.	Colgate mint-flavored toothpaste
d.	a generic mint-flavored toothpaste

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Applicative

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

a.	white chocolate chip with macadamia nut cookies
b.	Mrs. Field’s chocolate chip cookies
c.	milk chocolate chip cookies
d.	cookies

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Applicative

If the price of natural gas rises, when is the price elasticity of demand likely to be the highest?

a.	immediately after the price increase
b.	one month after the price increase
c.	three months after the price increase
d.	one year after the price increase

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Applicative

If the price of milk rises, when is the price elasticity of demand likely to be the lowest?

a.	immediately after the price increase
b.	one month after the price increase
c.	three months after the price increase
d.	one year after the price increase

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Applicative

For a good that is a luxury, demand

a.	tends to be inelastic.
b.	tends to be elastic.
c.	has unit elasticity.
d.	cannot be represented by a demand curve in the usual way.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

For a good that is a necessity, demand

a.	tends to be inelastic.
b.	tends to be elastic.
c.	has unit elasticity.
d.	cannot be represented by a demand curve in the usual way.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

A person who takes a prescription drug to control high cholesterol most likely has a demand for that drug that is

a.	inelastic.
b.	unit elastic.
c.	elastic.
d.	highly responsive to changes in income.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

The demand for Neapolitan ice cream is likely quite elastic because

a.	ice cream must be eaten quickly.
b.	this particular flavor of ice cream is viewed as a necessity by many ice-cream lovers.
c.	the market is broadly defined.
d.	other flavors of ice cream are good substitutes for this particular flavor.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

The demand for Werthers candy is likely

a.	elastic because candy is expensive relative to other snacks.
b.	elastic because there are many close substitutes for Werthers.
c.	elastic because Werthers are regarded as a necessity by many people.
d.	inelastic because it is usually eaten quickly, making the relevant time horizon short.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

There are very few, if any, good substitutes for motor oil. Therefore,

a.	the demand for motor oil would tend to be inelastic.
b.	the demand for motor oil would tend to be elastic.
c.	the demand for motor oil would tend to respond strongly to changes in prices of other goods.
d.	the supply of motor oil would tend to respond strongly to changes in people’s tastes for large cars relative to their tastes for small cars.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

Holding all other forces constant, when the price of gasoline rises, the number of gallons of gasoline demanded would fall substantially over a ten-year period because

a.	buyers tend to be much less sensitive to a change in price when given more time to react.
b.	buyers tend to be much more sensitive to a change in price when given more time to react.
c.	buyers will have substantially more real income over a ten-year period.
d.	the quantity supplied of gasoline increases very little in response to an increase in the price of gasoline.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

A good will have a more inelastic demand,

a.	the greater the availability of close substitutes.
b.	the broader the definition of the market.
c.	the longer the period of time.
d.	the more it is regarded as a luxury.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

A good will have a more elastic demand,

a.	the greater the availability of close substitutes.
b.	the more narrow the definition of the market.
c.	the shorter the period of time.
d.	the more it is regarded as a necessity.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

Which of the following statements is correct?

a.	The demand for flat-screen computer monitors is more elastic than the demand for monitors in general.
b.	The demand for grandfather clocks is more elastic than the demand for clocks in general.
c.	The demand for cardboard is more elastic over a long period of time than over a short period of time.
d.	All of the above are correct.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

Which of the following statements is correct?

a.	The demand for natural gas is more elastic over a short period of time than over a long period of time.
b.	The demand for smoke alarms is more elastic than the demand for Persian rugs.
c.	The demand for bourbon whiskey is more elastic than the demand for alcoholic beverages in general.
d.	All of the above are correct.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

Which of the following is not a determinant of the price elasticity of demand for a good?

a.	the time horizon
b.	the steepness or flatness of the supply curve for the good
c.	the definition of the market for the good
d.	the availability of substitutes for the good

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

The greater the price elasticity of demand, the

a.	more likely the product is a necessity.
b.	smaller the responsiveness of quantity demanded to a change in price.
c.	greater the percentage change in price over the percentage change in quantity demanded.
d.	greater the responsiveness of quantity demanded to a change in price.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

The value of the price elasticity of demand for a good will be relatively large when

a.	there are no good substitutes available for the good.
b.	the time period in question is relatively short.
c.	the good is a luxury as opposed to a necessity.
d.	All of the above are correct.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

For which of the following goods would demand be most elastic?

a.	clothing
b.	blue jeans
c.	Tommy Hilfiger jeans
d.	All three would have the same elasticity of demand since they are all related.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Applicative

For which of the following goods would demand be most inelastic?

a.	chocolate
b.	Godiva chocolate
c.	Hershey’s chocolate
d.	All three would have the same elasticity of demand since they are all related.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Applicative

Whether a good is a luxury or necessity depends on

a.	the price of the good.
b.	the preferences of the buyer.
c.	the intrinsic properties of the good.
d.	how scarce the good is.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

The price elasticity of demand for bread

a.	is computed as the percentage change in quantity demanded of bread divided by the percentage change in price of bread.
b.	depends, in part, on the availability of close substitutes for bread.
c.	reflects the many economic, social, and psychological forces that influence consumers’ tastes for bread.
d.	All of the above are correct.

ANS: D DIF: 1 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

The price elasticity of demand for eggs

a.	is computed as the percentage change in quantity demanded of eggs divided by the percentage change in price of eggs.
b.	will be lower if there is a new invention that is a close substitute for eggs.
c.	will be higher if consumers consider eggs to be a luxury good.
d.	All of the above are correct.

ANS: A DIF: 1 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

Other things equal, the demand for a good tends to be more inelastic, the

a.	fewer the available substitutes.
b.	longer the time period considered.
c.	more the good is considered a luxury good.
d.	more narrowly defined is the market for the good.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

Economists compute the price elasticity of demand as the

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

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Definitional

Suppose there is a 6 percent increase in the price of good X and a resulting 6 percent decrease in the quantity of X demanded. Price elasticity of demand for X is

a.	0.
b.	1.
c.	6.
d.	36.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Applicative

If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price results in a

a.	0.4 percent decrease in the quantity demanded.
b.	2.5 percent decrease in the quantity demanded.
c.	4 percent decrease in the quantity demanded.
d.	40 percent decrease in the quantity demanded.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Applicative

If the price elasticity of demand for a good is 10.0, then a 4 percent increase in price results in a

a.	0.4 percent decrease in the quantity demanded.
b.	2.5 percent decrease in the quantity demanded.
c.	4 percent decrease in the quantity demanded.
d.	40 percent decrease in the quantity demanded.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Applicative

If the price elasticity of demand for a good is 0.4, then a 10 percent increase in price results in a

a.	0.4 percent decrease in the quantity demanded.
b.	2.5 percent decrease in the quantity demanded.
c.	4 percent decrease in the quantity demanded.
d.	40 percent decrease in the quantity demanded.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Applicative

If the price elasticity of demand for a good is 0.25, then a 20 percent decrease in price results in a

a.	0.0125 percent increase in the quantity demanded.
b.	4 percent increase in the quantity demanded.
c.	5 percent increase in the quantity demanded.
d.	80 percent increase in the quantity demanded.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Applicative

If the price elasticity of demand for a good is 1.5, then a 3 percent decrease in price results in a

a.	0.5 percent increase in the quantity demanded.
b.	2 percent increase in the quantity demanded.
c.	4.5 percent increase in the quantity demanded.
d.	5 percent increase in the quantity demanded.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Applicative

If the price elasticity of demand for a good is 0.8, then which of the following events is consistent with a 4 percent decrease in the quantity of the good demanded?

a.	a 0.2 percent increase in the price of the good
b.	a 3.2 percent increase in the price of the good
c.	a 4.8 percent increase in the price of the good
d.	a 5 percent increase in the price of the good

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Applicative

For a particular good, a 2 percent increase in price causes a 12 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?

a.	There are no close substitutes for this good.
b.	The good is a luxury.
c.	The market for the good is broadly defined.
d.	The relevant time horizon is short.

ANS: B DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Analytical

For a particular good, a 12 percent increase in price causes a 3 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?

a.	There are many substitutes for this good.
b.	The good is a necessity.
c.	The market for the good is narrowly defined.
d.	The relevant time horizon is long.

ANS: B DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Analytical

For a particular good, a 3 percent increase in price causes a 10 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?

a.	The relevant time horizon is short.
b.	The good is a necessity.
c.	The market for the good is broadly defined.
d.	There are many close substitutes for this good.

ANS: D DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Analytical

For a particular good, a 10 percent increase in price causes a 3 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?

a.	The relevant time horizon is short.
b.	The good is a luxury.
c.	The market for the good is narrowly defined.
d.	There are many close substitutes for this good.

ANS: A DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Analytical

Demand is said to have unit elasticity if elasticity is

a.	less than 1.
b.	greater than 1.
c.	equal to 1.
d.	equal to 0.

ANS: C DIF: 1 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Definitional

Demand is said to be unit elastic if

a.	quantity demanded changes by the same percent as the price.
b.	quantity demanded changes by a larger percent than the price.
c.	the demand curve shifts by the same percentage amount as the price.
d.	quantity demanded does not respond to a change in price.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Definitional

Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers are to a change in price, the

a.	steeper the demand curve will be.
b.	flatter the demand curve will be.
c.	further to the right the demand curve will sit.
d.	closer to the vertical axis the demand curve will sit.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

Elasticity of demand is closely related to the slope of the demand curve. The less responsive buyers are to a change in price, the

a.	steeper the demand curve will be.
b.	flatter the demand curve will be.
c.	further to the right the demand curve will sit.
d.	closer to the vertical axis the demand curve will sit.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

The flatter the demand curve through a given point, the

a.	greater the price elasticity of demand at that point.
b.	smaller the price elasticity of demand at that point.
c.	closer the price elasticity of demand will be to the slope of the curve.
d.	greater the absolute value of the change in total revenue when there is a movement from that point upward and to the left along the demand curve.

ANS: A DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Analytical

The smaller the price elasticity of demand, the

a.	steeper the demand curve will be through a given point.
b.	flatter the demand curve will be through a given point.
c.	more strongly buyers respond to a change in price between any two prices P₁ and P₂.
d.	smaller the decrease in equilibrium price when the supply curve shifts rightward from S₁ to S₂.

ANS: A DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Analytical

When quantity moves proportionately the same amount as price, demand is

a.	elastic, and the price elasticity of demand is 1.
b.	perfectly elastic, and the price elasticity of demand is infinitely large.
c.	perfectly inelastic, and the price elasticity of demand is 0.
d.	unit elastic, and the price elasticity of demand is 1.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

Jean-Paul says that he will spend exactly 75 cents a day on M&Ms, regardless of the price of M&Ms. Jean-Paul’s demand for M&Ms is

a.	perfectly elastic.
b.	unit elastic.
c.	perfectly inelastic.
d.	None of the above answers is correct.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

As we move downward and to the right along a linear, downward-sloping demand curve,

a.	slope and elasticity both remain constant.
b.	slope changes but elasticity remains constant.
c.	slope and elasticity both change.
d.	slope remains constant but elasticity changes.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

When we move upward and to the left along a linear, downward-sloping demand curve, price elasticity of demand

a.	first becomes smaller, then larger.
b.	always becomes larger.
c.	always becomes smaller.
d.	first becomes larger, then smaller.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

The price elasticity of demand changes as we move along a

a.	horizontal demand curve.
b.	vertical demand curve.
c.	linear, downward-sloping demand curve.
d.	All of the above are correct.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

The difference between slope and elasticity is that

a.	slope is a ratio of two changes, and elasticity is a ratio of two percentage changes.
b.	slope is a ratio of two percentage changes, and elasticity is a ratio of two changes.
c.	slope measures changes in quantity demanded more accurately than elasticity.
d.	none of the above; there is no difference between slope and elasticity.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

According to a New York Times article published in November 2005, author Anna Bernasek asserts that a 10 percent increase in the price of gasoline leads to a decline in the quantity demanded of about

a.	0.01 percent.
b.	2 percent.
c.	20 percent.
d.	200 percent.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

According to a New York Times article published in November 2005, author Anna Bernasek asserts that a 10 percent increase in the price of electricity leads to a decline in the quantity demanded of about

a.	0.01 percent.
b.	3 percent.
c.	30 percent.
d.	300 percent.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

Figure 5-1

Refer to Figure 5-1. The demand curve representing the demand for a luxury good with several close substitutes is

a.	A.
b.	B.
c.	C.
d.	D.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Applicative

Refer to Figure 5-1. Atog says he would buy one cup of coffee per day regardless of the price. If this is true, then Atog’s demand for coffee is represented by demand curve

a.	A.
b.	B.
c.	C.
d.	D.

ANS: A DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand

MSC: Applicative

Figure 5-2

Refer to Figure 5-2. As price falls from Pa to Pb, which demand curve represents the most elastic demand?

a.	D1
b.	D2
c.	D3
d.	All of the above are equally elastic.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Applicative

Refer to Figure 5-2. As price falls from Pa to Pb, we could use the three demand curves to calculate three different values of the price elasticity of demand. Which of the three demand curves would produce the smallest elasticity?

a.	D1
b.	D2
c.	D3
d.	All of the above are equally elastic.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Applicative

Table 5-1

Good	Price Elasticity of Demand
A	1.3
B	2.1

Refer to Table 5-1. Which of the following is consistent with the elasticities given in Table 5-2?

a.	A is a luxury and B is a necessity.
b.	A is a good several years after a price increase, and B is that same good several days after the price increase.
c.	A is a Kit Kat bar and B is candy.
d.	A has fewer substitutes than B.

ANS: D DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Analytical

Refer to Table 5-1. Which of the following is consistent with the elasticities given in Table 5-2?

a.	A is grapes and B is fruit.
b.	A is T-shirts and B is socks.
c.	A is train tickets before cars were invented, and B is train tickets after cars were invented.
d.	A is diamond necklaces and B is beds.

ANS: C DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Analytical

Studies indicate that the price elasticity of demand for cigarettes is about 0.4. A government policy aimed at reducing smoking changed the price of a pack of cigarettes from $2 to $6. According to the midpoint method, the government policy should have reduced smoking by

a.	30%.
b.	40%.
c.	80%.
d.	250%.

ANS: B DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Applicative

If a 15% increase in price for a good results in a 20% decrease in quantity demanded, the price elasticity of demand is

a.	0.75.
b.	1.25.
c.	1.33.
d.	1.60.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Analytical

If a 20% increase in price for a good results in a 15% decrease in quantity demanded, the price elasticity of demand is

a.	0.75.
b.	1.25.
c.	1.33.
d.	1.60.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Analytical

If a 10% decrease in price for a good results in a 20% increase in quantity demanded, the price elasticity of demand is

a.	0.50.
b.	1.
c.	1.5.
d.	2.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Analytical

If a 6% decrease in price for a good results in a 2% increase in quantity demanded, the price elasticity of demand is

a.	0.02.
b.	0.33.
c.	3.
d.	4.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Analytical

Suppose that quantity demand rises by 10% as a result of a 15% decrease in price. The price elasticity of demand for this good is

a.	inelastic and equal to 0.67.
b.	elastic and equal to 0.67.
c.	inelastic and equal to 1.50.
d.	elastic and equal to 1.50.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Analytical

Suppose that quantity demand falls by 30% as a result of a 5% increase in price. The price elasticity of demand for this good is

a.	inelastic and equal to 6.
b.	elastic and equal to 6.
c.	inelastic and equal to 0.17.
d.	elastic and equal to 0.17.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Analytical

Table 5-2

The following table shows a portion of the demand schedule for a particular good at various levels of income.

Price	Quantity Demanded (Income = $5,000)	Quantity Demanded (Income = $7,500)	Quantity Demanded (Income = $10,000)
$24	2	3	4
$20	4	6	8
$16	6	9	12
$12	8	12	16
$8	10	15	20
$4	12	18	24

Refer to Table 5-2. Using the midpoint method, when income equals $7,500, what is the price elasticity of demand between $16 and $20?

a.	0.56
b.	0.75
c.	1.33
d.	1.80

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Analytical

Refer to Table 5-2. Using the midpoint method, when income equals $5,000, what is the price elasticity of demand between $8 and $12?

a.	0.56
b.	0.75
c.	1.33
d.	1.80

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Analytical

Refer to Table 5-2. Using the midpoint method, at a price of $16, what is the income elasticity of demand when income rises from $5,000 to $10,000?

a.	0.00
b.	0.50
c.	1.00
d.	1.50

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Analytical

Refer to Table 5-2. Using the midpoint method, at a price of $8, what is the income elasticity of demand when income rises from $7,500 to $10,000?

a.	0.00
b.	0.41
c.	1.00
d.	2.45

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Analytical

Refer to Table 5-2. Using the midpoint method, at a price of $12, what is the income elasticity of demand when income rises from $5,000 to $10,000?

a.	0.00
b.	0.41
c.	1.00
d.	2.45

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Analytical

Demand is said to be price elastic if

a.	the price of the good responds substantially to changes in demand.
b.	demand shifts substantially when income or the expected future price of the good changes.
c.	buyers do not respond much to changes in the price of the good.
d.	buyers respond substantially to changes in the price of the good.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Elastic demand

MSC: Definitional

When quantity demanded responds strongly to changes in price, demand is said to be

a.	fluid.
b.	elastic.
c.	dynamic.
d.	highly variable.

ANS: B DIF: 1 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Elastic demand

MSC: Definitional

Demand is elastic if elasticity is

a.	less than 1.
b.	equal to 1.
c.	equal to 0.
d.	greater than 1.

ANS: D DIF: 1 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Elastic demand

MSC: Definitional

For which of the following goods is demand probably most inelastic?

a.	camcorders
b.	insulin
c.	apples
d.	devices that remove cores from apples

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Elastic demand

MSC: Interpretive

Demand is said to be inelastic if

a.	buyers respond substantially to changes in the price of the good.
b.	demand shifts only slightly when the price of the good changes.
c.	the quantity demanded changes only slightly when the price of the good changes.
d.	the price of the good responds only slightly to changes in demand.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Inelastic demand

MSC: Definitional

If demand is price inelastic, then

a.	buyers do not respond much to a change in price.
b.	buyers respond substantially to a change in price, but the response is very slow.
c.	buyers do not alter their quantities demanded much in response to advertising, fads, or general changes in tastes.
d.	the demand curve is very flat.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Inelastic demand

MSC: Definitional

If the quantity demanded of a certain good responds only slightly to a change in the price of the good, then

a.	the demand for the good is said to be elastic.
b.	the demand for the good is said to be inelastic.
c.	the law of demand does not apply to the good.
d.	the demand curve for the good shifts only slightly in response to a change in price.

ANS: B DIF: 1 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Inelastic demand

MSC: Definitional

Demand is inelastic if elasticity is

a.	less than 1.
b.	equal to 1.
c.	greater than 1.
d.	equal to 0.

ANS: A DIF: 1 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Inelastic demand

MSC: Definitional

Demand is said to be inelastic if the

a.	quantity demanded changes proportionately more than price.
b.	price changes proportionately more than income.
c.	quantity demanded changes proportionately less than price.
d.	quantity demanded changes proportionately the same as price.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Inelastic demand

MSC: Definitional

If the price elasticity of demand is 1.5, regardless of which two points on the demand curve are used to compute the elasticity, then

a.	demand is perfectly inelastic, and the demand curve is vertical.
b.	demand is elastic, and the demand curve is a straight, downward-sloping line.
c.	demand is perfectly elastic, and the demand curve is horizontal.
d.	demand is elastic, and the demand curve is something other than a straight, downward-sloping line.

ANS: D DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Applicative

Table 5-3

The following table shows the demand schedule for a particular good.

Price	Quantity
$15	0
$12	5
$9	10
$6	15
$3	20
$0	25

Refer to Table 5-3. Using the midpoint method, what is the price elasticity of demand when price rises from $9 to $12?

a.	0.43
b.	0.67
c.	1.50
d.	2.33

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Analytical

Refer to Table 5-3. Using the midpoint method, when price rises from $6 to $9, the price elasticity of demand is

a.	0.43
b.	0.67
c.	1.00
d.	1.5

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Analytical

Refer to Table 5-3. Using the midpoint method, when price falls from $6 to $3, the price elasticity of demand is

a.	0.43
b.	0.67
c.	1.50
d.	2.33

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Analytical

When the price of bubble gum is $0.50, the quantity demanded is 400 packs per day. When the price falls to $0.40, the quantity demanded increases to 600. Given this information and using the midpoint method, we know that the demand for bubble gum is

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

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Applicative

The midpoint method is used to compute elasticity because it

a.	automatically computes a positive number instead of a negative number.
b.	results in an elasticity that is the same as the slope of the demand curve.
c.	gives the same answer regardless of the direction of change.
d.	automatically rounds quantities to the nearest whole unit.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Interpretive

Suppose the price of Twinkies decreases from $1.45 to $1.25 and, as a result, the quantity of Twinkies demanded increases from 2,000 to 2,200. Using the midpoint method, the price elasticity of demand for Twinkies in the given price range is

a.	2.00.
b.	1.55.
c.	1.00.
d.	0.64.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Applicative

Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 0.75. Which of the following events is consistent with a 10 percent decrease in the quantity of the good demanded?

a.	a 7.5 increase in the price of the good
b.	a 13.33 percent increase in the price of the good
c.	an increase in the price of the good from $7.50 to $10
d.	an increase in the price of the good from $10 to $17.50

ANS: B DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Applicative

Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 2. Which of the following events is consistent with a 0.1 percent increase in the price of the good?

a.	The quantity of the good demanded decreases from 250 to 150.
b.	The quantity of the good demanded decreases from 200 to 100.
c.	The quantity of the good demanded decreases by 0.05 percent.
d.	The quantity of the good demanded decreases by 0.2 percent.

ANS: D DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Applicative

When the price of a good is $5, the quantity demanded is 100 units per month; when the price is $7, the quantity demanded is 80 units per month. Using the midpoint method, the price elasticity of demand is about

a.	0.22.
b.	0.67.
c.	1.33.
d.	1.50.

ANS: B DIF: 1 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Applicative

When the price of a good is $5, the quantity demanded is 120 units per month; when the price is $7, the quantity demanded is 100 units per month. Using the midpoint method, the price elasticity of demand is about

a.	0.55.
b.	1.83.
c.	2.
d.	10.

ANS: A DIF: 1 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Applicative

When the price of a watch was $25 each, the jewelry shop sold 20 per month. When it raised the price to $35 each, it sold 14 per month. The price elasticity of demand for watches is about

a.	1.66.
b.	1.06.
c.	0.94.
d.	0.60.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Applicative

Which of the following expressions is valid for the price elasticity of demand?

a.	Price elasticity of demand = .
b.	Price elasticity of demand = .
c.	Price elasticity of demand = .
d.	Price elasticity of demand = .

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Applicative

Which of the following expressions can be used to compute the price elasticity of demand?

a.	Price elasticity of demand = • .
b.	Price elasticity of demand = • .
c.	Price elasticity of demand = • .
d.	Price elasticity of demand = • .

ANS: C DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Analytical

Suppose that 50 candy bars are demanded at a particular price. If the price of candy bars rises from that price by 4 percent, the number of candy bars demanded falls to 46. Using the midpoint approach to calculate the price elasticity of demand, it follows that the

a.	demand for candy bars in this price range is elastic.
b.	demand for candy bars in this price range is inelastic.
c.	demand for candy bars in this price range is unit elastic.
d.	price elasticity of demand for candy bars in this price range is 0.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Applicative

When the rental price of DVD movies is $4, Denise rents five per month. When the price is $3, she rents nine per month. Denise’s demand for DVD rentals is

a.	elastic, and her demand curve would be relatively flat.
b.	elastic, and her demand curve would be relatively steep.
c.	inelastic, and her demand curve would be relatively flat.
d.	inelastic, and her demand curve would be relatively steep.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Applicative

Figure 5-3

Refer to Figure 5-3. Between point A and point B,

a.	the slope is equal to -1/4 and the price elasticity of demand is equal to 2/3.
b.	the slope is equal to -1/4 and the price elasticity of demand is equal to 3/2.
c.	the slope is equal to -3/2 and the price elasticity of demand is equal to 1/4.
d.	the slope is equal to -2/3 and the price elasticity of demand is equal to 3/2.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Applicative

Refer to Figure 5-3. Between point A and point B on the graph, demand is

a.	perfectly elastic.
b.	inelastic.
c.	unit elastic.
d.	elastic, but not perfectly elastic.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Applicative

The midpoint method for calculating elasticities is convenient in that it allows us to

a.	ignore the percentage change in quantity demanded and instead focus entirely on the percentage change in price.
b.	calculate the same value for the elasticity, regardless of whether the price increases or decreases.
c.	assume that sellers’ total revenue stays constant when the price changes.
d.	restrict all elasticity values to between 0 and 1.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Interpretive

Table 5-4

Price	Total Revenue
$10	$100
$12	$108
$14	$112
$16	$112

Refer to Table 5-4. As price rises from $10 to $12, the price elasticity of demand using the midpoint method is approximately

a.	0.08.
b.	0.18.
c.	0.42.
d.	0.58.

ANS: D DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Applicative

Refer to Table 5-4. Demand is unit elastic when quantity demanded changes from

a.	10 to 9.
b.	9 to 8.
c.	8 to 7.
d.	There is not enough information given to determine the correct answer.

ANS: C DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Analytical

Refer to Table 5-4. When price is between $10 and $14, demand is

a.	elastic.
b.	unit elastic.
c.	inelastic.
d.	There is not enough information given to determine whether demand is elastic, unit elastic, or inelastic.

ANS: C DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Analytical

Figure 5-4

Refer to Figure 5-4. Suppose the point labeled B is the “halfway point” on the demand curve and it corresponds to a price of $5.00. Then, between prices of $4.99 and $5.01, the price elasticity of demand is

a.	less than 1 but greater than zero.
b.	equal to 1.
c.	greater than 1.
d.	equal to zero.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Interpretive

Refer to Figure 5-4. The section of the demand curve from A to B represents the

a.	elastic section of the demand curve.
b.	inelastic section of the demand curve.
c.	unit elastic section of the demand curve.
d.	perfectly elastic section of the demand curve.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

Refer to Figure 5-4. The section of the demand curve from B to C represents the

a.	elastic section of the demand curve.
b.	inelastic section of the demand curve.
c.	unit elastic section of the demand curve.
d.	perfectly elastic section of the demand curve.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

Refer to Figure 5-4. The section of the demand curve at point B represents the

a.	elastic section of the demand curve.
b.	inelastic section of the demand curve.
c.	unit elastic section of the demand curve.
d.	perfectly elastic section of the demand curve.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Interpretive

Refer to Figure 5-4. Assume the section of the demand curve from A to B corresponds to prices between $8 and $16. Then, when the price changes between $9 and $10,

a.	quantity demanded changes proportionately less than the price.
b.	quantity demanded changes proportionately more than the price.
c.	quantity demanded changes the same amount proportionately as price.
d.	the price elasticity of demand equals 1.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Elastic demand

MSC: Applicative

Refer to Figure 5-4. Assume the section of the demand curve from A to B corresponds to prices between $6 and $12. Then, when the price increases from $8 to $10,

a.	the percent decrease in the quantity demanded exceeds the percent increase in the price.
b.	the percent increase in the price exceeds the percent decrease in the quantity demanded.
c.	sellers’ total revenue increases as a result.
d.	it is possible that the quantity demanded fell from 550 to 500 as a result.

ANS: A DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Elastic demand

MSC: Applicative

Refer to Figure 5-4. Assume, for the good in question, two specific points on the demand curve are (Q = 1,000, P = $40) and (Q = 1,500, P = $30). Then which of the following scenarios is possible?

a.	Both of these points lie on the section of the demand curve from B to C.
b.	The vertical intercept of the demand curve is the point (Q = 0, P = $60).
c.	The horizontal intercept of the demand curve is the point (Q = 1,800, P = $0).
d.	Any of these scenarios is possible.

ANS: B DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Elastic demand

MSC: Analytical

Refer to Figure 5-4. The section of the demand curve from B to C represents the

a.	elastic section of the demand curve.
b.	perfectly elastic section of the demand curve.
c.	unit elastic section of the demand curve.
d.	inelastic section of the demand curve.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Inelastic demand

MSC: Interpretive

Refer to Figure 5-4. Assume the section of the demand curve from B to C corresponds to prices between $0 and $15. Then, when the price changes between $7 and $9,

a.	quantity demanded changes proportionately less than the price.
b.	quantity demanded changes proportionately more than the price.
c.	quantity demanded changes the same amount proportionately as price.
d.	the price elasticity of demand equals zero.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Inelastic demand

MSC: Applicative

Refer to Figure 5-4. Assume, for the good in question, two specific points on the demand curve are (Q = 2,000, P = $15) and (Q = 2,400, P = $12). Then which of the following scenarios is possible?

a.	Both of these points lie on section C of the demand curve.
b.	The vertical intercept of the demand curve is the point (Q = 0, P = $22).
c.	The horizontal intercept of the demand curve is the point (Q = 5,000, P = $0).
d.	Any of these scenarios is possible.

ANS: A DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Inelastic demand

MSC: Analytical

Refer to Figure 5-4. If the price decreases in the region of the demand curve between points A and B, we can expect total revenue to

a.	increase.
b.	stay the same.
c.	decrease.
d.	first decrease, then increase until total revenue is maximized.

ANS: A DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Analytical

Refer to Figure 5-4. If the price increases in the region of the demand curve between points A and B, we can expect total revenue to

a.	increase.
b.	stay the same.
c.	decrease.
d.	first increase, then decrease until total revenue is maximized.

ANS: C DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Analytical

Refer to Figure 5-4. If the price decreases in the region of the demand curve between points B and C, we can expect total revenue to

a.	increase.
b.	stay the same.
c.	decrease.
d.	first increase, then decrease until total revenue is maximized.

ANS: C DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Analytical

Refer to Figure 5-4. If the price increases in the region of the demand curve between points B and C, we can expect total revenue to

a.	increase.
b.	stay the same.
c.	decrease.
d.	first decrease, then increase until total revenue is maximized.

ANS: A DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Analytical

Figure 5-5

Refer to Figure 5-5. Demand is unit elastic between prices of

a.	$18 and $24.
b.	$24 and $30.
c.	$24 and $36.
d.	$30 and $36.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Applicative

Refer to Figure 5-5. Using the midpoint method, between prices of $12 and $18, price elasticity of demand is

a.	0.33.
b.	0.67.
c.	1.33.
d.	1.89.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Applicative

Refer to Figure 5-5. Using the midpoint method, between prices of $48 and $54, price elasticity of demand is about

a.	0.92.
b.	3.89.
c.	4.33.
d.	5.67.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Applicative

Refer to Figure 5-5. Using the midpoint method, between prices of $30 and $36, price elasticity of demand is about

a.	0.5.
b.	0.82.
c.	1.22.
d.	2.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand

MSC: Applicative

Refer to Figure 5-5. The maximum value of total revenue corresponds to a price of

a.	$18.
b.	$30.
c.	$42.
d.	$48.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

Refer to Figure 5-5. At a price of $48 per unit, sellers’ total revenue amounts to

a.	$150.
b.	$200.
c.	$288.
d.	$364.

ANS: C DIF: 1 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Definitional

Refer to Figure 5-5. At a price of $12 per unit, sellers’ total revenue amounts to

a.	$150.
b.	$200.
c.	$288.
d.	$364.

ANS: C DIF: 1 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Definitional

Refer to Figure 5-5. At a price of $30 per unit, sellers’ total revenue amounts to

a.	$150.
b.	$200.
c.	$288.
d.	$450.

ANS: D DIF: 1 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Definitional

Figure 5-6

Refer to Figure 5-6. Using the midpoint method, the price elasticity of demand between point A and point B is

a.	1.
b.	1.5.
c.	2.
d.	2.5.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Applicative

Refer to Figure 5-6. Using the midpoint method, the price elasticity of demand between point B and point C is

a.	0.5.
b.	0.75.
c.	1.0.
d.	1.3.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of demand

MSC: Applicative

Refer to Figure 5-6. If the price decreased from $18 to $6,

a.	total revenue would increase by $1,200, and demand is elastic between points A and C.
b.	total revenue would increase by $800, and demand is elastic between points A and C.
c.	total revenue would decrease by $1,200, and demand is inelastic between points A and C.
d.	total revenue would decrease by $800, and demand is inelastic between points A and C.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

Refer to Figure 5-6. Sellers’ total revenue would increase if the price

a.	increased from $4 to $6.
b.	increased from $16 to $18.
c.	decreased from $8 to $6.
d.	All of the above are correct.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

Refer to Figure 5-6. Sellers’ total revenue would increase if the price

a.	increased from $6 to $8.
b.	decreased from $18 to $16.
c.	decreased from $16 to $15.
d.	All of the above are correct.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

Refer to Figure 5-6. Which of the following price changes would result in no change in sellers’ total revenue?

a.	The price increases from $6 to $9.
b.	The price increases from $9 to $15.
c.	The price decreases from $12 to $9.
d.	The price decreases from $9 to $5.

ANS: C DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

Suppose demand is perfectly inelastic, and the supply of the good in question decreases. As a result,

a.	the equilibrium quantity decreases, and the equilibrium price is unchanged.
b.	the equilibrium price increases, and the equilibrium quantity is unchanged.
c.	the equilibrium quantity and the equilibrium price both are unchanged.
d.	buyers’ total expenditure on the good is unchanged.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand

MSC: Applicative

Suppose demand is perfectly elastic, and the supply of the good in question decreases. As a result,

a.	the equilibrium quantity decreases, and the equilibrium price is unchanged.
b.	the equilibrium price increases, and the equilibrium quantity is unchanged.
c.	the equilibrium quantity and the equilibrium price both are unchanged.
d.	buyers’ total expenditure on the good is unchanged.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Perfectly elastic demand

MSC: Applicative

A perfectly elastic demand implies that

a.	buyers will not respond to any change in price.
b.	any rise in price above that represented by the demand curve will result in a quantity demanded of zero.
c.	quantity demanded and price change by the same percent as we move along the demand curve.
d.	price will rise by an infinite amount when there is a change in quantity demanded.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Perfectly elastic demand

MSC: Interpretive

The case of perfectly elastic demand is illustrated by a demand curve that is

a.	vertical.
b.	horizontal.
c.	downward-sloping but relatively steep.
d.	downward-sloping but relatively flat.

ANS: B DIF: 1 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Perfectly elastic demand

MSC: Interpretive

When small changes in price lead to infinite changes in quantity demanded, demand is perfectly

a.	elastic, and the demand curve will be horizontal.
b.	inelastic, and the demand curve will be horizontal.
c.	elastic, and the demand curve will be vertical.
d.	inelastic, and the demand curve will be vertical.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Perfectly elastic demand

MSC: Interpretive

For a horizontal demand curve,

a.	slope is undefined, and price elasticity of demand is equal to 0.
b.	slope is equal to 0, and price elasticity of demand is undefined.
c.	slope and price elasticity of demand both are undefined.
d.	slope and price elasticity of demand both are equal to 0.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Perfectly elastic demand

MSC: Interpretive

In the case of perfectly inelastic demand,

a.	the change in quantity demanded equals the change in price.
b.	the percentage change in quantity demanded equals the percentage change in price.
c.	infinitely-large changes in quantity demanded result from very small changes in the price.
d.	quantity demanded stays the same whenever price changes.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand

MSC: Interpretive

When demand is perfectly inelastic, the demand curve will be

a.	negatively sloped, because buyers decrease their purchases when the price rises.
b.	vertical, because buyers purchase the same amount as before whenever the price rises or falls.
c.	positively sloped, because buyers increase their purchases when price rises.
d.	positively sloped, because buyers increase their total expenditures when price rises.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand

MSC: Interpretive

When demand is perfectly inelastic, the price elasticity of demand

a.	is zero, and the demand curve is vertical.
b.	is zero, and the demand curve is horizontal.
c.	approaches infinity, and the demand curve is vertical.
d.	approaches infinity, and the demand curve is horizontal.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand

MSC: Interpretive

A perfectly inelastic demand implies that buyers

a.	decrease their purchases when the price rises.
b.	purchase the same amount as before when the price rises or falls.
c.	increase their purchases only slightly when the price falls.
d.	respond substantially to an increase in price.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand

MSC: Interpretive

Alice says that she would buy one banana split a day regardless of the price. If she is telling the truth,

a.	Alice’s demand for banana splits is perfectly inelastic.
b.	Alice’s price elasticity of demand for banana splits is 1.
c.	Alice’s income elasticity of demand for banana splits is 0.
d.	None of the above answers is correct.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand

MSC: Interpretive

For a vertical demand curve,

a.	slope is undefined, and price elasticity of demand is equal to 0.
b.	slope is equal to 0, and price elasticity of demand is undefined.
c.	slope and price elasticity of demand both are undefined.
d.	slope and price elasticity of demand both are equal to 0.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand

MSC: Interpretive

In which of these instances is demand said to be perfectly inelastic?

a.	An increase in price of 2% causes a decrease in quantity demanded of 2%.
b.	A decrease in price of 2% causes an increase in quantity demanded of 0%.
c.	A decrease in price of 2% causes a decrease in total revenue of 0%.
d.	The demand curve is horizontal.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand

MSC: Interpretive

When the price of good A is $50, the quantity demanded of good A is 500 units. When the price of good A rises to $70, the quantity demanded of good A falls to 400 units. Using the midpoint method,

a.	the price elasticity of demand for good A is 1.50, and an increase in price will result in an increase in total revenue for good A.
b.	the price elasticity of demand for good A is 1.50, and an increase in price will result in a decrease in total revenue for good A.
c.	the price elasticity of demand for good A is 0.67, and an increase in price will result in an increase in total revenue for good A.
d.	the price elasticity of demand for good A is 0.67, and an increase in price will result in a decrease in total revenue for good A.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity

TOP: Midpoint method | Total revenue | Price elasticity of demand

MSC: Analytical

Consider airfares on flights between New York and Minneapolis. When the airfare is $250, the quantity demanded of tickets is 2,000 per week. When the airfare is $280, the quantity demanded of tickets is 1,700 per week. Using the midpoint method,

a.	the price elasticity of demand is about 1.43, and an increase in the airfare will cause airlines’ total revenue to decrease.
b.	the price elasticity of demand is about 1.43, and an increase in the airfare will cause airlines’ total revenue to increase.
c.	the price elasticity of demand is about 0.70, and an increase in the airfare will cause airlines’ total revenue to decrease.
d.	the price elasticity of demand is about 0.70, and an increase in the airfare will cause airlines’ total revenue to increase.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity

TOP: Midpoint method | Total revenue | Price elasticity of demand

MSC: Applicative

When the local used bookstore prices economics books at $15.00 each, it generally sells 70 books per month. If it lowers the price to $7.00, sales increase to 90 books per month. Given this information, we know that the price elasticity of demand for economics books is about

a.	2.91, and an increase in price from $7.00 to $15.00 results in an increase in total revenue.
b.	2.91, and an increase in price from $7.00 to $15.00 results in a decrease in total revenue.
c.	0.34, and an increase in price from $7.00 to $15.00 results in an increase in total revenue.
d.	0.34, and an increase in price from $7.00 to $15.00 results in a decrease in total revenue.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity

TOP: Midpoint method | Total revenue | Price elasticity of demand

MSC: Applicative

Harry’s Barber Shop increased its total monthly revenue from $1,500 to $1,800 when it raised the price of a haircut from $5 to $9. The price elasticity of demand for Harry’s Haircuts is

a.	0.567.
b.	0.700.
c.	1.429.
d.	2.200.

ANS: B DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity

TOP: Midpoint method | Total revenue | Price elasticity of demand

MSC: Applicative

Barb’s Bakery earned $200 in total revenue last month when it sold 100 loaves of bread. This month it earned $300 in total revenue when it sold 60 loaves of bread. The price elasticity of demand for Barb’s bread is

a.	0.27.
b.	0.58.
c.	1.25.
d.	1.71.

ANS: B DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity

TOP: Midpoint method | Total revenue | Price elasticity of demand

MSC: Applicative

Suppose that when the price of corn is $2 per bushel, farmers can sell 10 million bushels. When the price of corn is $3 per bushel, farmers can sell 8 million bushels. Which of the following statements is true?

a.	The demand for corn is income inelastic, and so an increase in the price of corn will increase the total revenue of corn farmers.
b.	The demand for corn is income elastic, and so an increase in the price of corn will increase the total revenue of corn farmers.
c.	The demand for corn is price inelastic, and so an increase in the price of corn will increase the total revenue of corn farmers.
d.	The demand for corn is price elastic, and so an increase in the price of corn will increase the total revenue of corn farmers.

ANS: C DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity

TOP: Midpoint method | Total revenue | Price elasticity of demand

MSC: Applicative

Suppose that when the price of beer is $2 per bottle, firms can sell 4 million bottles. When the price of beer is $3 per bottle, firms can sell 2 million bottles. Which of the following statements is true?

a.	The demand for beer is income inelastic, and so an increase in the price of beer will increase the total revenue of beer producers.
b.	The demand for beer is income elastic, and so an increase in the price of beer will increase the total revenue of beer producers.
c.	The demand for beer is price inelastic, and so an increase in the price of beer will increase the total revenue of beer producers.
d.	The demand for beer is price elastic, and so an increase in the price of beer will increase the total revenue of beer producers.

ANS: D DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity

TOP: Midpoint method | Total revenue | Price elasticity of demand

MSC: Applicative

Suppose that 50 candy bars are demanded at a particular price. If the price of candy bars rises from that price by 5 percent, the number of candy bars demanded falls to 48. Using the midpoint approach to calculate the price elasticity of demand, it follows that the

a.	demand for candy bars in this price range is unit elastic.
b.	price increase will decrease the total revenue of candy bar sellers.
c.	price elasticity of demand for candy bars in this price range is about 1.22.
d.	price elasticity of demand for candy bars in this price range is about 0.82.

ANS: D DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity

TOP: Midpoint method | Total revenue | Price elasticity of demand

MSC: Applicative

Suppose that 500 candy bars are demanded at a particular price. If the price of candy bars rises from that price by 10 percent, the number of candy bars demanded falls to 480. Using the midpoint approach to calculate the price elasticity of demand, it follows that the

a.	demand for candy bars in this price range is unit elastic.
b.	price increase will decrease the total revenue of candy bar sellers.
c.	price elasticity of demand for candy bars in this price range is about 0.41.
d.	price elasticity of demand for candy bars in this price range is about 0.24.

ANS: C DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity

TOP: Midpoint method | Total revenue | Price elasticity of demand

MSC: Applicative

When demand is inelastic, a decrease in price will cause

a.	an increase in total revenue.
b.	a decrease in total revenue.
c.	no change in total revenue, but an increase in quantity demanded.
d.	no change in total revenue, but a decrease in quantity demanded.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

When demand is elastic, a decrease in price will cause

a.	an increase in total revenue.
b.	a decrease in total revenue.
c.	no change in total revenue, but an increase in quantity demanded.
d.	no change in total revenue, but a decrease in quantity demanded.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

When demand is inelastic, an increase in price will cause

a.	an increase in total revenue.
b.	a decrease in total revenue.
c.	no change in total revenue, but an increase in quantity demanded.
d.	no change in total revenue, but a decrease in quantity demanded.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

When demand is elastic, an increase in price will cause

a.	an increase in total revenue.
b.	a decrease in total revenue.
c.	no change in total revenue, but an increase in quantity demanded.
d.	no change in total revenue, but a decrease in quantity demanded.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

Which of the following could be the price elasticity of demand for a good for which a decrease in price would increase revenue?

a.	0
b.	0.2
c.	1
d.	2.1

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Interpretive

Which of the following could be the price elasticity of demand for a good for which an increase in price would increase revenue?

a.	0.2
b.	1
c.	1.5
d.	All of the above could be correct.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Interpretive

Which of the following could be the price elasticity of demand for a good for which a decrease in price would decrease revenue?

a.	0.5
b.	1
c.	1.5
d.	All of the above could be correct.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Interpretive

Which of the following could be the price elasticity of demand for a good for which an increase in price would decrease revenue?

a.	0
b.	0.5
c.	1
d.	1.5

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Interpretive

Which of the following is not possible?

a.	Demand is elastic, and a decrease in price causes an increase in revenue.
b.	Demand is unit elastic, and a decrease in price causes an increase in revenue.
c.	Demand is inelastic, and an increase in price causes an increase in revenue.
d.	Demand is perfectly inelastic, and an increase in price causes an increase in revenue.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

If demand is price inelastic, then when price rises,

a.	total revenue will fall.
b.	total revenue will rise.
c.	total revenue will remain unchanged.
d.	total revenue may rise, fall, or remain unchanged. More information is need to determine the change in total revenue with certainty.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Analytical

Figure 5-7

The following graph shows the linear demand curve for a particular good.

Refer to Figure 5-7. For prices above $8, demand is price

a.	elastic, and total revenue will rise as price rises.
b.	inelastic, and total revenue will rise as price rises.
c.	elastic, and total revenue will fall as price rises.
d.	inelastic, and total revenue will fall as price rises.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

Refer to Figure 5-7. For prices below $6, demand is price

a.	elastic, and total revenue will rise as price rises.
b.	inelastic, and total revenue will rise as price rises.
c.	elastic, and total revenue will fall as price rises.
d.	inelastic, and total revenue will fall as price rises.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

Figure 5-8

Refer to Figure 5-8. For prices above $5, demand is price

a.	elastic, and raising price will increase total revenue.
b.	inelastic, and raising price will increase total revenue.
c.	elastic, and lowering price will increase total revenue.
d.	inelastic, and lowering price will increase total revenue.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Interpretive

Refer to Figure 5-8. For prices below $5, demand is price

a.	elastic, and raising price will increase total revenue.
b.	inelastic, and raising price will increase total revenue.
c.	elastic, and lowering price will increase total revenue.
d.	inelastic, and lowering price will increase total revenue.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Interpretive

Figure 5-9

Refer to Figure 5-9. Suppose this demand curve is a straight, downward-sloping line all the way from the horizontal intercept to the vertical intercept. We choose two prices, P₁ and P₂, and the corresponding quantities demanded, Q₁ and Q₂, for the purpose of calculating the price elasticity of demand. Also suppose P₂> P_1.In which of the following cases could we possibly find that (i) demand is elastic and (ii) an increase in price from P₁ to P₂ causes an increase in total revenue?

a.	0 < P₁< P₂< $10.
b.	$10 < P₁< P₂< $15.
c.	P₁> $15.
d.	None of the above is correct.

ANS: D DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Analytical

Refer to Figure 5-9. If price increases from $10 to $15, total revenue will

a.	increase by $20, so demand must be inelastic in this price range.
b.	increase by $5, so demand must be inelastic in this price range.
c.	decrease by $20, so demand must be elastic in this price range.
d.	decrease by $10, so demand must be elastic in this price range.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

Refer to Figure 5-9. A decrease in price from $15 to $10 leads to

a.	a decrease in total revenue of $10, so the price elasticity of demand is greater than 1 in this price range.
b.	a decrease in total revenue of $10, so the price elasticity of demand is less than 1 in this price range.
c.	a decrease in total revenue of $20, so the price elasticity of demand is less than 1 in this price range.
d.	a decrease in total revenue of $20, so demand is elastic in this price range.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

Figure 5-10

Refer to Figure 5-10. If rectangle D is larger than rectangle A, then

a.	demand is elastic between prices P₁ and P₂.
b.	a decrease in price from P₂ to P₁ will cause an increase in total revenue.
c.	the magnitude of the percent change in price between P₁ and P₂is smaller than the magnitude of the corresponding percent change in quantity demanded.
d.	All of the above are correct.

ANS: D DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Analytical

Refer to Figure 5-10. Total revenue when the price is P₁ is represented by the area(s)

a.	B + D.
b.	A + B.
c.	C + D.
d.	D.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

Refer to Figure 5-10. Total revenue when the price is P₂ is represented by the area(s)

a.	B + D.
b.	A + B.
c.	C + D.
d.	D.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

If the price elasticity of demand for tuna is 0.7, then a 1.5% increase in the price of tuna will decrease the quantity demanded of tuna by

a.	1.05%, and tuna sellers’ total revenue will increase as a result.
b.	1.05%, and tuna sellers’ total revenue will decrease as a result.
c.	2.14%, and tuna sellers’ total revenue will increase as a result.
d.	2.14%, and tuna sellers’ total revenue will decrease as a result.

ANS: A DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Analytical

If the price elasticity of demand for aluminum foil is 1.45, then a 2.4% decrease in the price of aluminum foil will increase the quantity demanded of aluminum foil by

a.	1.66%, and aluminum foil sellers’ total revenue will increase as a result.
b.	1.66%, and aluminum foil sellers’ total revenue will decrease as a result.
c.	3.48%, and aluminum foil sellers’ total revenue will increase as a result.
d.	3.48%, and aluminum foil sellers’ total revenue will decrease as a result.

ANS: C DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Analytical

If a change in the price of a good results in no change in total revenue, then

a.	the demand for the good must be elastic.
b.	the demand for the good must be inelastic.
c.	the demand for the good must be unit elastic.
d.	buyers must not respond very much to a change in price.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Interpretive

When demand is unit elastic, price elasticity of demand

a.	equals 1, and total revenue and price move in the same direction.
b.	equals 1, and total revenue and price move in opposite directions.
c.	equals 1, and total revenue does not change when price changes.
d.	equals 0, and total revenue does not change when price changes.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Interpretive

If the demand curve is linear and downward sloping, which of the following statements is not correct?

a.	Demand is more elastic on the lower part of the demand curve than on the upper part.
b.	Different pairs of points on the demand curve can result in different values of the price elasticity of demand.
c.	Different pairs of points on the demand curve result in identical values of the slope of the demand curve.
d.	Starting from a point on the upper part of the demand curve, an increase in price leads to a decrease in total revenue.

ANS: A DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Analytical

Total revenue

a.	always increases as price increases.
b.	increases as price increases, as long as demand is elastic.
c.	decreases as price increases, as long as demand is inelastic.
d.	remains unchanged as price increases when demand is unit elastic.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

In which of the following situations will total revenue increase?

a.	Price elasticity of demand is 1.2, and the price of the good decreases.
b.	Price elasticity of demand is 0.5, and the price of the good increases.
c.	Price elasticity of demand is 3.0, and the price of the good decreases.
d.	All of the above are correct.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Analytical

You have just been hired as a business consultant to determine what pricing policy would be appropriate in order to increase the total revenue of a major shoe store. The first step you would take would be to

a.	increase the price of every shoe in the store.
b.	look for ways to cut costs and increase profit for the store.
c.	determine the price elasticity of demand for the store’s products.
d.	determine the price elasticity of supply for the store’s products.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Interpretive

You are in charge of the local city-owned golf course. You need to increase the revenue generated by the golf course in order to meet expenses. The mayor advises you to increase the price of a round of golf. The city manager recommends reducing the price of a round of golf. You realize that

a.	the mayor thinks demand is elastic, and the city manager thinks demand is inelastic.
b.	both the mayor and the city manager think that demand is elastic.
c.	both the mayor and the city manager think that demand is inelastic.
d.	the mayor thinks demand is inelastic, and the city manager thinks demand is elastic.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

You are in charge of the local city-owned golf course. You need to increase the revenue generated by the golf course in order to meet expenses. The mayor advises you to decrease the price of a round of golf. The city manager recommends increasing the price of a round of golf. You realize that

a.	the mayor thinks demand is elastic, and the city manager thinks demand is inelastic.
b.	both the mayor and the city manager think that demand is elastic.
c.	both the mayor and the city manager think that demand is inelastic.
d.	the mayor thinks demand is inelastic, and the city manager thinks demand is elastic.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

Get Smart University is contemplating an increase in tuition to enhance revenue. If GSU feels that raising tuition would enhance revenue, it is

a.	ignoring the law of demand.
b.	assuming that the demand for university education is elastic.
c.	assuming that the demand for university education is inelastic.
d.	assuming that the supply of university education is elastic.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

Figure 5-11

Refer to Figure 5-11. When the price is $30, total revenue is

a.	$3,000.
b.	$5,000.
c.	$7,000.
d.	$9,000.

ANS: D DIF: 1 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Interpretive

Refer to Figure 5-11. When price falls from $50 to $40, it can be inferred that demand between those two prices is

a.	inelastic, since total revenue decreases from $8,000 to $5,000.
b.	inelastic, since total revenue increases from $5,000 to $8,000.
c.	elastic, since total revenue increases from $5,000 to $8,000.
d.	unit elastic, since total revenue does not change.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

Refer to Figure 5-11. An increase in price from $20 to $30 would

a.	increase total revenue by $2,000.
b.	decrease total revenue by $2,000.
c.	increase total revenue by $1,000.
d.	decrease total revenue by $1,000.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

Refer to Figure 5-11. An increase in price from $30 to $35 would

a.	increase total revenue by $250
b.	decrease total revenue by $250.
c.	increase total revenue by $500.
d.	decrease total revenue by $500.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

If the demand for donuts is elastic, then a decrease in the price of donuts will

a.	increase total revenue of donut sellers.
b.	decrease total revenue of donut sellers.
c.	not change total revenue of donut sellers.
d.	There is not enough information to answer this question.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

If the demand for donuts is elastic, then an increase in the price of donuts will

a.	increase total revenue of donut sellers.
b.	decrease total revenue of donut sellers.
c.	not change total revenue of donut sellers.
d.	There is not enough information to answer this question.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

If the demand for textbooks is inelastic, then a decrease in the price of textbooks will

a.	increase total revenue of textbook sellers.
b.	decrease total revenue of textbook sellers.
c.	not change total revenue of textbook sellers.
d.	There is not enough information to answer this question.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

If the demand for textbooks is inelastic, then an increase in the price of textbooks will

a.	increase total revenue of textbook sellers.
b.	decrease total revenue of textbook sellers.
c.	not change total revenue of textbook sellers.
d.	There is not enough information to answer this question.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

Eric produces jewelry boxes. If the demand for jewelry boxes is elastic and Eric wants to increase his total revenue, he should

a.	increase the price of his jewelry boxes.
b.	decrease the price of his jewelry boxes.
c.	not change the price of his jewelry boxes.
d.	None of the above answers is correct.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Interpretive

Holding all other forces constant, if increasing the price of a good leads to an increase in total revenue, then the demand for the good must be

a.	unit elastic.
b.	inelastic.
c.	elastic.
d.	None of the above is correct, since a price increase always leads to an increase in total revenue.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

Holding all other forces constant, if increasing the price of a good leads to a decrease in total revenue, then the demand for the good must be

a.	unit elastic.
b.	inelastic.
c.	elastic.
d.	None of the above is correct, since a price increase always leads to an increase in total revenue.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

Holding all other forces constant, if decreasing the price of a good leads to an increase in total revenue, then the demand for the good must be

a.	unit elastic.
b.	inelastic.
c.	elastic.
d.	None of the above is correct, since a price increase always leads to an increase in total revenue.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

Holding all other forces constant, if decreasing the price of a good leads to a decrease in total revenue, then the demand for the good must be

a.	unit elastic.
b.	inelastic.
c.	elastic.
d.	None of the above is correct, since a price increase always leads to an increase in total revenue.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

Suppose you are in charge of setting prices at a local sandwich shop. The business needs to increase its total revenue and your job is on the line. If the demand for sandwiches is elastic, you

a.	should increase the price of sandwiches.
b.	should decrease the price of sandwiches.
c.	should not change the price of sandwiches.
d.	could not determine what to do with price until you determine whether supply is elastic or inelastic.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

Suppose a producer is able to separate customers into two groups, one having an inelastic demand and the other having an elastic demand. If the producer’s objective is to increase total revenue, she should

a.	increase the price charged to customers with the elastic demand and decrease the price charged to customers with the inelastic demand.
b.	decrease the price charged to customers with the elastic demand and increase the price charged to customers with the inelastic demand.
c.	decrease the price to both groups of customers.
d.	increase the price for both groups of customers.

ANS: B DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Analytical

Your younger sister needs $50 to buy a new bike. She has opened a lemonade stand to make the money she needs. Your mother is paying for all of the ingredients. She currently is charging 25 cents per cup, but she wants to adjust her price to earn the $50 faster. If you know that the demand for lemonade is elastic, what is your advice to her?

a.	Leave the price at 25 cents and be patient.
b.	Raise the price to increase total revenue.
c.	Lower the price to increase total revenue.
d.	There isn’t enough information given to answer this question.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Applicative

An increase in price causes an increase in total revenue when

a.	demand is elastic.
b.	demand is inelastic.
c.	demand is unit elastic.
d.	All of the above are possible.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue

MSC: Applicative

The local pizza restaurant makes such great bread sticks that consumers do not respond much at all to a change in the price. If the owner is only interested in increasing revenue, he should

a.	lower the price of the bread sticks.
b.	leave the price of the bread sticks alone.
c.	raise the price of the bread sticks.
d.	reduce costs.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue

MSC: Interpretive

When demand is inelastic within a certain price range, then within that price range,

a.	an increase in price would increase total revenue because the decrease in quantity demanded is proportionately less than the increase in price.
b.	an increase in price would decrease total revenue because the decrease in quantity demanded is proportionately greater than the increase in price.
c.	a decrease in price would increase total revenue because the increase in quantity demanded is proportionately smaller than the decrease in price.
d.	a decrease in price would not affect total revenue.

ANS: A DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue

MSC: Applicative

When demand is inelastic the price elasticity of demand is

a.	less than 1, and price and total revenue will move in the same direction.
b.	less than 1, and price and total revenue will move in opposite directions.
c.	greater than 1, and price and total revenue will move in the same direction.
d.	greater than 1, and price and total revenue will move in opposite directions.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue

MSC: Applicative

How does total revenue change as one moves downward and to the right along a linear demand curve?

a.	It always increases.
b.	It always decreases.
c.	It first increases, then decreases.
d.	It is unaffected by a movement along the demand curve.

ANS: C DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue

MSC: Analytical

On a downward-sloping linear demand curve, total revenue reaches its maximum value at the

a.	midpoint of the demand curve.
b.	lower end of the demand curve.
c.	upper end of the demand curve.
d.	It is impossible to tell without knowing prices and quantities demanded.

ANS: A DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue

MSC: Analytical

Suppose the point (Q = 2,000, P = $60) is the midpoint on a certain downward-sloping, linear demand curve. Then

a.	an increase in price from $40 to $42 will increase total revenue.
b.	a decrease in price from $61 to $59 will leave total revenue unchanged.
c.	the maximum value of total revenue is $120,000.
d.	All of the above are correct.

ANS: D DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Analytical

Moving downward and to the right along a linear demand curve, we know that total revenue

a.	first increases, then decreases.
b.	first decreases, then increases.
c.	always increases.
d.	always decreases.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Interpretive

Total revenue will be at its largest value on a linear demand curve at

a.	the top of the curve, where prices are highest.
b.	the midpoint of the curve.
c.	the low end of the curve, where quantity demanded is highest.
d.	None of the above is correct.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand

MSC: Interpretive

Last year, Sheila bought 6 pairs of shoes when her income was $40,000. This year, her income is $50,000 and she purchased 10 pairs of shoes. Holding other factors constant, it follows that Sheila

a.	considers shoes to be a necessity.
b.	considers shoes to be an inferior good.
c.	considers shoes to be a normal good.
d.	has a low price elasticity of demand for shoes.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Interpretive

Last year, Sheila bought 6 pairs of shoes when her income was $40,000. This year, her income is $52,000 and she purchased 7 pairs of shoes. Holding other factors constant and using the midpoint method, it follows that Sheila’s income elasticity of demand is about

a.	0.59, and Sheila regards shoes as an inferior good.
b.	0.59, and Sheila regards shoes as a normal good.
c.	1.7, and Sheila regards shoes as an inferior good.
d.	1.7, and Sheila regards shoes as a normal good.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Applicative

Necessities such as food and clothing tend to have

a.	high price elasticities of demand and high income elasticities of demand.
b.	high price elasticities of demand and low income elasticities of demand.
c.	low price elasticities of demand and high income elasticities of demand.
d.	low price elasticities of demand and low income elasticities of demand.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Interpretive

Income elasticity of demand measures how

a.	the quantity demanded changes as consumer income changes.
b.	consumer purchasing power is affected by a change in the price of a good.
c.	the price of a good is affected when there is a change in consumer income.
d.	many units of a good a consumer can buy given a certain income level.

ANS: A DIF: 1 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Definitional

For Susie, a 7 percent increase in income results in a 12 percent increase in the quantity demanded of pizza. For Susie, the income elasticity of demand for pizza is

a.	negative, and pizza is an normal good.
b.	negative, and pizza is a inferior good.
c.	positive, and pizza is an inferior good.
d.	positive, and pizza is a normal good.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Applicative

For which of the following goods is the income elasticity of demand likely highest?

a.	water
b.	diamonds
c.	hamburgers
d.	housing

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Interpretive

Last year, Joan bought 50 pounds of hamburger when her household’s income was $40,000. This year, her household income was only $30,000 and Joan bought 60 pounds of hamburger. All else constant, Joan’s income elasticity of demand for hamburger is

a.	positive, so Joan considers hamburger to be an inferior good.
b.	positive, so Joan considers hamburger to be a normal good and a necessity.
c.	negative, so Joan considers hamburger to be an inferior good.
d.	negative, so Joan considers hamburger to be a normal good but not a necessity.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Interpretive

If an increase in income results in a decrease in the quantity demanded of a good, then for that good, the

a.	cross-price elasticity of demand is negative.
b.	price elasticity of demand is elastic.
c.	income elasticity of demand is negative.
d.	income elasticity of demand is positive.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Interpretive

To determine whether a good is considered normal or inferior, one could examine the value of the

a.	income elasticity of demand for that good.
b.	price elasticity of demand for that good.
c.	price elasticity of supply for that good.
d.	cross-price elasticity of demand for that good.

ANS: A DIF: 1 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Interpretive

You and your college roommate eat three packages of Ramen noodles each week. After graduation last month, both of you were hired at several times your college income. You still enjoy Ramen noodles very much and buy even more, but your roommate plans to buy fewer Ramen noodles in favor of foods she prefers more. When looking at income elasticity of demand for Ramen noodles,

a.	yours would be negative and your roommate’s would be positive.
b.	yours would be positive and your roommate’s would be negative.
c.	yours would be zero and your roommate’s would approach infinity.
d.	yours would approach infinity and your roommate’s would be zero.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Interpretive

You and your college roommate eat three packages of Ramen noodles each week. After graduation last month, both of you were hired at several times your college income. Your roommate still enjoys Ramen noodles very much and buys even more, but you plan to buy fewer Ramen noodles in favor of foods you prefer more. When looking at income elasticity of demand for Ramen noodles,

a.	yours would be negative and your roommate’s would be positive.
b.	yours would be positive and your roommate’s would be negative.
c.	yours would be zero and your roommate’s would approach infinity.
d.	yours would approach infinity and your roommate’s would be zero.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Interpretive

Suppose good X has a negative income elasticity of demand. This implies that good X is

a.	a normal good.
b.	a necessity.
c.	an inferior good.
d.	a luxury.

ANS: C DIF: 1 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Interpretive

For which of the following types of goods would the income elasticity of demand be positive and relatively large?

a.	all inferior goods
b.	all normal goods
c.	goods for which there are many complements
d.	luxuries

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Interpretive

Assume that a 4 percent increase in income results in a 2 percent increase in the quantity demanded of a good. The income elasticity of demand for the good is

a.	negative and therefore the good is an inferior good.
b.	negative and therefore the good is a normal good.
c.	positive and therefore the good is a normal good.
d.	positive and therefore the good is an inferior good.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Applicative

Assume that a 4 percent decrease in income results in a 6 percent increase in the quantity demanded of a good. The income elasticity of demand for the good is

a.	negative and therefore the good is an inferior good.
b.	negative and therefore the good is a normal good.
c.	positive and therefore the good is an inferior good.
d.	positive and therefore the good is a normal good.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Applicative

Muriel’s income elasticity of demand for football tickets is 1.50. All else equal, this means that if her income increases by 20 percent, she will buy

a.	150 percent more football tickets.
b.	50 percent more football tickets.
c.	30 percent more football tickets.
d.	20 percent more football tickets.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Applicative

When her income increased from $10,000 to $20,000, Heather’s consumption of macaroni decreased from 10 pounds to 5 pounds and her consumption of soy-burgers increased from 2 pounds to 4 pounds. We can conclude that for Heather,

a.	macaroni and soy-burgers are both normal goods with income elasticities equal to 1.
b.	macaroni is an inferior good and soy-burgers are normal goods; both have income elasticities of 1.
c.	macaroni is an inferior good with an income elasticity of -1 and soy-burgers are normal goods with an income elasticity of 1.
d.	macaroni and soy-burgers are both inferior goods with income elasticities equal to -1.

ANS: C DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Applicative

Which of the following should be held constant when calculating an income elasticity of demand?

a.	the quantity of the good demanded
b.	the price of the good
c.	income
d.	All of the above should be held constant.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Interpretive

Which of the following should be held constant when calculating an income elasticity of demand?

a.	the price of the good
b.	prices of related goods
c.	tastes
d.	All of the above should be held constant.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Interpretive

Table 5-5

Income

Quantity of Good X

Purchased

Quantity of Good Y

Purchased

$30,000

$40,000

Refer to Table 5-5. Using the midpoint method, what is the income elasticity of demand for good X?

a.	-3.5
b.	-0.29
c.	0.29
d.	3.5

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Applicative

Refer to Table 5-5. Using the midpoint method, the income elasticity of demand for good Y is

a.	2.33, and good Y is a normal good.
b.	-2.33, and good Y is an inferior good.
c.	-0.43, and good Y is a normal good.
d.	-0.43, and good Y is an inferior good.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Applicative

Food and clothing tend to have

a.	small income elasticities because consumers, regardless of their incomes, choose to buy relatively constant quantities of these goods.
b.	small income elasticities because consumers buy proportionately more of both goods at higher income levels than they buy at low income levels.
c.	large income elasticities because they are necessities.
d.	large income elasticities because they are relatively inexpensive.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Applicative

The income elasticity of demand for caviar tends to be

a.	high because caviar is relatively expensive.
b.	low because caviar is packaged in small containers.
c.	high because buyers generally feel that they can do without it.
d.	low because it is almost always in short supply.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand

MSC: Interpretive

Suppose goods A and B are substitutes for each other. We would expect the cross-price elasticity between these two goods to be

a.	positive.
b.	negative.
c.	either positive or negative. It depends whether A and B are normal goods or inferior goods.
d.	either positive or negative. It depends whether the current price level is on the elastic or inelastic portion of the demand curve.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand

MSC: Interpretive

Last month, sellers of good Y took in $100 in total revenue on sales of 50 units of good Y. This month sellers of good Y raised their price and took in $120 in total revenue on sales of 40 units of good Y. At the same time, the price of good X stayed the same, but sales of good X increased from 20 units to 40 units. We can conclude that goods X and Y are

a.	substitutes, and have a cross-price elasticity of 0.60.
b.	complements, and have a cross-price elasticity of 0.60.
c.	substitutes, and have a cross-price elasticity of 1.67.
d.	complements, and have a cross-price elasticity of 1.67.

ANS: C DIF: 3 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand

MSC: Applicative

Which of the following could be the cross-price elasticity of demand for two goods that are complements?

a.	-1.3
b.	0
c.	0.2
d.	1.4

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand

MSC: Interpretive

Suppose that when the price of good X falls from $10 to $8, the quantity demanded of good Y rises from 20 units to 25 units. Using the midpoint method,

a.	the cross-price elasticity of demand is -1.0, and X and Y are complements.
b.	the cross-price elasticity of demand is -1.0, and X and Y are substitutes.
c.	the cross-price elasticity of demand is 1.0, and X and Y are complements.
d.	the cross-price elasticity of demand is 1.0, and X and Y are substitutes.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand

MSC: Applicative

Which of the following expressions represents a cross-price elasticity of demand?

a.	percentage change in quantity demanded of bread divided by percentage change in quantity supplied of bread
b.	percentage change in quantity demanded of bread divided by percentage change in price of butter
c.	percentage change in price of bread divided by percentage change in quantity demanded of bread
d.	percentage change in quantity demanded of bread divided by percentage change in income

ANS: B DIF: 1 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand

MSC: Definitional

Cross-price elasticity of demand measures how

a.	the price of one good changes in response to a change in the price of another good.
b.	the quantity demanded of one good changes in response to a change in the quantity demanded of another good.
c.	the quantity demanded of one good changes in response to a change in the price of another good.
d.	strongly normal or inferior a good is.

ANS: C DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand

MSC: Definitional

The cross-price elasticity of demand can tell us whether goods are

a.	normal or inferior.
b.	elastic or inelastic.
c.	luxuries or necessities.
d.	complements or substitutes.

ANS: D DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand

MSC: Interpretive

If the cross-price elasticity of two goods is negative, then those two goods are

a.	necessities.
b.	complements.
c.	normal goods.
d.	inferior goods.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand

MSC: Interpretive

If the cross-price elasticity of two goods is positive, then those two goods are

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

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand

MSC: Interpretive

Suppose the cross-price elasticity of demand between hot dogs and mustard is -2.00. This implies that a 20 percent increase in the price of hot dogs will cause the quantity of mustard purchased to

a.	fall by 200 percent.
b.	fall by 40 percent.
c.	rise by 200 percent.
d.	rise by 40 percent.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand

MSC: Applicative

If two goods are substitutes, their cross-price elasticity will be

a.	positive.
b.	negative.
c.	zero.
d.	equal to the difference between the income elasticities of demand for the two goods.

ANS: A DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand

MSC: Interpretive

If two goods are complements, their cross-price elasticity will be

a.	positive.
b.	negative.
c.	zero.
d.	equal to the difference between the income elasticities of demand for the two goods.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand

MSC: Interpretive

If, for two goods, the cross-price elasticity of demand is 1.25, then

a.	the two goods are luxuries.
b.	the two goods are substitutes.
c.	one of the goods is normal and the other good is inferior.
d.	the demand for one of the goods conforms to the law of demand, but the demand for the other good violates the law of demand.

ANS: B DIF: 2 REF: 5-1

NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand

MSC: Interpretive

Sec02 – Elasticity and Its Application – The Elasticity of Supply

MULTIPLE CHOICE

A key determinant of the price elasticity of supply is the

a.	time horizon.
b.	income of consumers.
c.	price elasticity of demand.
d.	importance of the good in a consumer’s budget.

ANS: A DIF: 1 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Interpretive

A key determinant of the price elasticity of supply is the

a.	number of close substitutes for the good in question.
b.	definition of the market.
c.	length of the time period.
d.	extent to which buyers alter their quantities demanded in response to changes in their incomes.

ANS: C DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Interpretive

A key determinant of the price elasticity of supply is

a.	the ability of sellers to change the price of the good they produce.
b.	the ability of sellers to change the amount of the good they produce.
c.	how responsive buyers are to changes in sellers’ prices.
d.	the slope of the demand curve.

ANS: B DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Interpretive

The supply of a good will be more elastic, the

a.	more the good is considered a luxury.
b.	broader is the definition of the market for the good.
c.	larger the number of close substitutes for the good.
d.	longer the time period being considered.

ANS: D DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Interpretive

The price elasticity of supply measures how much

a.	the quantity supplied responds to changes in input prices.
b.	the quantity supplied responds to changes in the price of the good.
c.	the price of the good responds to changes in supply.
d.	sellers respond to changes in technology.

ANS: B DIF: 1 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Definitional

The price elasticity of supply measures how responsive

a.	sellers are to a change in price.
b.	sellers are to a change in buyers’ income.
c.	buyers are to a change in production costs.
d.	equilibrium price is to a change in supply.

ANS: A DIF: 1 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Definitional

The price elasticity of supply measures how responsive

a.	equilibrium price is to equilibrium quantity.
b.	sellers are to a change in buyers’ income.
c.	sellers are to a change in price.
d.	consumers are to the number of substitutes.

ANS: C DIF: 1 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Definitional

If the quantity supplied responds only slightly to changes in price, then

a.	supply is said to be elastic.
b.	supply is said to be inelastic.
c.	an increase in price will not shift the supply curve very much.
d.	even a large decrease in demand will change the equilibrium price only slightly.

ANS: B DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Interpretive

Frequently, in the short run, the quantity supplied of a good is

a.	impossible, or nearly impossible, to measure.
b.	not very responsive to price changes.
c.	determined by the quantity demanded of the good.
d.	determined by psychological forces and other non-economic forces.

ANS: B DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Interpretive

In the long run, the quantity supplied of most goods

a.	will increase in almost all cases, regardless of what happens to price.
b.	cannot respond at all to a change in price.
c.	can respond to a change in price, but the change is almost always inconsequential.
d.	can respond substantially to a change in price.

ANS: D DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Interpretive

When a supply curve is relatively flat,

a.	sellers are not at all responsive to a change in price.
b.	the equilibrium price changes substantially when the demand for the good changes.
c.	the supply is relatively elastic.
d.	the supply is relatively inelastic.

ANS: C DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Interpretive

When a supply curve is relatively flat,

a.	sellers are not very responsive to changes in price.
b.	the supply is relatively inelastic.
c.	the supply is relatively elastic.
d.	Both a and b are correct.

ANS: C DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Interpretive

If the price elasticity of supply for wheat is less than 1, then the supply of wheat is

a.	inelastic.
b.	elastic.
c.	unit elastic.
d.	quite sensitive to changes in income.

ANS: A DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Interpretive

A linear, upward-sloping supply curve has

a.	a constant slope and a changing elasticity of supply.
b.	a changing slope and a constant elasticity of supply.
c.	both a constant slope and a constant elasticity of supply.
d.	both a changing slope and a changing elasticity of supply.

ANS: A DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Interpretive

As price elasticity of supply increases, the supply curve

a.	becomes flatter.
b.	becomes steeper.
c.	becomes downward sloping.
d.	shifts to the right.

ANS: A DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Interpretive

A key determinant of the price elasticity of supply is the time period under consideration. Which of the following statements best explains this fact?

a.	Supply curves are steeper over long periods of time than over short periods of time.
b.	Buyers of goods tend to be more responsive to price changes over long periods of time than over short periods of time.
c.	The number of firms in a market tends to be more variable over long periods of time than over short periods of time.
d.	Firms prefer to change their prices in the short run rather than in the long run.

ANS: C DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Interpretive

Some firms eventually experience problems with their capacity to produce output as their output levels increase. For these firms,

a.	market power is substantial.
b.	supply is perfectly inelastic.
c.	supply is more elastic at low levels of output and less elastic at high levels of output.
d.	supply is less elastic at low levels of output and more elastic at high levels of output.

ANS: C DIF: 3 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Applicative

Generally, a firm is more willing and able to increase quantity supplied in response to a price change when

a.	the relevant time period is short rather than long.
b.	the relevant time period is long rather than short.
c.	supply is inelastic.
d.	the firm is experiencing capacity problems.

ANS: B DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Applicative

If two supply curves pass through the same point and one is steep and the other is flat, which of the following statements is correct?

a.	The flatter supply curve represents a supply that is inelastic relative to the supply represented by the steeper supply curve.
b.	The steeper supply curve represents a supply that is inelastic relative to the supply represented by the flatter supply curve.
c.	Given two prices with which to calculate the price elasticity of supply, that elasticity is the same for both curves.
d.	A decrease in demand will increase total revenue if the steeper supply curve is relevant, while a decrease in demand will decrease total revenue if the flatter supply cure is relevant.

ANS: B DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Interpretive

Scenario 5-1

The supply of aged cheddar cheese is inelastic and the supply of bread is elastic. Both goods are considered to be normal goods by a majority of consumers. Suppose that a large income tax increase decreases the demand for both goods by 10%.

Refer to Scenario 5-1. The price elasticity of supply for aged cheddar cheese could be

a.	-1.
b.	0.
c.	0.5.
d.	1.5.

ANS: C DIF: 3 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Interpretive

Refer to Scenario 5-1. The price elasticity of supply for bread could be

a.	-1.
b.	0.
c.	0.5.
d.	1.5.

ANS: D DIF: 3 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Interpretive

If a 25% change in price results in a 40% change in quantity supplied, then the price elasticity of supply is

a.	0.63, and supply is elastic.
b.	0.63, and supply is inelastic.
c.	1.60, and supply is elastic.
d.	1.60, and supply is inelastic.

ANS: C DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Analytical

If a 40% change in price results in a 25% change in quantity supplied, then the price elasticity of supply is

a.	0.63, and supply is elastic.
b.	0.63, and supply is inelastic.
c.	1.60, and supply is elastic.
d.	1.60, and supply is inelastic.

ANS: B DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Analytical

If the price elasticity of supply is 1.5, and a price increase led to a 1.8% increase in quantity supplied, then the price increase amounted to

a.	0.67%.
b.	0.83%.
c.	1.20%.
d.	2.70%.

ANS: C DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Analytical

If the price elasticity of supply is 1.5, and a price increase led to a 3% increase in quantity supplied, then the price increase amounted to

a.	0.2%.
b.	0.5%.
c.	2%.
d.	4.5%.

ANS: C DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Analytical

If a 30 percent change in price causes a 15 percent change in quantity supplied, then the price elasticity of supply is

a.	0.5, and supply is elastic.
b.	0.5, and supply is inelastic.
c.	2, and supply is inelastic.
d.	2, and supply is elastic.

ANS: B DIF: 3 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Applicative

Suppose the price elasticity of supply for how-to books is 0.3 in the short run and 1.2 in the long run. If an increase in the demand for how-to books causes the price of how-to books to increase by 36%, then the quantity supplied of how-to books will increase by

a.	0.8% in the short run and 3.3% in the long run.
b.	1.2% in the short run and 0.3% in the long run.
c.	10.8% in the short run and 43.2% in the long run.
d.	120% in the short run and 30% in the long run.

ANS: C DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Analytical

Suppose the price elasticity of supply for how-to books is 0.3 in the short run and 1.2 in the long run. If an increase in the demand for how-to books causes the price of how-to books to increase by 20%, then the quantity supplied of how-to books will increase by

a.	0.67% in the short run and 0.17% in the long run.
b.	3% in the short run and 1.2% in the long run.
c.	6% in the short run and 24% in the long run.
d.	66.7% in the short run and 16.7% in the long run.

ANS: C DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Analytical

Suppose the price elasticity of supply for how-to books is 0.3 in the short run and 1.2 in the long run. If an increase in the demand for how-to books causes the price of how-to books to increase by 5%, then the quantity supplied of how-to books will increase by

a.	1.5% in the short run and 6% in the long run.
b.	6% in the short run and 1.5% in the long run.
c.	16.7% in the short run and 4.2% in the long run.
d.	4.2% in the short run and 16.7% in the long run.

ANS: A DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Analytical

Figure 5-12

The following figure shows the supply curve for a particular good.

Refer to Figure 5-12. Over which range is the supply curve in this figure the most elastic?

a.	Between $16 and $40
b.	Between $40 and $100
c.	Between $100 and $220
d.	Between $220 and $430

ANS: A DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Applicative

Refer to Figure 5-12. Over which range is the supply curve in this figure the least elastic?

a.	Between $16 and $40
b.	Between $40 and $100
c.	Between $100 and $220
d.	Between $220 and $430

ANS: D DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Applicative

Refer to Figure 5-12. Using the midpoint method, what is the price elasticity of supply between $16 and $40?

a.	0.125
b.	0.86
c.	1.0
d.	2.5

ANS: C DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Analytical

Refer to Figure 5-12. Using the midpoint method, what is the price elasticity of supply between $100 and $220?

a.	0.58
b.	0.67
c.	1.00
d.	1.73

ANS: A DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Analytical

Figure 5-13

Refer to Figure 5-13. Along which of these segments of the supply curve is supply least elastic?

a.	between G and H
b.	between C and D
c.	between A and C
d.	between A and B

ANS: A DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Applicative

Refer to Figure 5-13. Along which of these segments of the supply curve is supply most elastic?

a.	between A and B
b.	between C and D
c.	between D and H
d.	between G and H

ANS: A DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply

MSC: Applicative

Refer to Figure 5-13. Using the midpoint method, what is the price elasticity of supply between points A and B?

a.	2.33
b.	1.0
c.	0.43
d.	0.1

ANS: A DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Analytical

Refer to Figure 5-13. Using the midpoint method, what is the price elasticity of supply between points B and C?

a.	1.67
b.	1.19
c.	0.84
d.	0.61

ANS: B DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Analytical

Refer to Figure 5-13. Using the midpoint method, what is the price elasticity of supply between points D and G?

a.	1.89
b.	1.26
c.	0.53
d.	0.34

ANS: C DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Analytical

Figure 5-14

Refer to Figure 5-14. Using the midpoint method, what is the price elasticity of supply between $4 and $6?

a.	0.75
b.	1.00
c.	1.20
d.	1.25

ANS: D DIF: 3 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Analytical

Refer to Figure 5-14. Using the midpoint method, what is the price elasticity of supply between $6 and $8?

a.	0.86
b.	1.00
c.	1.17
d.	1.25

ANS: C DIF: 3 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Analytical

Figure 5-15

Refer to Figure 5-15. Using the midpoint method, what is the price elasticity of supply between point A and point B?

a.	0.58
b.	0.71
c.	1.06
d.	1.4

ANS: B DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Analytical

Refer to Figure 5-15. Using the midpoint method, what is the price elasticity of supply between point B and point C?

a.	1.44
b.	1.29
c.	0.96
d.	0.78

ANS: D DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Analytical

Refer to Figure 5-15. If, holding the supply curve fixed, there were an increase in demand that caused the equilibrium price to increase from $6 to $8, then sellers’ total revenue would

a.	increase.
b.	decrease.
c.	remain unchanged.
d.	The effect on total revenue cannot be determined from the given information.

ANS: A DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of supply

MSC: Applicative

Table 5-6

Supply Curve A

Supply Curve B

Supply Curve C

Price

$1.00

$2.00

$1.00

$3.00

$2.00

$5.00

Quantity

Supplied

500

600

900

400

700

Refer to Table 5-6. Which of the three supply curves represents the least elastic supply?

a.	supply curve A
b.	supply curve B
c.	supply curve C
d.	There is no difference in the elasticity of the three supply curves.

ANS: A DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Applicative

Refer to Table 5-6. Which of the three supply curves represents the most elastic supply?

a.	supply curve A
b.	supply curve B
c.	supply curve C
d.	There is no difference in the elasticity of the three supply curves.

ANS: C DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Applicative

Refer to Table 5-6. Along which of the supply curves does quantity supplied move proportionately more than the price?

a.	along supply curve B only
b.	along supply curves B and C
c.	along all three supply curves
d.	Quantity supplied moves proportionately more than the price along none of the three supply curves.

ANS: D DIF: 3 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Applicative

At a price of $1.00, a local coffee shop is willing to supply 100 cinnamon rolls per day. At a price of $1.20, the coffee shop would be willing to supply 150 cinnamon rolls per day. Using the midpoint method, the price elasticity of supply is

a.	0.45
b.	0.90
c.	1.11
d.	2.20

ANS: D DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Analytical

At a price of $1.20, a local coffee shop is willing to supply 100 cinnamon rolls per day. At a price of $1.40, the coffee shop would be willing to supply 150 cinnamon rolls per day. Using the midpoint method, the price elasticity of supply is

a.	0.15
b.	0.375
c.	2.5
d.	2.60

ANS: D DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Analytical

On a certain supply curve, one point is (quantity supplied = 200, price = $4.00) and another point is (quantity supplied = 250, price = $4.50). Using the midpoint method, the price elasticity of supply is about

a.	0.22.
b.	0.53.
c.	1.00.
d.	1.89.

ANS: D DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Analytical

On a certain supply curve, one point is (quantity supplied = 200, price = $2.00) and another point is (quantity supplied = 250, price = $2.50). Using the midpoint method, the price elasticity of supply is about

a.	0.2.
b.	0.5.
c.	1.0.
d.	2.5.

ANS: C DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Analytical

Holding all other factors constant and using the midpoint method, if a pencil manufacturer increases production by 20 percent when the market price of pencils increases from $0.50 to $0.60, then supply is

a.	inelastic, since the price elasticity of supply is equal to .91.
b.	inelastic, since the price elasticity of supply is equal to 1.1.
c.	elastic, since the price elasticity of supply is equal to 0.91.
d.	elastic, since the price elasticity of supply is equal to 1.1.

ANS: D DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Analytical

Holding all other factors constant and using the midpoint method, if a pencil manufacturer increases production from 40 to 50 boxes when price increases by 20 percent, then supply is

a.	inelastic, since the price elasticity of supply is equal to .91.
b.	inelastic, since the price elasticity of supply is equal to 1.1.
c.	elastic, since the price elasticity of supply is equal to 0.91.
d.	elastic, since the price elasticity of supply is equal to 1.1.

ANS: D DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Analytical

Suppose that an increase in the price of carrots from $1.30 to $1.80 per pound increases the quantity of carrots that carrot farmers produce from 1.2 million pounds to 1.6 million pounds. Using the midpoint method, what is the approximate value of the price elasticity of supply?

a.	0.67
b.	0.89
c.	1.00
d.	1.13

ANS: B DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Analytical

An increase in the price of pure chocolate morsels from $2.25 to $2.45 causes suppliers of chocolate morsels to increase their quantity supplied from 125 bags per minute to 145 bags per minute. Supply is

a.	elastic, and the price elasticity of supply is 1.74.
b.	elastic, and the price elasticity of supply is 0.57.
c.	inelastic, and the price elasticity of supply is 1.74.
d.	inelastic, and the price elasticity of supply is 0.57.

ANS: A DIF: 3 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Analytical

A bakery would be willing to supply 500 bagels per day at a price of $0.50 each. At a price of $0.80, the bakery would be willing to supply 1,100 bagels. Using the midpoint method, the price elasticity of supply for bagels is

a.	0.62.
b.	0.77.
c.	1.24.
d.	1.63.

ANS: D DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Analytical

A bakery would be willing to supply 500 bagels per day at a price of $0.50 each. At a price of $0.80, the bakery would be willing to supply 1,100 bagels. Using the midpoint method, the price elasticity of supply for bagels is

a.	0.62, and supply is elastic.
b.	0.62, and supply is inelastic.
c.	1.63, and supply is elastic.
d.	1.63, and supply is inelastic.

ANS: C DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Analytical

In January the price of widgets was $2.00, and Wendy’s Widgets produced 80 widgets. In February the price of widgets was $2.50, and Wendy’s Widgets produced 110 widgets. In March the price of widgets was $3.00, and Wendy’s Widgets produced 140 widgets. The price elasticity of supply of Wendy’s Widgets was

a.	0.70 when the price increased from $2.00 to $2.50 and 0.76 when the price increased from $2.50 to $3.00.
b.	0.88 when the price increased from $2.00 to $2.50 and 1.08 when the price increased from $2.50 to $3.00.
c.	1.42 when the price increased from $2.00 to $2.50 and 1.32 when the price increased from $2.50 to $3.00.
d.	1.50 when the price increased from $2.00 to $2.50 and 1.18 when the price increased from $2.50 to $3.00.

ANS: C DIF: 3 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Analytical

In January the price of widgets was $1.00, and Wendy’s Widgets produced 80 widgets. In February the price of widgets was $1.50, and Wendy’s Widgets produced 110 widgets. In March the price of widgets was $2.00, and Wendy’s Widgets produced 140 widgets. The price elasticity of supply of Wendy’s Widgets was

a.	0.79 when the price increased from $1.00 to $1.50 and 0.84 when the price increased from $1.50 to $2.00.
b.	1.27 when the price increased from $1.00 to $1.50 and 1.19 when the price increased from $1.50 to $2.00.
c.	0.79 when the price increased from $1.00 to $1.50 and 1.19 when the price increased from $1.50 to $2.00.
d.	1.27 when the price increased from $1.00 to $1.50 and 0.84 when the price increased from $1.50 to $2.00.

ANS: A DIF: 3 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Midpoint method | Price elasticity of supply

MSC: Analytical

Which of the following statements is valid when the market supply curve is vertical?

a.	Market quantity supplied does not change when the price changes.
b.	Supply is perfectly elastic.
c.	An increase in market demand will increase the equilibrium quantity.
d.	An increase in market demand will not increase the equilibrium price.

ANS: A DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic supply

MSC: Interpretive

Which of the following statements is not valid when the market supply curve is vertical?

a.	Market quantity supplied does not change when the price changes.
b.	Supply is perfectly inelastic.
c.	An increase in market demand will increase the equilibrium quantity.
d.	An increase in market demand will increase the equilibrium price.

ANS: C DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic supply

MSC: Interpretive

Which of the following statements is valid when supply is perfectly elastic at a price of $4?

a.	The elasticity of supply approaches infinity.
b.	The supply curve is vertical.
c.	At a price below $4, quantity supplied is infinite.
d.	At a price above $4, quantity supplied is zero.

ANS: A DIF: 3 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Perfectly elastic supply

KEY: Interpretive

Which of the following statements is not valid when supply is perfectly elastic?

a.	The elasticity of supply approaches infinity.
b.	The supply curve is horizontal.
c.	Very small changes in price lead to large changes in quantity supplied.
d.	The time period under consideration is more likely a short period rather than a long period.

ANS: D DIF: 3 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Perfectly elastic supply

MSC: Interpretive

If the quantity supplied is the same regardless of price, then supply is

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

ANS: C DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic supply

MSC: Definitional

When supply is perfectly elastic, the value of the price elasticity of supply is

a.	0.
b.	1.
c.	greater than 0 and less than 1.
d.	infinity.

ANS: D DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Perfectly elastic supply

MSC: Interpretive

Which of the following would be true as the price elasticity of supply approaches infinity?

a.	Very small changes in price lead to very large changes in quantity supplied.
b.	Very large changes in price lead to very small changes in quantity supplied.
c.	Very small changes in price lead to no change in quantity supplied.
d.	Very large changes in price lead to no change in quantity supplied.

ANS: A DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Perfectly elastic supply

MSC: Interpretive

Figure 5-16

Refer to Figure 5-16. Which supply curve represents perfectly inelastic supply?

a.	S1
b.	S2
c.	S3
d.	None of the supply curves is perfectly inelastic.

ANS: A DIF: 1 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic supply

MSC: Interpretive

Refer to Figure 5-16. Which supply curve is most likely relevant over a very long period of time?

a.	S1
b.	S2
c.	S3
d.	All of the above are equally likely to be relevant over a very long period of time.

ANS: C DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Perfectly elastic supply

MSC: Interpretive

If sellers do not adjust their quantities supplied at all in response to a change in price,

a.	advances in technology must be prevalent.
b.	the time period under consideration must be very long.
c.	supply is perfectly elastic.
d.	supply is perfectly inelastic.

ANS: D DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic supply

MSC: Interpretive

If the price elasticity of supply is zero, then

a.	supply is more elastic than it is in any other case.
b.	the supply curve is horizontal.
c.	the quantity supplied is the same, regardless of price.
d.	a change in demand will cause a relatively small change in the equilibrium price.

ANS: C DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic supply

MSC: Interpretive

If the price elasticity of supply for a good is equal to infinity, then

a.	the supply curve is vertical.
b.	the supply curve is horizontal.
c.	the supply curve also has a slope equal to infinity.
d.	the quantity supplied is constant regardless of the price.

ANS: B DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Perfectly elastic supply

MSC: Interpretive

Which of the following is an illustration of the market for original paintings by deceased artist Vincent Van Gogh?

a.	A
b.	B
c.	C
d.	D

ANS: C DIF: 2 REF: 5-2

NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic supply

MSC: Applicative

Sec03 – Elasticity and Its Application – Three Applications of Supply, Demand, and Elasticity

MULTIPLE CHOICE

Scenario 5-2

The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both goods are considered to be normal goods by a majority of consumers. Suppose that a large income tax increase decreases the demand for both goods by 10%.

Refer to Scenario 5-2. The equilibrium price will

a.	increase in the aged cheddar cheese market and increase in the bread market.
b.	increase in the aged cheddar cheese market and decrease in the bread market.
c.	decrease in the aged cheddar cheese market and increase in the bread market.
d.	decrease in the aged cheddar cheese market and decrease in the bread market.

ANS: D DIF: 2 REF: 5-3

NAT: Analytic LOC: Elasticity

TOP: Equilibrium | Normal goods | Price elasticity of supply MSC: Applicative

Refer to Scenario 5-2. The equilibrium quantity will

a.	increase in the aged cheddar cheese market and increase in the bread market.
b.	increase in the aged cheddar cheese market and decrease in the bread market.
c.	decrease in the aged cheddar cheese market and increase in the bread market.
d.	decrease in the aged cheddar cheese market and decrease in the bread market.

ANS: D DIF: 2 REF: 5-3

NAT: Analytic LOC: Elasticity

TOP: Equilibrium | Normal goods | Price elasticity of supply MSC: Applicative

Refer to Scenario 5-2. The change in equilibrium price will be

a.	greater in the aged cheddar cheese market than in the bread market.
b.	greater in the bread market than in the aged cheddar cheese market.
c.	the same in the aged cheddar cheese and bread markets.
d.	may be greater in either the aged cheddar cheese market or the bread market.

ANS: A DIF: 3 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: Equilibrium | Price elasticity of supply

MSC: Analytical

Refer to Scenario 5-2. The change in equilibrium quantity will be

a.	greater in the aged cheddar cheese market than in the bread market.
b.	greater in the bread market than in the aged cheddar cheese market.
c.	the same in the aged cheddar cheese and bread markets.
d.	may be greater in either the aged cheddar cheese market or the bread market.

ANS: B DIF: 3 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: Equilibrium | Price elasticity of supply

MSC: Analytical

Refer to Scenario 5-2. Total consumer spending on aged cheddar cheese will

a.	increase, and total consumer spending on bread will increase.
b.	increase, and total consumer spending on bread will decrease.
c.	decrease, and total consumer spending on bread will increase.
d.	decrease, and total consumer spending on bread will decrease.

ANS: D DIF: 3 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: Equilibrium | Total consumer spending

MSC: Analytical

Scenario 5-3

Milk has an inelastic demand and beef has an elastic demand. Suppose that a mysterious increase in bovine infertility decreases both the population of dairy cows and the population of beef cattle by 50 percent.

Refer to Scenario 5-3. The equilibrium price will

a.	increase in the milk market and increase in the beef market.
b.	increase in the milk market and decrease in the beef market.
c.	decrease in the milk market and increase in the beef market.
d.	decrease in the milk market and decrease in the beef market.

ANS: A DIF: 2 REF: 5-3

NAT: Analytic LOC: Elasticity

TOP: Equilibrium | Productivity | Price elasticity of demand MSC: Applicative

Refer to Scenario 5-3. The equilibrium quantity will

a.	increase in the milk market and increase in the beef market.
b.	increase in the milk market and decrease in the beef market.
c.	decrease in the milk market and increase in the beef market.
d.	decrease in the milk market and decrease in the beef market.

ANS: D DIF: 2 REF: 5-3

NAT: Analytic LOC: Elasticity

TOP: Equilibrium | Productivity | Price elasticity of demand MSC: Applicative

Refer to Scenario 5-3. The change in equilibrium price will be

a.	greater in the milk market than in the beef market.
b.	greater in the beef market than in the milk market.
c.	the same in the milk and beef markets.
d.	may be greater in either the milk market or the beef market.

ANS: A DIF: 3 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: Equilibrium | Price elasticity of demand

MSC: Analytical

Refer to Scenario 5-3. The change in equilibrium quantity will be

a.	greater in the milk market than in the beef market.
b.	greater in the beef market than in the milk market.
c.	the same in the milk and beef markets.
d.	may be greater in either the milk market or the beef market.

ANS: B DIF: 3 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: Equilibrium | Price elasticity of demand

MSC: Analytical

Refer to Scenario 5-3. Total consumer spending on milk will

a.	increase, and total consumer spending on beef will increase.
b.	increase, and total consumer spending on beef will decrease.
c.	decrease, and total consumer spending on beef will increase.
d.	decrease, and total consumer spending on beef will decrease.

ANS: B DIF: 3 REF: 5-3

NAT: Analytic LOC: Elasticity

TOP: Equilibrium | Price elasticity of demand | Total consumer spending

MSC: Analytical

The discovery of a new hybrid wheat would increase the supply of wheat. As a result, wheat farmers would realize an increase in total revenue if

a.	the supply of wheat is elastic.
b.	the supply of wheat is inelastic.
c.	the demand for wheat is inelastic.
d.	the demand for wheat is elastic.

ANS: D DIF: 2 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: Supply | Price elasticity of demand | Total revenue

MSC: Applicative

Because the demand for wheat tends to be inelastic, the development of a new, more productive hybrid wheat would tend to

a.	increase the total revenue of wheat farmers.
b.	decrease the total revenue of wheat farmers.
c.	decrease the demand for wheat.
d.	decrease the supply of wheat.

ANS: B DIF: 2 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: Supply | Price elasticity of demand | Total revenue

MSC: Applicative

Knowing that the demand for wheat is inelastic, if all farmers voluntarily did not plant wheat on 10 percent of their land, then

a.	consumers of wheat would buy more wheat.
b.	wheat farmers would suffer a reduction in their total revenue.
c.	wheat farmers would experience an increase in their total revenue.
d.	the demand for wheat would decrease.

ANS: C DIF: 2 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: Supply | Price elasticity of demand | Total revenue

MSC: Applicative

If corn farmers know that the demand for corn is inelastic, and they want to increase their total revenue, they should all

a.	plant more corn so that they would be able to sell more each year.
b.	increase spending on fertilizer in an attempt to produce more corn on the acres they farm.
c.	reduce the number of acres they plant in corn.
d.	contribute to a fund that promotes technological advances in corn production.

ANS: C DIF: 2 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand | Total revenue

MSC: Applicative

There are fewer farmers in the United States today than 200 years ago because of

a.	increases in farm technology.
b.	increased government regulations in farming.
c.	an elastic demand for food.
d.	environmental programs designed to reduce soil erosion.

ANS: A DIF: 2 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: Technology | Inelastic demand

MSC: Applicative

How did the farm population in the United States change between 1950 and 2008?

a.	It dropped from 10 million to fewer than 3 million people.
b.	It dropped from 20 million to fewer than 5 million people.
c.	It dropped from 30 million to just over 6 million people.
d.	It increased from 10 million to almost 13 million people.

ANS: A DIF: 1 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: Population MSC: Definitional

Between 1950 and 2008 there was a

a.	20 percent drop in the number of farmers, but farm output more than tripled.
b.	30 percent drop in the number of farmers, but farm output more than tripled.
c.	50 percent drop in the number of farmers, but farm output more than doubled.
d.	70 percent drop in the number of farmers, but farm output more than doubled.

ANS: D DIF: 2 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: Population | Output

MSC: Definitional

An advance in farm technology that results in an increased market supply is

a.	good for farmers because it raises prices for their products but bad for consumers because it raises prices consumers pay for food.
b.	bad for farmers because total revenue will fall but good for consumers because prices for food will fall.
c.	good for farmers because it raises prices for their products and also good for consumers because more output is available for consumption.
d.	bad for farmers because total revenue will fall and bad for consumers because farmers will raise the price of food to increase their total revenue.

ANS: B DIF: 2 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: Technology | Supply

MSC: Applicative

Farm programs that pay farmers not to plant crops on all their land

a.	hurt farmers by lowering their total revenue and hurt consumers by causing shortages of some food items.
b.	help farmers by cutting costs, which helps consumers by lowering food prices.
c.	help farmers by increasing total revenue in the market but hurt consumers by raising prices.
d.	help farmers directly since they receive government payments but have no real effects on consumers.

ANS: C DIF: 2 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: Total revenue

MSC: Applicative

Which of the following was not a reason OPEC failed to keep the price of oil high?

a.	Over the long run, producers of oil outside of OPEC responded to higher prices by increasing oil exploration and by building new extraction capacity.
b.	Consumers responded to higher prices with greater conservation.
c.	Consumers replaced old inefficient cars with newer efficient ones.
d.	The agreement OPEC members signed allowed each country to produce as much oil as each wanted.

ANS: D DIF: 2 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: OPEC MSC: Applicative

OPEC successfully raised the world price of oil in the 1970s and early 1980s, primarily due to

a.	an inelastic demand for oil and a reduction in the amount of oil supplied.
b.	a reduction in the amount of oil supplied and a world-wide oil embargo.
c.	a world-wide oil embargo and an elastic demand for oil.
d.	a reduction in the amount of oil supplied and an elastic demand for oil.

ANS: A DIF: 2 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: OPEC MSC: Applicative

In the market for oil in the short run, demand

a.	and supply are both elastic.
b.	and supply are both inelastic.
c.	is elastic and supply is inelastic.
d.	is inelastic and supply is elastic.

ANS: B DIF: 2 REF: 5-3

NAT: Analytic LOC: Elasticity

TOP: Price elasticity of demand | Price elasticity of supply MSC: Interpretive

A decrease in supply will cause the largest increase in price when

a.	both supply and demand are inelastic.
b.	both supply and demand are elastic.
c.	demand is elastic and supply is inelastic.
d.	demand is inelastic and supply is elastic.

ANS: A DIF: 3 REF: 5-3

NAT: Analytic LOC: Elasticity

TOP: Price elasticity of demand | Price elasticity of supply MSC: Analytical

A decrease in supply will cause the smallest increase in price when

a.	both supply and demand are inelastic.
b.	demand is elastic and supply is inelastic.
c.	both supply and demand are elastic.
d.	demand is inelastic and supply is elastic.

ANS: C DIF: 3 REF: 5-3

NAT: Analytic LOC: Elasticity

TOP: Price elasticity of demand | Price elasticity of supply MSC: Analytical

Which of the following statements does not help to explain why government drug interdiction increases drug-related crime?

a.	The demand for illegal drugs is inelastic.
b.	Interdiction results in drug addicts having a greater need for quick cash.
c.	Interdiction results in an increase in the amount of money needed to buy the same amount of drugs.
d.	Government drug programs are more lenient now with drug offenders than they were in the 1980s.

ANS: D DIF: 2 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: Government | Price elasticity of demand

MSC: Applicative

Which of the following statements helps to explain why government drug interdiction increases drug-related crime?

a.	The direct impact is on buyers, not sellers.
b.	Successful drug interdiction policies reduce the demand for illegal drugs.
c.	Drug addicts will have an even greater need for quick cash to support their habits.
d.	In the short run, both equilibrium quantities and prices will fall in the markets for illegal drugs.

ANS: C DIF: 2 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: Government | Price elasticity of demand

MSC: Applicative

Which of the following statements is not correct concerning government attempts to reduce the flow of illegal drugs into the country?

a.	Drug interdiction raises prices and total revenue in the drug market.
b.	Drug interdiction can increase drug-related crime.
c.	Drug interdiction shifts the demand curve for drugs to the left.
d.	Drug interdiction shifts the supply curve of drugs to the left.

ANS: C DIF: 2 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: Government | Demand | Supply

MSC: Applicative

Given the market for illegal drugs, when the government is successful in reducing the flow of drugs into the United States,

a.	supply decreases, demand is unaffected, and price increases.
b.	demand decreases, supply is unaffected, and price decreases.
c.	demand and supply both decrease, leaving price essentially unchanged.
d.	supply decreases, demand increases, and price increases substantially as a result.

ANS: A DIF: 2 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: Government | Demand | Supply

MSC: Applicative

If marijuana were legalized, it is likely that there would be an increase in the supply of marijuana. Advocates of marijuana legalization argue that this would significantly reduce the amount of revenue going to the criminal organizations that currently supply marijuana. These advocates believe that the

a.	supply for marijuana is elastic.
b.	demand for marijuana is elastic.
c.	supply for marijuana is inelastic.
d.	demand for marijuana is inelastic.

ANS: D DIF: 2 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand | Total revenue

MSC: Applicative

Under which of the following conditions would the interdiction of illegal drugs result in a decrease in the quantity of drugs sold and in a decrease in total spending on illegal drugs by drug users?

a.	The interdiction has the effect of shifting the demand curve for illegal drugs to the right.
b.	The price elasticity of demand for illegal drugs is 1.3.
c.	The price elasticity of supply for illegal drugs is 0.8.
d.	As a result of the interdiction, the price of illegal drugs increases by 20 percent and the quantity of illegal drugs sold decreases by 16 percent.

ANS: B DIF: 2 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand | Total revenue

MSC: Applicative

Scenario 5-4

Suppose the government is concerned about firms in the United States importing illegal caviar. As a result, the government increases border patrols to catch illegal shipments. U.S. Customs agents perform DNA testing on the caviar to determine if it comes from endangered species of fish. If so, the government destroys the caviar.

Refer to Scenario 5-4. What would we expect to observe in the caviar market?

a.	Equilibrium prices and quantities will increase.
b.	Equilibrium prices will increase by more if the demand for caviar is elastic than if demand is inelastic.
c.	Total revenues to caviar firms will increase if the demand for caviar is inelastic.
d.	All of the above are correct.

ANS: C DIF: 2 REF: 5-3

NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand | Total revenue

MSC: Applicative

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