Microeconomics Canadian 14th Edition Mcconnell - Test Bank

Microeconomics Canadian 14th Edition Mcconnell – Test Bank

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ExamName___________________________________MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.1)The price elasticity of demand coefficient indicates:1)A)the extent to which a demand curve shifts as incomes change.B)buyer responsiveness to price changes.C)the slope of the demand curve.D)how far business executives can stretch their fixed costs.Answer:B2)The basic formula for the price elasticity of demand coefficient is:2)A)absolute decline in price/absolute increase in quantity demanded.B)percentage change in quantity demanded/percentage change in price.C)percentage change in price/percentage change in quantity demanded.D)absolute decline in quantity demanded/absolute increase in price.Answer:B3)The concept of price elasticity of demand measures:3)A)the extent to which the demand curve shifts as the result of a price decline.B)the number of buyers in a market.C)the slope of the demand curve.D)the sensitivity of consumers to price changes.Answer:D4)If the price elasticity of demand for a product is 2.5, then a price cut from $2.00 to$1.80 will:4)A)increase the quantity demanded by about 25 percent.B)decrease the quantity demanded by about 2.5 percent.C)increase the quantity demanded by about 250 percent.D)increase the quantity demanded by about 2.5 percent.Answer:A5)Suppose that as the price of Y falls from $2.00 to $1.90 the quantity of Y demandedincreases from 110 to 118. Then the price elasticity of demand (using the midpointformula) is:5)A)1.73.B)4.00.C)2.09.D)1.37.Answer:D6)When the price of a product is increased 10 percent, the quantity demanded decreases15 percent. In this range of prices, demand for this product is:6)A)unitary elastic.B)inelastic.C)cross-elastic.D)elastic.Answer:D1
7)If the price elasticity of demand for a product is equal to 0.5, then a 10 percent decreasein price will:7)A)increase quantity demanded by 5 percent.B)decrease quantity demanded by 0.5 percent.C)decrease quantity demanded by 5 percent.D)increase quantity demanded by 0.5 percent.Answer:A8)The price elasticity of demand for widgets is 0.80. Assuming no change in the demandcurve for widgets, a 16 percent increase in sales implies a:8)A)20 percent reduction in priceB)40 percent reduction in price.C)12 percent reduction in price.D)1 percent reduction in price.Answer:A9)If the demand for bacon is relatively elastic, a 10 percent decline in the price of baconwill:9)A)increase the quantity demanded by less than 10 percent.B)decrease the quantity demanded by more than 10 percent.C)decrease the quantity demanded by less than 10 percent.D)increase the quantity demanded by more than 10 percent.Answer:D10)The following is the data on demand for a product. If the price decreases from $9 to $7,the price elasticity of demand (using the midpoint formula) is:10)A)1.60.B).63.C)1.16.D)2.27.Answer:A11)When the price of candy bars increased from $.45 to $.55 the quantity demandedchanged from 21,000 per day to 19,000 per day. In this range the price elasticity ofdemand for candy bars (using the midpoint formula) is:11)A)0.2.B)0.5.C)1.D)2.Answer:B2
12)If price declines from $450 to $350 and, as a result, quantity demanded increases from1200 to 1500, price elasticity of demand (using the midpoint formula) is:12)A)1.78.B)1.12.C)3.42.D).89.Answer:D13)The price of product X is reduced from $100 to $90 and, as a result, the quantitydemanded increases from 50 to 60 units. Therefore, demand for X in this price range:13)A)is elastic.B)is inelastic.C)is of unit elasticity.D)has declined.Answer:A14)Suppose we find that the price elasticity of demand for a product is 3.5 when its price isincreased by 2 percent. We can conclude that quantity demanded:14)A)decreased by 7 percent.B)decreased by 9 percent.C)increased by 7 percent.D)decreased by 12 percent.Answer:A15)The price elasticity of demand for beef is about 0.60. Other things equal, this means thata 20 percent increase in the price of beef will cause the quantity demanded of beef to:15)A)decrease by approximately 12 percent.B)decrease by approximately 26 percent.C)decrease by approximately 32 percent.D)increase by approximately 12 percent.Answer:A16)Suppose the price of local cable TV service increased from $16.20 to $19.80 and as aresult, the number of cable subscribers decreased from 224,000 to 176,000. Along thisportion of the demand curve, price elasticity of demand (using the midpoint formula) is:16)A)1.6.B)0.8.C)8.0.D)1.2.Answer:D17)If the price of hand calculators falls from $10 to $9 and, as a result, the quantitydemanded increases from 100 to 125, then:17)A)demand is elastic.B)demand is of unit elasticity.C)demand is inelastic.D)not enough information is given to make a statement about elasticity.Answer:A18)If the price elasticity of demand for gasoline is 0.20:18)A)a 10 percent rise in the price of gasoline will decrease the amount purchased by 2percent.B)a rise in the price of gasoline will reduce total revenue.C)a 10 percent fall in the price of gasoline will increase the amount purchased by 20percent.D)the demand for gasoline is linear.Answer:A3
19)If 100 units of product K are sold at a unit price of $10 and 75 units of product K aresold at a unit price of $15, one can conclude that in this price range:19)A)consumers are sensitive to price changes of product K.B)demand for product K is inelastic.C)demand for product K is elastic.D)demand for product K has shifted to the right.Answer:B20)Assume a single good. If the price of the good decreases from $6.30 to $5.70, consumerspending would:20)A)decrease if demand were either D1or D2.B)decrease if demand were D2onlyC)decrease if demand were D1only.D)increase if demand were either D1or D2.Answer:B4
21)Assume a single good. If the price of the good increased from $5.70 to $6.30 along D1,the price elasticity of demand (using the midpoint formula) along this portion of thedemand curve would be:21)A)0.8.B)1.0.C)2.0.D)1.2.Answer:D22)If the demand for product X is inelastic, a 4 percent increase in the price of X will:22)A)increase the quantity of X demanded by more than 4 percent.B)decrease the quantity of X demanded by less than 4 percent.C)decrease the quantity of X demanded by more than 4 percent.D)increase the quantity of X demanded by less than 4 percent.Answer:B5
23)Assume that price increases from $2 to $10. The coefficient of price elasticity of demand(using the midpoint formula) relating to this change in price is about:23)A).67 and demand is inelastic.B)1 and demand is unit elastic.C).25 and demand is inelastic.D)1.5 and demand is elastic.Answer:C6
24)Assume that price declines from $10 to $2. The coefficient of price elasticity of demand(using the midpoint formula) relating to this change in price is about:24)A)1 and demand is unit elastic.B).25 and demand is inelastic.C)1.5 and demand is elastic.D).67 and demand is inelastic.Answer:B25)Block’s sells 500 bottles of perfume a month when the price is $7. A huge increase inresource costs causes price to rise to $9 and Block’s only manages to sell 460 bottles ofperfume. The price elasticity of demand (using the midpoint formula) is:25)A).33 and demand is elastic.B)3.0 and demand is inelastic.C).33 and demand is inelastic.D)3.0 and demand is elastic.Answer:C26)The price elasticity of demand is:26)A)positive, but the plus sign is ignored.B)negative, but the minus sign is ignored.C)positive for normal goods and negative for inferior goods.D)positive because price and quantity demanded are inversely related.Answer:B27)If the price of shoes falls from $10 to $8 and the amount sold increases by 12 percent, itcan be concluded that:27)A)the demand for shoes is elastic.B)shoes are complementary goods.C)the demand for shoes is inelastic.D)the demand for shoes is perfectly inelastic.Answer:C7
28)If a demand for a product is elastic, the value of the price elasticity coefficient is:28)A)greater than one.B)zero.C)less than one.D)equal to one.Answer:A29)The demand for a product is inelastic with respect to price if:29)A)a drop in price is accompanied by an increase in the quantity demanded.B)the elasticity coefficient is greater than 1.C)consumers are largely unresponsive to a price change.D)a drop in price is accompanied by a decrease in the quantity demanded.Answer:C30)In the P1P2price range demand is:30)A)relatively elastic.B)relatively inelastic.C)perfectly elastic.D)of unit elasticity.Answer:A8
31)In the P3P4price range demand is:31)A)of unit elasticity.B)perfectly elastic.C)relatively elastic.D)relatively inelastic.Answer:D32)Suppose Aiyanna’s pizzeria currently faces a linear demand curve and is charging a veryhigh price per pizza and doing very little business. Aiyanna now decides to lower pizzaprices by 5 percent per week for an indefinite period of time. We can expect that eachsuccessive week:32)A)demand will become more price elastic.B)Price elasticity of demand will not change as price is lowered.C)the elasticity of supply will increase.D)demand will become less price elastic.Answer:D33)A product priced at $5 has annual sales of 1,000 units. When price is reduced to $4,quantity increases to 1,250 units. Other things unchanged, the price elasticity of demandfor the product is:33)A)zero.B)unitary.C)inelastic.D)elastic.Answer:B34)The coefficient of price elasticity is less than 1 but greater than zero. Demand is thus:34)A)perfectly inelasticB)perfectly elasticC)relatively elasticD)relatively inelasticAnswer:D9
35)The coefficient of price elasticity is 0.2. Demand is thus:35)A)relatively elasticB)perfectly inelasticC)perfectly elasticD)relatively inelasticAnswer:D36)If the price elasticity of demand for a good is .75, the demand for the good can bedescribed as:36)A)normal.B)inferior.C)elastic.D)inelastic.Answer:D37)Refer to the demand schedule below. In which price range is the demand elastic?37)A)$2-$1B)$4-$3C)below $1D)$3-$2Answer:B38)The price elasticity of demand is relatively elastic:38)A)in the $6-$5 price range only.B)in the $3-$1 price range.C)in the $6-$4 price range.D)over the entire $6-$1 price range.Answer:C10
39)The price elasticity of demand is relatively inelastic:39)A)over the entire $6-$1 price range.B)in the $6-$5 price range only.C)in the $3-$1 price range.D)in the $6-$4 price range.Answer:C40)The price elasticity of demand is unity:40)A)over the entire $6-$4 price range.B)in the $4-$3 price range only.C)over the entire $3-$1 price range.D)throughout the entire price range because the slope of the demand curve is constant.Answer:B11
41)Which demand curve is relatively more elastic between P1and P2?41)A)D1B)D2C)D3D)D4Answer:A42)Which demand curve is perfectly inelastic?42)A)D5B)D2C)D4D)D3Answer:A12
43)If an increase in the supply of a product results in a decrease in the price, but no changein the actual quantity of the product exchanged, then:43)A)the price elasticity of supply is zero.B)the price elasticity of supply is infinite.C)the price elasticity of demand is zeroD)the price elasticity of demand is unitary.Answer:C44)A demand curve which is parallel to the vertical axis is:44)A)perfectly inelasticB)relatively elasticC)perfectly elasticD)relatively inelasticAnswer:A45)Quantity demanded is completely unresponsive to price changes. Demand is thus:45)A)relatively elasticB)perfectly elasticC)relatively inelasticD)perfectly inelasticAnswer:D46)A firm can sell more or less output at a constant price. Demand is thus:46)A)relatively inelasticB)relatively elasticC)perfectly inelasticD)perfectly elasticAnswer:D47)A demand curve which is parallel to the horizontal axis is:47)A)relatively elasticB)relatively inelasticC)perfectly elasticD)perfectly inelasticAnswer:C48)A perfectly inelastic demand curve:48)A)graphs as a line parallel to the horizontal axis.B)has a price elasticity coefficient of unity throughout.C)graphs as a line parallel to the vertical axis.D)has a price elasticity coefficient greater than unity.Answer:C49)A perfectly inelastic demand schedule:49)A)rises upward and to the right, but has a constant slope.B)can be represented by a line parallel to the horizontal axis.C)can be represented by a line parallel to the vertical axis.D)cannot be shown on a two-dimensional graph.Answer:C13
50)The total-revenue test for elasticity:50)A)does not apply to supply because price and quantity are directly related.B)applies to the short-run supply curve, but not to the long-run supply curve.C)is equally applicable to both demand and supply.D)does not apply to demand because price and quantity are inversely related.Answer:A51)Which of the following statements is not correct?51)A)In the range of prices in which demand is elastic, total revenue will diminish asprice decreases.B)If the relative change in price is greater than the relative change in the quantitydemanded associated with it, demand is inelastic.C)Demand tends to be elastic at high prices and inelastic at low prices.D)Total revenue will not change if price varies within a range where the elasticitycoefficient is unity.Answer:A52)In which of the following instances will total revenue decline?52)A)price falls and demand is elasticB)price rises and supply is elasticC)price rises and demand is elasticD)price rises and demand is inelasticAnswer:C53)If a firm’s demand for labour is elastic, a union-negotiated wage increase will:53)A)cause a shortage of labour.B)necessarily be inflationary.C)cause the firm’s total payroll to decline.D)cause the firm’s total payroll to increase.Answer:C54)If the demand for a product is elastic, then total revenue will:54)A)rise as price falls.B)be constant in response to a price change.C)fall as price falls.D)increase whether price increases or decreases.Answer:A55)Other things the same, if a price change causes total revenue to change in the oppositedirection, demand is:55)A)relatively inelastic.B)perfectly inelastic.C)relatively elastic.D)of unit elasticity.Answer:C14
56)A manufacturer of frozen pizzas found that total revenue decreased when price waslowered from $5 to $4. It was also found that total revenue decreased when price wasraised from $5 to $6. Thus,56)A)the demand for pizza is elastic above $5 and inelastic below $5.B)$5 is not the equilibrium price of pizza.C)the demand for pizza is elastic both above and below $5.D)the demand for pizza is inelastic above $5 and elastic below $5.Answer:A57)Which of the following is correct?57)A)If demand is elastic, a decrease in price will decrease total revenue.B)If demand is elastic, a decrease in price will increase total revenue.C)If demand is elastic, an increase in price will increase total revenue.D)If demand is inelastic, an increase in price will decrease total revenue.Answer:B58)Price and total revenue vary in opposite directions. Demand is thus:58)A)perfectly inelasticB)relatively elasticC)relatively inelasticD)perfectly elasticAnswer:B59)When the percentage change in price is greater than the resulting percentage change inquantity demanded:59)A)an increase in price will increase total revenue.B)demand may be either elastic or inelastic.C)demand is elastic.D)a decrease in price will increase total revenue.Answer:A60)Suppose the price elasticity coefficients of demand are 1.43, 0.67, 1.11, and 0.29 forproducts W, X, Y, and Z respectively. A 1 percent decrease in price will increase totalrevenue in the case(s) of:60)A)Y and Z.B)W and Y.C)Z and W.D)X and Z.Answer:B61)Suppose Via Rail asked government authorities for permission to increase its commuterrates by 20 percent. The railroad argued that declining revenues made this rate increaseessential. Opponents of the rate increase contended that the railroad’s revenues wouldfall because of the rate hike. It can be concluded that:61)A)the railroad felt that the demand for passenger service was inelastic and opponentsof the rate increase felt it was elastic.B)the railroad felt that the demand for passenger service was elastic and opponents ofthe rate increase felt it was inelastic.C)both groups felt that the demand was elastic but for different reasons.D)both groups felt that the demand was inelastic but for different reasons.Answer:A15
62)If a firm finds that it can sell $13,000 of a product when its price is $5 per unit and$11,000 of it when its price is $6, then:62)A)elasticity of demand is 0.74.B)in the $6-$5 price range, the demand for the product is inelastic.C)in the $6-$5 price range, the demand for the product is elastic.D)the demand for the product must have increased.Answer:B63)Suppose the price elasticity of demand for bread is 0.20. If the price of bread falls by 10percent, the quantity demanded will increase by:63)A)2 percent and total expenditures on bread will rise.B)20 percent and total expenditures on bread will fall.C)2 percent and total expenditures on bread will fall.D)20 percent and total expenditures on bread will rise.Answer:C64)Informed University (IU) raises tuition for the purpose of increasing its revenue so thatmore faculty can be hired. This action is based on the assumption that the demand foreducation at IU is:64)A)decreasing.B)relatively inelastic.C)relatively elastic.D)perfectly elastic.Answer:B65)If a price reduction reduces a firm’s total revenue:65)A)the demand for the product is inelastic in this price range.B)in this price range the elasticity coefficient of demand is greater than 1.C)this price decline will increase the firm’s profits.D)the product is an inferior good.Answer:A66)In which of the following cases will total revenue increase?66)A)price rises and demand is elasticB)price rises and demand is inelasticC)price falls and demand is inelasticD)price falls and supply is elasticAnswer:B67)If the University Chamber Music Society decides to raise ticket prices to provide morefunds to finance concerts, the Society is assuming that the demand for tickets is:67)A)shifting to the left.B)parallel to the horizontal axis.C)inelastic.D)elastic.Answer:C16
68)The provincial legislature has cut Informed University’s appropriations. IU’s Board ofGovernors decides to increase tuition and fees to compensate for the loss of revenue.The board is assuming that the:68)A)coefficient of price elasticity of demand for education at IU is greater than unity.B)demand for education at IU is elastic.C)coefficient of price elasticity of demand for education at IU is unity.D)demand for education at IU is inelastic.Answer:D69)Suppose that the price of peanuts falls from $3 to $2 per bushel and that, as a result, thetotal revenue received by peanut farmers changes from $16 to $14 billion. Thus:69)A)the demand for peanuts is elastic.B)the demand curve for peanuts has shifted to the right.C)no inference can be made as to the elasticity of demand for peanuts.D)the demand for peanuts is inelastic.Answer:D70)Which of the following is correct?70)A)If the demand for a product is inelastic, a change in price will cause total revenue tochange in the opposite direction.B)If the demand for a product is inelastic, a change in price will cause total revenue tochange in the same direction.C)The price elasticity coefficient applies to demand, but not to supply.D)If the demand for a product is inelastic, a change in price may cause total revenue tochange in either the opposite or the same direction.Answer:B71)Which of the following is not characteristic of the demand for a commodity which iselastic?71)A)The elasticity coefficient is less than one.B)Total revenue declines if price is increased.C)The relative change in quantity demanded is greater than the relative change inprice.D)Buyers are relatively sensitive to price changes.Answer:A72)Which is inconsistent with an elastic demand curve?72)A)Total revenues fall when prices rise.B)The elasticity coefficient is less than one.C)Buyers are relatively sensitive to price changes.D)The relative change in quantity exceeds the relative change in price.Answer:B17
73)If the price elasticity of demand for a product is unity, a decrease in price will:73)A)increase the quantity demanded and increase total revenue.B)have no effect upon the amount purchased.C)increase the quantity demanded, but total revenue will be unchanged.D)increase the quantity demanded, but decrease total revenue.Answer:C74)Which of the following is correct?74)A)Although the slope of a downward sloping demand curve (line) is constant, priceelasticity declines as we move from high to low price ranges.B)A steep slope means demand is inelastic; a flat slope means demand is elastic.C)Although the slope of a downward sloping demand curve is constant, priceelasticity increases as we move from high to low price ranges.D)Although the demand curve is concave to the origin, price elasticity of demand isconstant throughout.Answer:A75)Moving upward on a downward-sloping straight-line demand curve, we find that priceelasticity:75)A)increases continuously.B)is constant.C)decreases continuously.D)may either increase or decrease.Answer:A76)Most demand curves are relatively elastic in the upper-left portion because the originalprice:76)A)from which the percentage price change is calculated is small and the originalquantity from which the percentage change in quantity is calculated is large.B)from which the percentage price change is calculated is large and the originalquantity from which the percentage change in quantity is calculated is small.C)and quantity from which the percentage changes in price and quantity are calculatedare both small.D)and quantity from which the percentage changes in price and quantity are calculatedare both large.Answer:B77)The price elasticity of demand of a straight-line demand curve is:77)A)elastic, but does not change at various points on the curve.B)inelastic, but does not change at various points on the curve.C)1 at all points on the curve.D)elastic in high-price ranges and inelastic on low-price ranges.Answer:D18
78)A leftward shift in the supply curve of product X will increase equilibrium price to agreater extent the:78)A)more elastic the supply curve.B)more inelastic the demand for the product.C)more elastic the demand for the product.D)larger the elasticity of demand coefficient.Answer:B79)Consider the following two parallel demand curves. Which curve is relatively moreelastic at P1?79)A)AAB)BBC)cannot be determined.D)Both have the same slope; therefore both have the same elasticity.Answer:B80)For a linear demand curve:80)A)demand is elastic at low prices.B)elasticity is constant along the curve.C)elasticity is unity at every point on the curve.D)demand is elastic at high prices.Answer:D19
81)The diagram shows two product demand curves. On the basis of this diagram we can saythat:81)A)over range P1P2price elasticity of demand is greater for D1than for D2.B)over range P1P2price elasticity is the same for the two demand curves.C)over range P1P2price elasticity of demand is greater for D2than for D1.D)not enough information is given to compare price elasticities.Answer:A82)The elasticity of demand:82)A)tends to be “elastic” in high-price ranges and “inelastic” in low-price ranges.B)tends to be “inelastic” in high-price ranges and “elastic” in low-price ranges.C)is infinitely large for a perfectly inelastic demand curve.D)is the same at each price-quantity combination on a stable demand curve.Answer:A20
83)Refer to the diagram below. Between prices of $5.70 and $6.30:83)A)D1is more elastic than D2.B)D1and D2have identical elasticities.C)D2is more elastic than D1D)D2is an inferior good and D1is a normal good.Answer:A84)As price increases along a downward sloping linear demand curve:84)A)price elasticity of demand decreases.B)price elasticity of demand increases.C)price elasticity of demand does not change.D)the behaviour of price elasticity of demand cannot be determined.Answer:B21
85)Total revenue at price P1is indicated by area(s):85)A)C + DB)AC)A + CD)A + BAnswer:D86)If price falls to P2, total revenue will become area(s):86)A)CB)C + DC)A + CD)B + DAnswer:D22
87)The decline in price from P1to P2will:87)A)decrease total revenue by D + A.B)increase total revenue by D – A.C)decrease total revenue by A.D)increase total revenue by B + D.Answer:B88)In the P1to P2price range, we can say:88)A)that demand is elastic with respect to price.B)nothing concerning Price elasticity of Demand.C)that demand is inelastic with respect to price.D)that consumer purchases are relatively insensitive to price changes.Answer:A23
89)Refer to the diagram below. If price falls from $10 to $2, total revenue:89)A)rises from C + D to B + A and demand is elastic.B)falls from A + B to B + C and demand is inelastic.C)rises from A + B to A + B + D + C and demand is elastic.D)falls from A + D to B + C and demand is inelastic.Answer:B24
90)If the price is P3, then the total revenue is represented by areas:90)A)A + B + C + D + E + F + G.B)B + C + D + E + F + G.C)B + C + D.D)E + F + G.Answer:B25
91)If the price decreases from P3to P2, then the loss in total revenue is areas:91)A)H + I and the gain in total revenue are areas A + B + C.B)E + F + G and the gain in total revenue are areas H + I + J.C)B + E and the gain in total revenue are areas H + I.D)A + B + C + D and the gain in total revenue is E + F + G.Answer:C26
92)If the price increases from P1to P2, then the gain in total revenue is areas:92)A)C + F + H and the loss in total revenue is area J.B)B + E and the loss in total revenue are areas H + I + J.C)A + B + C and the loss in total revenue are areas G + I + J.D)E + F + G and the loss in total revenue is area J.Answer:A27
93)If the price decreases from P4to P3, then the gain in total revenue is areas:93)A)A + B + C + D and the loss in total revenue is area E.B)B + C + D and the loss in total revenue is area A.C)E + F + G and the loss in total revenue are areas A + B + C + D.D)E + F + G and the loss in total revenue is area A.Answer:D28
94)Consider a situation where price increases from P3to P4. In this price range, demand isrelatively:94)A)inelastic because the loss in total revenue (area A) is greater than the gain in totalrevenue (areas E + F + G).B)elastic because the loss in total revenue (areas E + F + G) is greater than the gain intotal revenue (area A).C)inelastic because the loss in total revenue (areas E + F + G) is greater than the gainin total revenue (area A).D)elastic because the loss in total revenue (area A) is greater than the gain in totalrevenue (areas E + F + G).Answer:B29
95)Consider a situation where price decreases from P2to P1. In this price range, demand isrelatively:95)A)inelastic because the loss in total revenue (areas D + G + I + J) is greater than thegain in total revenue (areas C + F + H).B)inelastic because the gain in total revenue (area J) is less than the loss in totalrevenue (areas C + F + H).C)elastic because the loss in total revenue (area J) is less than the gain in total revenue(areas C + F + H).D)elastic because the loss in total revenue (areas C + F + H) is greater than the gain intotal revenue (area J).Answer:B96)If in the short run the demand for mass transit is inelastic and in the long run thedemand is elastic, then a price:96)A)decrease will decrease total revenue in the short run and decrease total revenue inthe long run.B)increase will increase total revenue in the short run but decrease total revenue in thelong run.C)increase will decrease total revenue in the short run but increase total revenue in thelong run.D)decrease will increase total revenue in the short run but decrease total revenue in thelong run.Answer:B30
97)You are the newly appointed sales manager of the Rock Record Company and havebeen charged with the task of increasing revenues. Your economics consultants haveinformed you that at present price and output levels, price elasticity of demand for yourproduct is less than one. You should:97)A)hold prices constant and increase supply.B)increase prices.C)cut advertising expenditures to decrease the demand for these records.D)decrease prices.Answer:B98)Chuck Grim has a price elasticity of demand for beer of 1.00. Suppose the price of eachbeer is increased by 10 percent. What will happen to the total amount Chuck spends onbeer?98)A)It will decrease 10 percent.B)It will not change.C)It is impossible to tell.D)It will increase 10 percent.Answer:B99)Consider the demand curve below. If area OABC is smaller than area ODEF, we mayconclude that demand in this range is:99)A)price-elastic.B)price-inelastic.C)income-inelastic.D)income-elastic.Answer:A100)Which is not characteristic of a product with relatively inelastic demand?100)A)Consumers have had only a short time period to adjust to changes in price.B)Buyers spend a small percentage of their total income on the product.C)There are a large number of good substitutes for the good.D)The good is regarded by consumers as a necessity.Answer:C31
101)In some markets consumers may buy many different brands of a product. Which of thestatements below best represents a situation where demand for a particular brand wouldbe very elastic?101)A)The different brands are almost identical. I always buy the cheapest.B)I pinch pennies in buying other products, but like most people I feel I owe it tomyself to get the best brand of this product.C)I use so little of that product that when I do buy it, I don’t pay much attention to theprice.D)The brand I buy is so superior to other available brands that I hardly consider theothers.Answer:A102)What is the most likely effect of the development of television, videocassette players,and rental movies on the movie theatre industry?102)A)movie theatre tickets become an inferior goodB)increased price elasticity of demand for movie theatre ticketsC)increased demand for movie theatre ticketsD)decreased costs of producing moviesAnswer:B103)We would expect:103)A)the demand for Coca-Cola to be less elastic than the demand for soft drinks ingeneral.B)no relationship between the elasticity of demand for Coca-Cola and the elasticity ofdemand for soft drinks in general.C)the demand for Coca-Cola to be more elastic than the demand for soft drinks ingeneral.D)none of these to hold true.Answer:C104)The demand for Cheerios cereal is more price-elastic than the demand for cereals as awhole. This is best explained by the fact that:104)A)there are more substitutes for Cheerios than for cereals as a whole.B)consumption of cereals as a whole is greater than consumption of Cheerios.C)Cheerios are a luxury.D)cereals are a necessity.Answer:A105)The narrower the definition of a product:105)A)the smaller the number of substitutes and the larger the Price elasticity of Demand.B)the smaller the number of substitutes and the smaller the Price elasticity of Demand.C)the larger the number of substitutes and the larger the Price elasticity of Demand.D)the larger the number of substitutes and the smaller the Price elasticity of Demand.Answer:C32
106)The demand for autos is likely to be:106)A)of the same elasticity as the demand for Honda Accords.B)less elastic than the demand for Honda Accords.C)perfectly inelastic.D)more elastic than the demand for Honda Accords.Answer:B107)Which of the following statements is correct?107)A)Supply is more elastic in the short run than in the long run.B)Demand is more elastic in the short run than in the long run.C)Supply is more elastic when there are a small number of producers in the industry.D)Demand is more elastic when a large number of substitute goods are available.Answer:D108)The demands for such products as salt, bread, and electricity tend to be:108)A)relatively price inelastic.B)perfectly price elastic.C)of unit price elasticity.D)perfectly price inelastic.Answer:A109)Which of the following generalizations is not correct?109)A)The price elasticity of demand is greater for necessities than it is for luxuries.B)The larger the number of close substitutes available, the greater will be the priceelasticity of demand for a particular product.C)The larger an item is in one’s budget, the greater the price elasticity of demand.D)The price elasticity of demand is greater the longer the time period underconsideration.Answer:A110)The demand for a luxury good whose purchase would exhaust a significant portion ofone’s income is:110)A)relatively elasticB)relatively inelasticC)perfectly elasticD)perfectly inelasticAnswer:A111)The demand for a necessity whose cost is a small component of one’s total income is:111)A)perfectly inelasticB)relatively elasticC)perfectly elasticD)relatively inelasticAnswer:D112)The elasticity of demand for a product is likely to be greater:112)A)the smaller the proportion of one’s income spent on the product.B)the smaller the number of substitute products available.C)the greater the amount of time over which buyers adjust to a price change.D)if the product is a “necessity,” rather than a “luxury” good.Answer:C33
113)Price elasticity of demand is generally:113)A)greater in the short run than in the long run.B)the same in both the short run and the long run.C)greater for “necessities” than it is for “luxuries.”D)greater in the long run than in the short run.Answer:D114)The more time consumers have to adjust to a change in price:114)A)the greater will be the price elasticity of demand.B)the smaller will be the price elasticity of demand.C)the more likely the product is a normal good.D)the more likely the product is an inferior good.Answer:A115)The price elasticity of demand will increase with the length of the period to which thedemand curve pertains because:115)A)consumers will be better able to find substitutes.B)consumers’ incomes will increase.C)all prices will increase over time.D)the demand curve will shift outward.Answer:A116)If the demand for farm products is price inelastic, a good harvest will cause farmrevenues to:116)A)be unchanged.B)decrease.C)increase.D)either increase or decrease, depending on what happens to supply.Answer:B117)Farmers often find that large bumper crops are associated with declines in their grossincomes. This suggests that:117)A)farm products are normal goods.B)the price elasticity of demand for farm products is greater than 1.C)the price elasticity of demand for farm products is less than 1.D)farm products are inferior goods.Answer:C118)If demand for farm crops is inelastic, a good harvest will cause farm revenues to:118)A)increase because of a downward movement along the supply curve, encouraging anincrease in demand.B)remain unchanged, because the increase in quantity that can be sold will be matchedby an equal decrease in price.C)increase because of the increase in the quantity that farmers can sell.D)decrease because of a percentage fall in price greater than the percentage increase inquantity sold.Answer:D34
119)If the federal government imposed a 10 percent excise tax on yachts costing more than$100,000. This tax would:119)A)fail to bring in the expected amount of tax revenue because the demand for yachts ismore price elastic than the government estimated.B)fail to bring in the expected amount of tax revenue because the demand for yachts isless income elastic than the government estimates.C)bring about an increase in the demand for yachts and stimulate employment in theboat-building industry.D)bring in more tax revenue than expected because the demand for yachts is less priceelastic than the government estimates.Answer:A120)A provincial government wants to increase the taxes on cigarettes to increase taxrevenue. This tax would only be effective in raising new tax revenues if the priceelasticity of demand is:120)A)unity.B)less than one.C)greater than one.D)infinity.Answer:B121)If the demand for a product is elastic, then:121)A)a higher tax will generate more tax revenue.B)total revenue will decrease as price decreases.C)a higher tax will generate less tax revenue.D)total revenue will remain constant as price remains constant.Answer:C122)An antidrug policy which reduces the supply of heroin might:122)A)increase street crime because the addict’s demand for heroin is highly inelastic.B)reduce street crime because the addict’s demand for heroin is highly elastic.C)increase street crime because the addict’s demand for heroin is highly elastic.D)reduce street crime because the addict’s demand for heroin is highly inelastic.Answer:A123)The price elasticity of supply measures how:123)A)responsive quantity supplied is to a change in incomes.B)responsive the quantity supplied of Y is to changes in the price of X.C)responsive the quantity supplied of X is to changes in the price of X.D)easily labour and capital can be substituted for one another in the productionprocess.Answer:C35
124)Suppose that the price of product X rises by 20 percent and the quantity supplied of Xincreases by 15 percent. The coefficient of price elasticity of supply for good X is:124)A)negative and therefore X is an inferior good.B)positive and therefore X is a normal good.C)more than 1 and therefore supply is elastic.D)less than 1 and therefore supply is inelastic.Answer:D125)Assume that the price of product X rises by 5 percent and the quantity supplied of Xincreases by 15 percent. The coefficient of price elasticity of supply for good X is:125)A)negative and therefore X is an inferior good.B)less than 1 and therefore supply is inelastic.C)positive and therefore X is a normal good.D)more than 1 and therefore supply is elastic.Answer:D126)Suppose the price elasticity of supply for crude oil is 2.5. How much would price haveto rise to increase production by 20 percent?126)A)45 percentB)8 percentC)121/2percentD)20 percentAnswer:B127)What is the price elasticity of supply between points A and B below?127)A)1/3B)3C)1D)-1Answer:C36
128)Assume that price increases from $2 to $10. The coefficient of the price elasticity ofsupply (using the midpoint formula) relating to this price change is about:128)A).25 and supply is inelastic.B)1 and supply is unit elastic.C)2.5 and supply is elastic.D)5 and supply is elastic.Answer:A129)Assume that price decreases from $10 to $2. The coefficient of the price elasticity ofsupply (using the midpoint formula) relating to this price change is about:129)A).5 and supply is inelastic.B).25 and supply is inelastic.C)1 and supply is unit elastic.D)4 and supply is elastic.Answer:B37
130)The following diagram shows the supply curves for two products. This diagram indicatesthat:130)A)over range Q1Q2price elasticity of supply is greater for S1than for S2.B)over range Q1Q2price elasticity of supply is the same for the two curves.C)over range Q1Q2price elasticity of supply is greater for S2than for S1.D)not enough information is given to compare price elasticities.Answer:A131)The elasticity of supply for a product will be 2 when:131)A)a 1 percent decrease in price causes a 2 percent decrease in quantity supplied.B)a 1 percent decrease in the price causes a 0.2 percent decrease in quantity supplied.C)a 2 percent decrease in price causes a 1 percent decrease in quantity supplied.D)a 2 percent decrease in price causes a 2 percent decrease in quantity supplied.Answer:A38
132)The following data relate to the supply schedule of a product.Over which price range is the elasticity of supply greater than 1?132)A)$15 to $20B)$20 to $25C)$10 to $15D)$25 to $30Answer:D133)At a price of $4 per unit, Gadgets Inc. is willing to supply 20,000 gadgets, while UnitedGadgets is willing to supply 10,000 gadgets. If the price were to rise to $8 per unit, theirrespective quantities supplied would rise to 45,000 and 25,000. If these are the only twofirms supplying gadgets, what is the elasticity of supply (using the midpoint formula) inthe market for gadgets?133)A)1.2B)0.8C)0.833D)1Answer:A134)If the supply of product X is perfectly elastic, an increase in the demand for it willincrease:134)A)equilibrium price but equilibrium quantity will be unchanged.B)equilibrium price but reduce equilibrium quantity.C)equilibrium quantity but reduce equilibrium price.D)equilibrium quantity but equilibrium price will be unchanged.Answer:D135)Suppose the price of a product rises and the total revenue of sellers increases.135)A)It can be concluded that the demand for the product is elastic.B)No conclusion can be reached with respect to the elasticity of supply.C)It can be concluded that the supply of the product is elastic.D)It can be concluded that the supply of the product is inelastic.Answer:B39
136)If the supply of a product is inelastic, the value of the price elasticity coefficient ofsupply is:136)A)less than one.B)greater than one.C)equal to one.D)zero.Answer:A137)Suppose the supply of product X is perfectly inelastic. If there is an increase in thedemand for this product, equilibrium price:137)A)and quantity will both decrease.B)will increase but equilibrium quantity will be unchanged.C)will increase but equilibrium quantity will decline.D)will decrease but equilibrium quantity will increase.Answer:B138)A supply curve which is a vertical straight line indicates that:138)A)production costs for this product cannot be calculated.B)a change in price will have no effect on the quantity supplied.C)an unlimited amount of the product will be supplied at a constant price.D)the relationship between price and quantity supplied is inverse.Answer:B139)A supply curve which is parallel to the horizontal axis suggests that:139)A)a change in demand will change the equilibrium quantity but not price.B)the relationship between price and quantity supplied is inverse.C)a change in demand will change price in the same direction.D)the industry is organized monopolistically.Answer:A140)An increase in demand will increase equilibrium price to a greater extent:140)A)the less elastic the supply curve.B)the more elastic the supply curve.C)if the product is a normal good.D)if the product is an inferior good.Answer:A141)Assume there is an increase in the demand for hand calculators. The subsequent:141)A)increase in price will be greater the greater the inelasticity of supply.B)decline in price will be greater the greater the elasticity of supply.C)increase in price will be greater in the long run than in the short run.D)increase in price will be greater the greater the elasticity of supply.Answer:A142)The main determinant of elasticity of supply is the:142)A)number of close substitutes for the product available to consumers.B)amount of time the producer has to adjust inputs in response to a price change.C)number of uses for the product.D)urgency of consumer wants for the product.Answer:B40
143)The diagram concerns supply adjustments to an increase in demand (D1to D2) in theimmediate market period, the short run, and the long run. Supply curves S1, S2, and S3apply to the:143)A)immediate market period, long run, and short run respectively.B)immediate market period, short run, and long run respectively.C)short run, long run, and immediate market period respectively.D)long run, short run, and immediate market period respectively.Answer:D41
144)The diagram concerns supply adjustments to an increase in demand (D1to D2) in theimmediate market period, the short run, and the long run. In the immediate marketperiod the increase in demand will:144)A)have no effect on either equilibrium price or quantity.B)increase equilibrium quantity, but not equilibrium price.C)increase both equilibrium price and quantity.D)increase equilibrium price, but not equilibrium quantity.Answer:D42
145)The diagram concerns supply adjustments to an increase in demand (D1to D2) in theimmediate market period, the short run, and the long run. In the long run the increase indemand will:145)A)increase equilibrium quantity, but not equilibrium price.B)have no effect on either equilibrium price or quantity.C)increase both equilibrium price and quantity.D)increase equilibrium price, but not equilibrium quantity.Answer:C43
146)The diagram concerns supply adjustments to an increase in demand (D1to D2) in theimmediate market period, the short run, and the long run. On the basis of this illustrationwe can conclude that:146)A)short-run adjustments are more economically efficient than are long-runadjustments.B)supply is less elastic the greater the amount of time producers have to adjust to achange in demand.C)the amount of time producers have to adjust to a change in demand is not adeterminant of supply elasticity.D)supply is more elastic the greater the amount of time producers have to adjust to achange in demand.Answer:D147)If a product has a short-run elasticity of supply equal to zero, then an increase in thedemand for the product will:147)A)have no effect on price or quantity sold.B)increase price and reduce the quantity sold to zero.C)increase price and leave quantity sold unchanged.D)leave the price unchanged and reduce the quantity sold.Answer:C148)Economists distinguish between the short run and the long run by noting that:148)A)output prices are subject to fluctuations in the long run.B)some inputs cannot be varied in the short run.C)no inputs can be varied in the long run.D)input prices are subject to fluctuations in the short run.Answer:B44
149)To economists the main differences between “the short run” and “the long run” are that:149)A)fixed costs are more important to decision making in the long run than they are inthe short run.B)in the short run all resources are fixed, while in the long run all resources arevariable.C)the law of diminishing returns applies in the long run, but not in the short run.D)in the long run all resources are variable, while in the short run at least one resourceis fixed.Answer:D150)Price elasticity of supply is:150)A)greater in the short run than in the long run.B)positive in the short run but negative in the long run.C)independent of time.D)greater in the long run than in the short run.Answer:D151)Supply curves tend to be:151)A)perfectly elastic in the long run because consumer demand will have sufficient timeto adjust fully to changes in supply.B)perfectly inelastic in the long run because the law of scarcity imposes absolutelimits upon production.C)less elastic in the long run because there is time for firms to enter or leave anindustry.D)more elastic in the long run because there is time for firms to enter or leave theindustry.Answer:D152)For an increase in demand, the price effect is smallest and the quantity effect is largest:152)A)when supply is least elastic.B)in the short run.C)in the long run.D)in the immediate market period.Answer:C153)The supply of known Monet paintings is:153)A)perfectly elastic.B)relatively inelastic.C)relatively elastic.D)perfectly inelastic.Answer:D154)The main sources for the fluctuation in price of gold are:154)A)the unlimited demand and supply.B)the shifts in demand and highly inelastic supply.C)the shifts in supply and highly inelastic demand.D)the unlimited supply of gold and perfectly inelastic demand.Answer:B45
155)The formula for cross elasticity of demand is percentage change in:155)A)quantity demanded of X/percentage change in income.B)quantity demanded of X/percentage change in price of X.C)price of X/percentage change in quantity demanded of Y.D)quantity demanded of X/percentage change in price of Y.Answer:D156)Cross elasticity of demand measures how sensitive purchases of a specific product areto changes in:156)A)income.B)the price of that same product.C)the general price level.D)the price of some other product.Answer:D157)The larger the positive cross elasticity coefficient of demand between products X and Y,the:157)A)smaller the price elasticity of demand for both products.B)stronger their complementariness.C)the less sensitive purchases of each are to increases in income.D)greater their substitutability.Answer:D158)We would expect the cross elasticity of demand between Pepsi and Coke to be:158)A)positive, indicating normal goods.B)positive, indicating inferior goods.C)negative, indicating substitute goods.D)positive, indicating substitute goods.Answer:D159)If a 10 percent increase in the price of one good results in an increase of 5 percent in thequantity demanded of another good, then it can be concluded that the two goods are:159)A)normal.B)independent.C)complements.D)substitutes.Answer:D160)A 3 percent increase in the price of tea causes a 6 percent increase in the demand forcoffee. The cross elasticity of demand for coffee with respect to the price of tea is:160)A)-0.5.B)+0.5.C)+2.0.D)-2.0.Answer:C161)Suppose that a 10 percent increase in the price of normal good Y causes a 20 percentincrease in the quantity demanded of normal good X. The coefficient of cross elasticityof demand is:161)A)positive and therefore these goods are substitutes.B)negative and therefore these goods are complements.C)positive and therefore these goods are complements.D)negative and therefore these goods are substitutes.Answer:A46
162)The cross elasticity of demand for product X with respect to the price of product Y is 1.It can be concluded that X and Y are:162)A)substitute products.B)luxury products.C)complementary products.D)unrelated products.Answer:A163)A study shows that the coefficient of the cross price elasticity of Coke and Sprite ispositive. This information indicates that Coke and Sprite are:163)A)normal goods.B)independent goods.C)complementary goods.D)substitute goods.Answer:D164)A study reported that the coefficient of the cross price elasticity of popcorn and potatochips is positive. Based on this report, you can conclude that popcorn and potato chipsare:164)A)normal goods.B)substitute goods.C)independent goods.D)complementary goods.Answer:B165)Cross elasticity of demand between complementary products is:165)A)unitary.B)zero.C)positive but less than 1.D)negative.Answer:D166)We would expect the cross elasticity of demand between dress shirts and ties to be:166)A)positive, indicating inferior goods.B)negative, indicating substitute goods.C)negative, indicating complementary goods.D)positive, indicating normal goods.Answer:C167)The cross elasticity of demand between bikes and bike helmets is likely to be:167)A)a positive number between zero and -1.B)a positive number greater than 1.C)zero.D)a negative number.Answer:D168)If a 10 percent increase in the price of one good results in a decrease of 5 percent in thequantity demanded of another good, then it can be concluded that the two goods are:168)A)substitutes.B)independent.C)normal.D)complements.Answer:D47
169)Suppose that a 20 percent increase in the price of normal good Y causes a 10 percentdecline in the quantity demanded of normal good X. The coefficient of cross elasticityof demand is:169)A)negative and therefore these goods are complements.B)positive and therefore these goods are substitutes.C)positive and therefore these goods are complements.D)negative and therefore these goods are substitutes.Answer:A170)Considering coffee, we would expect the cross elasticity of demand for:170)A)tea to be positive, but negative for cream.B)tea to be negative, but positive for cream.C)both tea and cream to be negative.D)both tea and cream to be positive.Answer:A171)The graph below shows the relationship between the price of product B and the quantityof product A demanded over a period of time. It may be concluded that the crosselasticity of demand for A with respect to B is:171)A)zero.B)positive but greater than 1.C)positive but less than 1.D)infinity.Answer:A48
172)The diagram below suggests that:172)A)X and Y are substitute goods.B)X and Y are both normal goods.C)X and Y are independent goods.D)X and Y are both inferior goods.Answer:C173)We would expect the cross elasticity of demand for Pepsi in relation to other soft drinksto be greater than that for soft drinks generally because:173)A)there are fewer good substitutes for soft drinks generally than for Pepsi.B)the income effect always exceeds the substitution effect.C)there are more good substitutes for soft drinks generally than for Pepsi.D)soft drinks are normal goods.Answer:A49
174)In which case would the coefficient of cross elasticity of demand be positive?174)A)A.B)B.C)C.D)D.Answer:D175)In which case would the coefficient of cross elasticity of demand be negative?175)A)AB)BC)CD)DAnswer:C50
176)The case of substitute goods is represented by figure:176)A)A.B)B.C)C.D)D.Answer:D177)The case of complementary goods is represented by figure:177)A)A.B)B.C)C.D)D.Answer:C51
178)Suppose the income elasticity of demand for toys is +2.00. This means that:178)A)a 10 percent increase in income will decrease the purchase of toys by 2 percent.B)a 10 percent increase in income will increase the purchase of toys by 2 percent.C)toys are an inferior good.D)a 10 percent increase in income will increase the purchase of toys by 20 percent.Answer:D179)Suppose that when your income increases from $28,000 to $30,000 per year, yourpurchases of X increase from 4 to 5 units because of that income increase. Thus:179)A)X is a substitute good.B)the income effect exceeds the substitution effect.C)X is an inferior good.D)the demand for X is elastic with respect to income.Answer:D180)A positive income elasticity of demand coefficient indicates that:180)A)two products are complementary goods.B)two products are substitute goods.C)a product is an inferior good.D)a product is a normal good.Answer:D181)A consumer’s weekly income is $300 and the consumer buys 5 bars of chocolate perweek. When income increases to $330, the consumer buys 6 bars per week. The incomeelasticity of demand for chocolate by this consumer is about:181)A)1B)2C).5.D)0Answer:B182)Assume that a 4 percent increase in income in the economy produces an 8 percentincrease in the quantity demanded of good X. The coefficient of income elasticity ofdemand is:182)A)positive and therefore X is a normal good.B)negative and therefore X is an inferior good.C)negative and therefore X is a normal good.D)positive and therefore X is an inferior good.Answer:A52
183)The case of a normal good is represented by figure(s):183)A)A.B)B.C)C.D)D.Answer:A184)In which case would the coefficient of income elasticity be positive?184)A)A.B)B.C)C.D)D.Answer:A53
185)The case of an inferior good is represented by figure(s):185)A)A only.B)B only.C)C.D)D.Answer:B186)In which case would the coefficient of income elasticity be negative?186)A)A.B)B.C)C.D)D.Answer:B54
187)If turnips are an example of an inferior good, then a decrease in the demand for turnipscould be brought about by a(n):187)A)increase in consumer incomes.B)increase in the price of turnips.C)decrease in consumer incomes.D)decrease in the price of some other product.Answer:A188)If the income elasticity of demand for lard is -3.00, this means that:188)A)lard is a substitute for butter.B)lard is an inferior good.C)more lard will be purchased when its price falls.D)lard is a normal good.Answer:B189)Assume that a 3 percent increase in income in the economy produces a 1 percentdecline in the quantity demanded of good X. The coefficient of income elasticity ofdemand for good X is:189)A)positive and therefore X is a normal good.B)negative and therefore X is a normal good.C)positive and therefore X is an inferior good.D)negative and therefore X is an inferior good.Answer:D190)If average consumer incomes increase proportionately faster than the demand for aproduct, then the income elasticity of demand for the product is:190)A)equal to 1.B)greater than zero but less than 1.C)greater than 1.D)zero.Answer:B191)Based on the information in the table below, which product would be an inferior good?191)A)Product AB)Product BC)Product CD)Product DAnswer:C55
192)The income elasticity of demand for food is unity. A consumer’s monthly income is$2,000, of which 20 percent is spent on food. If income doubles, the amount spent onfood will be:192)A)$800 per month.B)$500 per month.C)$400 per month.D)$1000 per month.Answer:A193)The table below shows the demand and supply data for a competitive market. Ifgovernment levies a per unit excise tax of $1 on suppliers of this product, equilibriumprice and quantity will be:193)A)$7 and 3,000.B)$8.50 and 2,250.C)$9 and 3,000.D)$7.50 and 2,250.Answer:B194)The table below shows the demand and supply data for a competitive market. Ifgovernment levies a per unit excise tax of $1 on suppliers of this product, its revenuefrom this tax would be:194)A)3,000B)1,750C)2,500D)2,250Answer:D195)The equations for the demand and supply curves for a particular product are P = 10 – .4Qand P = 2 + .4Q respectively, where P is price and Q is quantity expressed in units of100. After an excise tax is imposed on the product the supply equation is P = 3 + .4 Q.The excise tax on each unit of the product is:195)A)1B)2C)3D)4Answer:A56
196)The equations for the demand and supply curves for a particular product are P = 10 – .4Qand P = 2 + .4Q respectively, where P is price and Q is quantity expressed in units of100. After an excise tax is imposed on the product the supply equation is P = 3 + .4 Q.The equilibrium quantity before the imposition of the tax is:196)A)1400 units.B)1000 units.C)800 units.D)1200 units.Answer:B197)The equations for the demand and supply curves for a particular product are P = 10 – .4Qand P = 2 + .4Q respectively, where P is price and Q is quantity expressed in units of100. After an excise tax is imposed on the product the supply equation is P = 3 + .4 Q.The equilibrium quantity after the excise tax is imposed is:197)A)850 units.B)750 units.C)875 units.D)950 units.Answer:C198)The equations for the demand and supply curves for a particular product are P = 10 – .4Qand P = 2 + .4Q respectively, where P is price and Q is quantity expressed in units of100. After an excise tax is imposed on the product the supply equation is P = 3 + .4 Q.Government’s revenue from this tax is:198)A)1500B)125C)875D)800Answer:C199)In which Stis the before-tax supply curve and St is the supply curve after the impositionof an excise tax. The total tax payment to government is shown by area(s):199)A)A + B + C + E + F.B)A + B + C.C)E + F.D)A only.Answer:B57
200)In which Stis the before-tax supply curve and Stis the supply curve after the impositionof an excise tax. The total amount of the tax paid by consumers is shown by area(s):200)A)A + B.B)A + B + C.C)E + F.D)A + B + F.Answer:A201)In which S is the before-tax supply curve and Stis the supply curve after the impositionof an excise tax. The total amount of the tax paid by producers is shown by area(s):201)A)E + F.B)C only.C)A + B + C.D)A + B + F.Answer:B58
202)Assume the Ministry of the Environment imposes an excise tax on polluting firms. Inwhich of the following situations would we expect the additional costs to be borne mostheavily by consumers?202)A)demand is highly elastic and supply is highly inelasticB)demand is highly inelastic and supply is highly elasticC)demand and supply are both highly inelasticD)demand and supply are both highly elasticAnswer:B203)If the demand for a product is perfectly elastic and supply is upward sloping, a $1excise tax per unit on suppliers will:203)A)raise price by more than $1.B)lower price by $1.C)not raise price at all.D)raise price by $1.Answer:C204)If the supply of a product is perfectly elastic and demand is downward sloping, anexcise tax of $2 per unit will increase price by:204)A)$2 and increase equilibrium output.B)more than $2.C)less than $2.D)$2 and reduce equilibrium output.Answer:D205)In which of the market situations will the largest portion of an excise tax of a specifiedamount per unit of output be borne by producers?205)A)2B)4C)1D)3Answer:D59
206)In which of the market situations will the largest portion of an excise tax of a specifiedamount per unit of output be borne by buyers?206)A)3B)1C)2D)4Answer:B207)Assume the demand for automobile tires is highly inelastic and that the supply is highlyelastic. The burden of a $2 excise tax on each tire will be:207)A)borne primarily by sellers of tires.B)borne primarily by buyers of tires.C)borne by resource suppliers who provide the inputs for manufacturing tires.D)shared about equally by buyers and sellers of tires.Answer:B60
208)In which S is the before-tax supply curve and Stis the supply curve after the impositionof an excise tax. The burden of this tax is borne:208)A)most heavily by consumers.B)most heavily by producers.C)only by consumers.D)equally by consumers and producers.Answer:A209)Which of the following generalizations is correct?209)A)the more inelastic the demand for a product, the larger the portion of an excise taxwhich is borne by sellersB)the more elastic the demand for a product, the larger the portion of an excise taxwhich is borne by buyersC)the more inelastic the supply of a product, the larger the portion of an excise taxwhich is borne by buyersD)the more elastic the supply of a product, the larger the portion of an excise taxwhich is borne by buyersAnswer:D210)Assume the supply curve for product X is perfectly elastic and that government imposesa $2 per unit excise tax. We can conclude that the resulting:210)A)increase in output will be greater the more elastic the demand curve.B)decrease in output will be greater the less elastic the demand curve.C)increase in output will be greater the less elastic the demand curve.D)decrease in output will be greater the more elastic the demand curve.Answer:D211)If the demand for a product is perfectly inelastic and the supply curve is upwardsloping, the imposition of a $1 excise tax per unit of output will:211)A)raise price by $1B)raise price by less than $1.C)raise price by more than $1.D)lower price by $1.Answer:A61
212)If the demand for a product is perfectly inelastic, the incidence of an excise tax will be:212)A)entirely on the buyer.B)entirely on the seller.C)mostly on the buyer.D)mostly on the seller.Answer:A213)The HST213)A)exists only in Ontario, Nova Scotia and Quebec.B)is the same for all provinces.C)is a tax that all provinces have implemented.D)combines the GST with the PST.Answer:D214)The HST214)A)extended taxation to many services that were previously not taxed.B)is the same for all provinces.C)is not expected to be revenue neutral.D)exists only in Ontario, British Columbia, Nova Scotia, New Brunswick andNewfoundland and LabradorAnswer:ATRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.215)Refer to the data. The demand for this product is elastic in the $8-$7 price range.215)Answer:TrueFalse216)If price and total revenue are directly related, demand is inelastic.216)Answer:TrueFalse217)If price changes and total revenue change in the opposite direction, demand is relativelyelastic.217)Answer:TrueFalse218)The smaller the number of substitutes for a product, the greater will be the priceelasticity of demand for it.218)Answer:TrueFalse219)Generally speaking, the smaller the percentage of one’s total budget devoted to aparticular product, the more price elastic will be the demand for that product.219)Answer:TrueFalse62
220)Generally speaking, the demand for luxury goods is more price elastic than is thedemand for necessities.220)Answer:TrueFalse221)Refer to the data. The supply of this product is inelastic in the $6-$5 price range.221)Answer:TrueFalse222)Cross elasticity of demand measures the effect of a change in the price of one productupon the quantity demanded of another product.222)Answer:TrueFalse223)If the coefficient of cross elasticity of demand is positive, the two products arecomplementary goods.223)Answer:TrueFalse224)A cross elasticity of demand coefficient of +2.5 indicates that the two products aresubstitutes.224)Answer:TrueFalse225)We would expect the coefficient of cross elasticity of demand for cameras and film(used with cameras) to be positive.225)Answer:TrueFalse226)Income elasticity measures the effect of a change in income on the purchases of somegood or service.226)Answer:TrueFalse227)If the coefficient of income elasticity of demand is positive, the product is an inferiorgood.227)Answer:TrueFalse228)An income elasticity coefficient of -1.8 means the product is a normal good.228)Answer:TrueFalse229)With a specific demand, the more inelastic the supply, the smaller the proportion of thetax borne by producers.229)Answer:TrueFalse63
230)If the demand for wheat is highly price inelastic, a bumper crop may reduce farmincomes.230)Answer:TrueFalse231)If the demand for agricultural products is inelastic, a relatively small increase in supplywill cause farm prices and incomes to decline.231)Answer:TrueFalse232)The HST varies across provinces.232)Answer:TrueFalse64

ExamName___________________________________ESSAY. Write your answer in the space provided or on a separate sheet of paper.1)The following data shows the relationship between price and quantity demanded at four differentprices for a product:P = $11, Qd= 16P = $9, Qd= 24P = $7, Qd= 32P = $5, Qd= 40Using the midpoints formula, what is the price elasticity of demand between: (a) $11 and $9; (b) $9and $7; (c) $7 and $5?Answer:(a) 2.0; (b) 1.14; (c) 0.672)What is the significance of a price elasticity of demand that is equal to 2?Answer:A price elasticity of demand equal to 2 indicates that demand is elastic. More precisely, thevalue indicates that a 1% change in the price of a product will cause a 2% change in thequantity demanded of that product. An increase in the price of the product will lead to lowertotal revenues and a decrease in price will lead to higher total revenues.3)What is the significance of a price elasticity of demand that is equal to 0.4?Answer:A price elasticity of demand equal to 0.4 indicates that demand is inelastic. More precisely,the value indicates that a 1% change in the price of a product will cause a 0.4% change in thequantity demanded of that product. An increase in the price of the product will lead to highertotal revenues and a decrease in price will lead to lower total revenues.4)What is the significance of a price elasticity of demand that is equal to 1?Answer:A price elasticity of demand equal to 1 indicates that demand is unit elastic. More precisely,the value indicates that a 1% change in the price of a product will cause a 1% change in thequantity demanded of that product. A change in the price of the product will not affect totalrevenues.5)What is the significance of a price elasticity of demand that is infinite?Answer:A price elasticity of demand that is infinite indicates that demand is perfectly elastic.Consumers are completely sensitive to changes in price. A very small decrease in the price ofthe product will cause consumers to increase their quantity demanded from zero to as muchas they could obtain. If consumers are already purchasing the product, any increase in itsprice will cause consumers to purchase zero.1
6)What is the significance of a price elasticity of demand that is equal to 0?Answer:A price elasticity of demand equal to 0 indicates that demand is perfectly inelastic. Thequantity demanded by consumers is completely unresponsive to changes in price. Anychange in the price of the product will not affect the quantity demanded but will lead to anidentical percentage change in total revenues.7)Use the below graph to show what happens to total revenue when: (a) price falls fromP1toP2; (b)price rises fromP3toP2. Explain your answer in terms of areas of total revenue gained or lostusing the alphabetical letters representing different areas on the graph. (c) Is demand elastic orinelastic? How do you know?Answer:(a) Total revenue when price isP1is areas A + B + C. When price falls toP2, total revenue isareas B + C + D + E. The size of lost area A is greater than gained areas D + E, so totalrevenue will fall.(b) Total revenue when price isP3is areas C + E + F. When price rises toP2, total revenue isareas B + C + D + E. The change in price resulted in a loss of area F, but a larger gain in areasB + D. Thus total revenue will rise.(c) Demand is inelastic based on the total revenue test. As price falls fromP1toP2, totalrevenue falls or as price rises fromP3toP2, total revenue increases.8)The demand for a product is unit elastic throughout. If consumers purchase 8,000 units when theprice is $5, how many units will they purchase if the price if $4?Answer:Since demand is unit elastic throughout, the total revenues generated when the price is $5must be the same as those when the price is $4. At $5, total revenues are $40,000. Therefore,at $4, consumers must purchase 10,000 units.2
9)What is the price elasticity of demand if a 10% increase in price causes a 10% increase in totalrevenues?Answer:According to the total revenue test, demand is inelastic. In fact, demand is perfectly inelastic.After the price increase, producers will sell the same quantity as before but will charge a10% higher price. As a result, total revenues rise by an equal 10%.10)On the demand curve below, indicate the character of the price elasticity of demand across allprices.Answer:3
11)The following is a straight-line demand curve that confronts a single firm.(a) In column 3, compute total revenue. In column 4, compute the coefficient for the price elasticityof demand at each price using the midpoints formula.(b) Describe the character of elasticity across the prices based on the total revenue test and theelasticity coefficient.(c) Does a straight-line demand curve have constant elasticity?(d) Of what practical significance is your answer to (c)?Answer:(a) See the above table for the answers.(b) Total revenue declines when price drops from $3 to $2, and the elasticity coefficient alsobecomes less than 1 at that price change. Demand is elastic in the range of prices between $6and $4, and inelastic below $3. A drop in price from $4 to $3 illustrates unitary elasticity.(c) The clear answer is “no” based on the answers in the table. Although the slope of a lineardemand curve is, by definition, constant, elasticity varies because it measures percentagechanges.(d) The significance is twofold. (1) One cannot tell elasticity by looking at a demand curvebecause the elasticity changes over the range of the curve. (2) The elasticity of demand forany product will depend on the level of its initial price and quantity, not just on the change inprice. Therefore, the demand for a product may be very elastic in one price range (generally4
Answer:the higher price ranges) and very inelastic in another (lower) price range.12)Using the demand data given, complete the following table by computing total revenue at each ofthe prices. Indicate whether demand is elastic, inelastic, or unitary between each set of prices.Answer:5
13)Use the data from the table in the previous question and the two graphs below for this problem. Onthe first graph: (a) plot the demand curve; and (b) indicate the elastic, unitary, and inelasticportions of the demand curve. On the second graph: (a) plot the total revenue on the vertical axisand the quantity demanded on the horizontal axis; (b) indicate the elastic, unitary, and inelasticportions of the demand and total revenue curves. (Note: The scale for quantity demanded that youplot on horizontal axis of each graph should be the same on both graphs.)Answer:14)Evaluate. If the demand curve is linear, then the price elasticity of demand must be constantbecause the slope of the demand curve is constant.Answer:This statement is false. Although the slope is constant, the price and quantity demandedcombinations change. Therefore, the price elasticity of demand is not constant. Indeed,demand becomes less elastic as price falls along a linear demand curve.6
15)The president of a toy company asks you for advice about whether the company should cut theprice of its best-selling doll this year based on the following information: last year the company cutthe price of its best-selling doll by 10% and the quantity of dolls demanded increased by 10%.Answer:The total revenue test indicates that the price elasticity of demand for the doll in last year’sprice range was unit elastic, or 1. If the firm cuts the doll’s price this year, then it will mostlikely put the price of the doll in the inelastic range of demand, and thus a percentage changein price will lead to a greater percentage change in quantity in this range, causing totalrevenues to fall. You should advise the president not to cut the price because the firm ismaximizing its total revenue.16)The owner of a health club asks you for advice about whether the company should raise or lowerthe price of its membership this year based on the following information: last year the club raisedthe price of its membership by 5% and the number of members paying the same fee fell by 7%.Answer:The formula for the price elasticity of demand indicates the demand for memberships is priceelastic or 1.4 in this case (7 divided by 5). This result suggests that total revenues for the clubshould have decreased last year. Another increase in price this year would only decrease totalrevenues. You should advise the owner to lower membership prices because it shouldincrease total revenue given that the membership price is in the elastic range.17)The Metropolitan Transit System recently announced a 50% increase in the price of a transit ticket.The administrators said that they needed an increase in revenue to cover their rising costs. Explainthe economic rationale for this decision.Answer:The objective of the administrators is to increase revenue to cover rising costs. If theyincrease the price of a transit ticket to increase revenue, then the administrators must believethat the demand for transit services is inelastic in this price range.18)Ford Motor Company announced a major rebate program for its cars and trucks. The rebateprogram amounts to a simple reduction in price. The company executives hope to increase revenueas a result of this rebate program. What economic explanation would justify this decision?Answer:The company executives believe that the price decrease will increase total revenue. In thiscase, the executives must think that demand is elastic in this price range. When demand iselastic, a cut in price will increase total revenue.19)A gasoline station very near a professional football stadium parks cars on its lot to make money ongame days. Last year it charged $4.00 per car and parked 1,000 cars. This year it raised the parkingprice to $5.00 and parked 850 cars. Did the station owner make a good economic decision inraising the parking prices from one year to the next? Explain.Answer:The owner made a good decision in raising price. The total revenue test indicates that totalrevenue increased with the increase in price. The $4.00 price times 1,000 cars produced$4,000 in revenue, but the $5.00 price times the 850 cars produced $4,250 in revenue, for again of $250. These results indicate that demand for parking is inelastic in this price range.The midpoints formula also shows that demand is inelastic in the price range because thecoefficient is 0.73.7
20)The president of the Micro Brewing Corporation asks you, as the company economist, to forecastchanges in consumer beer purchases associated with a proposed price change. You conduct asurvey and find that if the price of a six-pack increases from $5.50 to $7.50, the quantity demandedwill decrease from 2,200 units to 1,800 units a month. Should the Micro Brewing Corporation raiseits price? Explain the economic basis for this recommendation to the president.Answer:Yes, the corporation should increase the price of a six-pack. Over the price range considered,the price elasticity of demand coefficient is 0.65, or inelastic, using the midpoints formula.An increase in price when demand is inelastic will increase total revenue. This increase intotal revenue also can be shown by multiplication. With a price of $5.50 times a quantity of2,200 per month, the total revenue was $12,100. With the higher price of $7.50 times a lowerquantity of 1,800, the total revenue is $13,500. Thus, there is a gain of $1,400 in totalrevenue from raising the price.21)Based on the determinants of elasticity as discussed in the text, explain what the price elasticity ofdemand of the following products would be: (a) ballpoint pens; (b) Crest toothpaste; (c) diamondrings; (d) sugar; and (e) refrigerators.Answer:(a) Ballpoint pens: Demand should be slightly elastic because there are substitutes, and theyare not a complete necessity. However, they are not very durable and the price is smallrelative to most incomes, and the substitutes are not quite the same so the elasticity will not behigh.(b) Crest toothpaste: Demand should be very elastic because there are very many otherbrand-name substitutes, and this brand is not a necessity.(c) Diamond rings: Demand should be elastic because there are other types of rings, the priceis high relative to most incomes, they are durable, and they are a luxury item.(d) Sugar: Demand should be inelastic because there are few close substitutes, the price issmall relative to most incomes, it is not a durable good, and not usually viewed as a luxury.(e) Refrigerators: Demand is probably somewhat elastic because the price is large relative tomost incomes and they are durable so an old refrigerator can last until “the price is right.”However, refrigerators are not luxuries and there are no good substitutes, so the demand isprobably not very elastic with respect to price.8
22)Explain how each of four different factors can affect the price elasticity of demand. Give anexample for each determinant.Answer:First, the price elasticity of demand can be affected by the number of substitutes. In general,the larger the number of substitutes for a product, the greater will be the elasticity of demand.The price elasticity of demand for beef tends to be relatively high because there are manypossible substitute sources of protein (e.g., chicken, turkey, or fish). Second, elasticity is alsoaffected by the proportion of income spent on a product. Other things equal, the higher theprice of a product relative to people’s incomes (and budgets), the greater the product’selasticity of demand. Sugar has a relatively low price elasticity of demand because the costof sugar is a minor part of a consumer’s budget. By contrast, the price elasticity of demandfor computers and other consumer appliances such as washing machines is relatively highbecause they require a large outlay from a consumer’s budget. Third, luxuries will tend to beprice-elastic while necessities are price-inelastic. Bread will have a low price elasticity ofdemand coefficient relative to that for a luxury auto. Fourth, time will influence the elasticityof demand. The greater the amount of time considered, the greater the elasticity of demand.In the short-run the demand for travel to a warm location during the winter will be lessprice-elastic than the demand for travel to a warm location at other times of the year.23)Evaluate. Farmers as a group benefit when there is good growing season. Use the concept ofelasticity in your answer.Answer:This statement is generally false. The elasticity of demand for many agricultural products isinelastic. The higher output resulting from a good growing season must be sold atsignificantly lower prices. Prices must fall by a larger percentage than output rises.Therefore, the incomes (total revenues) of farmers as a group are actually lower.24)Federal and provincial governments often seek to raise tax revenue by levying excise or sales taxeson specific products. What economic factors should be considered in determining the products thatwill raise the most tax revenue? Give examples of products in your answer.Answer:Government officials should consider taxing products for which the price elasticity ofdemand is inelastic. Liquor, gasoline, and cigarettes are examples of goods with inelasticdemand on which tax increases are imposed to raise tax revenue. When a product has aninelastic demand, an increase in taxes will increase total spending on the product and hencethe revenue collected by government. There will be a negative effect on the quantityconsumed, and thus employment in the industry, but the employment effects will be lessharmful than if the product taxed was elastic. Taxing a product for which the demand isrelatively elastic is likely to reduce tax revenue from the product and reduce significantlyemployment in the industry. Such a situation arose in Canada when the Federal governmentimposed an air security tax on flights. Passengers especially on short haul flights were moresensitive to the higher prices than the Federal government expected. As a result, revenuesfrom the security tax were lower than expected and passenger traffic fell significantlyreducing employment in the industry.9
25)Explain the perspective that tougher enforcement of drug laws for cocaine or other drug laws mayactually increase the crime rate. Use the concepts of demand, supply, and elasticity in yourexplanation.Answer:Tougher enforcement of drug laws reduces the supply of cocaine and other illegal drugs,thus driving up the street price. The demand for cocaine and other drugs, however, appearsto be highly inelastic. The increased price will increase total revenues and profits for sellers,but at the same time it will increase total spending by drug users. To support this increasedspending, drug users are likely to commit more crimes. Thus, the increased enforcement ofdrug laws may have the secondary effect of increasing money-producing crimes such asrobbery, burglary, shoplifting, and fraud.26)Discuss the pros and cons of legalizing drugs such as heroin or cocaine from an economicperspective using the concepts of supply, demand, and elasticity.Answer:The pro side for legalization looks at the price elasticity of demand for heroin and cocaine.This demand is price-inelastic which means that if the price of these drugs was reduced,there would be less spent on them by users. Legalization of these drugs will tend to increasethe supply and reduce the price. The reduced price will reduce the total expenditures on thesedrugs. Fewer users will have to resort to crime to pay for the drugs and there would be lessneed for law-enforcement resources used for the “war on drugs.”The opponents of legalization suggest that there are two types of consumers of illegal drugsNaddicts and occasional users. The demand from addicts is price-inelastic as discussedabove. The demand by the occasional users, however, is more price-elastic. As price falls,this type of user will spend more on these drugs. This additional consumption in turn maycause some of the occasional users to become addicts. The greater social acceptability for theuse of such drugs may also increase the demand for these drugs, which would increaseconsumption, stimulate more addiction, and increase crime in the long run. The additionalsocial cost from these developments would be much greater than any benefit from simplereduction of expenditures by addicts and short-term reduction in law-enforcement costs.27)The following data shows the relationship between price and quantity supplied at four differentprices for a product:P = $11, Qs= 30P = $9, Qs= 28P = $7, Qs= 24P = $5, Qs= 16Using the midpoints formula, what is the price elasticity of supply between: (a) $11 and $9; (b) $9and $7; (c) $7 and $5?Answer:(a) 0.34; (b) 0.62; (c) 1.210
28)Use the supply data in the schedule shown below to complete the table by computing the priceelasticity of supply coefficients between each set of prices. Indicate whether supply is elastic,inelastic or unitary at each set of prices.Answer:29)Why is there no total revenue test for elasticity of supply?Answer:The simple answer is a semantic one; a firm’s supply curve is based on costs of production,so we would have to use a “total costs” test. Also, according to the “law of supply”, price andquantity are directly related, so a rise in price would always raise potential total revenue anda fall in price would always decrease potential total revenue, so the total revenue test wouldnot be meaningful.30)What is the main determinant of the price elasticity of supply? Explain.Answer:The amount of time that producers have to respond to a change in price is the maindeterminant. The longer the time, the easier it is for producers to shift resources intoproduction and increase the quantity supplied. The more time the firm has to adjust to achange in price, the greater the elasticity of supply.31)Describe and give reasons for the characteristics of the elasticity of supply of a farm product that issold at a farmer’s market on a particular day.Answer:The supply is probably perfectly inelastic in this case indicating that a change in price willnot bring forth more quantity supplied. The farmer has a specific quantity of the productavailable for sale that day. Even if the price increases, the farmer cannot increase thequantity he or she wants to sell because the market period is too short of time for a change tobe made to production.11
32)Draw three supply and demand graphs that illustrate the effect of time on the elasticity of supplyusing the below graphs. The three graphs should show: (a) the immediate market period; (b) theshort run; and (c) the long run.Answer:33)Why would it be valuable for a business to know the cross elasticity of demand for the twoproducts it produces: peanuts and popcorn?Answer:The cross elasticity of demand shows the responsiveness of the quantity demanded for oneproduct to a change in the price of another product. The business can use this concept todetermine whether there is a substitute, complementary, or independent relationship betweenpeanuts and popcorn. If peanuts and popcorn are substitutes, a rise in the price of peanutswill cause an increase in the quantity demanded for popcorn (the cross elasticity will bepositive). On the other hand, if peanuts and popcorn are complementary goods, a rise in theprice of peanuts will decrease the quantity demanded for popcorn (the cross elasticity will benegative). The business will want to know the nature of the relationship between the twoproducts and how responsive the quantity demanded for one product is to a change in theprice of the other before a price is changed. This cross elasticity information will be usefulfor increasing total revenue and profits.12
34)Use the information in the table below to identify the type of cross elasticity relationship betweenproducts X and Y in each of the following five cases, A to E.Answer:35)For the following three cases, use a midpoints formula to calculate the coefficient for the crosselasticity of demand and identify the type of relationship between the two products.(a) The quantity demanded for product A increases from 30 to 40 as the price of product B increasesfrom $0.10 to $0.20.Coefficient: ______ Relationship: ________________(b) The quantity demanded for product A decreases from 3000 to 1500 as the price of good Bincreases from $5 to $10.Coefficient: ______ Relationship: ________________(c) The quantity demanded for product A remains 400 units as the price of product B increases from$25 to $30.Coefficient: ______ Relationship: ________________Answer:(a) Coefficient: 0.43 Relationship:substitutes(b) Coefficient: -1.00 Relationship:complements(c) Coefficient: 0.00 Relationship:independent13
36)Use the information in the table below to identify the income elasticity type of each of thefollowing products, A to E.Answer:37)You would think that if people’s income increased over time, then all industries in the economyshould benefit equally, but this is not the case. Explain why and give examples.Answer:The explanation is based on the income elasticity of demand. Those industries in theeconomy for which the demand is income elastic (auto, housing, and restaurants) haveexperienced stronger growth other the years because the percentage change in quantitydemanded is greater than the percentage change in income for these normal goods. Otherindustries such as agriculture have experienced slower growth in output because the demandfor the products produced for most agricultural goods is income inelastic. In this case, thepercentage change in quantity demanded is less than the percentage change in income.38)What is the practical significance of income elasticity coefficients? Explain the significance usingas examples an income elasticity of 3.5 for computers and an income elasticity of 0.20 for icecream.Answer:The income elasticity of demand roughly indicates which industries are likely to beexpanding and prosperous and what industries are likely to be stagnant. The elasticitycoefficient of 3.5 for the computer industry indicates that each 1% increase in income leadsto a 3.5% increase in the quantity demanded for computers. This relationship bodes well forthe long-term prosperity in the computer industry. Conversely, the 0.2 coefficient for icecream indicates that a 1% increase in income leads to only 0.2 of a percent of an increase inthe quantity demanded of ice cream. This low coefficient indicates that the ice creamindustry will not benefit greatly from an increase in consumer incomes.39)What is the significance of an income elasticity of demand that is equal to 2?Answer:An income elasticity of demand equal to 2 indicates that demand is quite responsive toincome changes. More precisely, the value indicates that a 1% change in income will cause a2% change in the quantity demanded of that product. An increase in income will lead to agreater proportion of income spent on the product.14
40)What is the significance of an income elasticity of demand that is equal to -0.25?Answer:An income elasticity of demand equal to -0.25 indicates that this is an inferior good. Moreprecisely, the value indicates that a 1% change in income will cause a -0.25% change in thequantity demanded of that product. An increase in income will lead to a decrease in spendingon the product.41)Last year, 50,000 units of a product were purchased when its price was $2 per unit. This year,incomes have increased by 3% and as a result, 60,000 units of the product are purchased at a priceof $3 per unit.(a) What is the price elasticity of demand for this product?(b) What is the income elasticity of demand for this product?(c) What is the price elasticity of supply for this product?Answer:(a) The price elasticity of demand for this product cannot be determined. The change in thequantity demanded is the result of both a change in income and a change in price. The priceelasticity of demand is measured along a demand curve where the price is allowed to changebut all other things, the determinants of demand, are equal.(b) The income elasticity of demand for this product cannot be determined. The change in thequantity demanded is the result of both a change in income and a change in price. The incomeelasticity of demand is measured by holding all things other than income constant.(c) If we assume that only the demand has shifted between the two years, then the priceelasticity of supply for this product can be determined. Its value is .45.42)Suppose demand is perfectly elastic and supply is positively sloped. How much of a $1 per unit taxlevied on producers is paid by consumers?Answer:When demand is perfectly elastic, the demand curve is completely horizontal. Therefore, anyshift of the supply curve as a result of the excise tax will not affect the equilibrium price.Producers cannot pass any of the tax onto consumers. After paying the tax, producers receive$1 less for each unit of their product.43)Suppose demand is perfectly inelastic and supply is positively sloped. How much of a $1 per unittax levied on producers is paid by consumers?Answer:When demand is perfectly inelastic, the demand curve is completely vertical. Therefore, theleftward shift of the supply curve as a result of the excise tax will increase the equilibriumprice by the amount of the tax. Producers pass all of the tax onto consumers. Afterforwarding the tax to the government, producers receive the same price for their product asbefore the tax.44)Suppose supply is perfectly elastic and demand is negatively sloped. How much of a $1 per unittax levied on producers is paid by consumers?Answer:When supply is perfectly elastic, the supply curve is completely horizontal. Therefore, anyshift of the supply curve as a result of the excise tax will increase the equilibrium price bythe amount of the tax. Producers pass all of the tax onto consumers. After forwarding the taxto the government, producers receive the same price for their product as before the tax.15
45)Suppose supply is perfectly inelastic and demand is negatively sloped. How much of a $1 per unittax levied on producers is paid by consumers?Answer:When supply is perfectly inelastic, the supply curve is completely vertical. Therefore, avertical shift of the supply curve by the size of the tax will not affect the equilibrium price.Producers cannot pass any of the tax onto consumers. After paying the tax, producers receive$1 less for each unit of their product.46)If the government wanted to raise tax revenues by imposing excise taxes of products, whichproducts would be better candidates for taxation?Answer:The better candidates for the tax are products such as tobacco, alcohol, gasoline and otherproducts whose demands are inelastic. If the government levied excise taxes on productswhose demands are elastic, consumption would drop significantly and very little taxrevenues would be generated. By focusing on products for which demand is inelastic, thegovernment is assured of significant revenues because the sales of such products will not fallmuch.47)In the table below are the demand and supply schedules for beer in thousands of cases.(a) What are the equilibrium price and quantity before a tax is imposed?(b) What is the price elasticity of demand at the equilibrium?(c) What is the price elasticity of supply at the equilibrium?(d) Based on your answers to (b) and (c), would buyers or sellers bear a larger portion of an excisetax?(e) Suppose the provincial government imposes an excise tax of $0.60 per case of beer, what is theafter- tax supply schedule?(f) What is the equilibrium price of beer after the tax is imposed? How much of the $0.60 is borneby buyers and how much by sellers?Answer:16
Answer:(a) The equilibrium price is $10.60 and 500 thousand cases are bought and sold.(b) 5.3 [(100/500)/($.40/$10.60)].(c) 10.6 [(200/500)/($.40/$10.60)].(d) Since demand is less elastic than supply, buyers would pay a larger proportion of an excisetax.(e)See table above.(f) The equilibrium price is $11.00 and 400 thousand cases are bought and sold. $0.40 isborne by buyers and $0.20 is borne by sellers.48)In the table below are the demand and supply schedules for rum in thousands of litres.(a) What are the equilibrium price and quantity before a tax is imposed?(b) What is the price elasticity of demand at the equilibrium?(c) What is the price elasticity of supply at the equilibrium?(d) Based on your answers to (b) and (c), would buyers or sellers bear a larger portion of an excisetax?(e) Suppose the provincial government imposes an excise tax of $1.00 per litre of rum, what is theafter-tax supply schedule?(f) What is the equilibrium price of rum after the tax is imposed? How much of the $1.00 is borneby buyers and how much by sellers?Answer:17
Answer:(a) The equilibrium price is $5.75 and 600 thousand litres are bought and sold.(b) 3.8 [(200/600)/($.50/$5.75)].(c) 3.8 [(200/600)/($.50/$5.75)].(d) Since demand and supply are equally elastic, an excise tax would be split evenly betweenbuyers and sellers.(e)See table above.(f) The equilibrium price is $6.25 and 400 thousand litres are bought and sold. $0.50 is borneby the seller and $0.50 is borne by the buyer.18