Ch.5 Test Questions & Answers Elasticity And Its Application - Principles of Microeconomics ANZ Edition Test Bank by Joshua Gans. DOCX document preview.
CHAPTER 5 – Elasticity and its application
TRUE/FALSE
1. The concept of the slope is the best way to measure the responsiveness of demand to changes in its determinants.
DIF: Easy TOP: The price elasticity of demand and its determinants
2. The demand for a good is said to be elastic if a small price decrease leads to a substantial increase in the quantity demanded.
DIF: Easy TOP: The price elasticity of demand and its determinants
3. Necessities tend to have price inelastic demands, whereas luxuries have price elastic demands.
DIF: Easy TOP: The price elasticity of demand and its determinants
4. Major Australian supermarket chains have been fighting to sell milk at the lowest price. The fact that they place such importance on the price must mean that they consider demand for milk to be somewhat price inelastic.
DIF: Moderate TOP: The price elasticity of demand and its determinants
5. Goods with close substitutes tend to have more elastic demands than do goods without close substitutes.
DIF: Easy TOP: Availability of close substitutes
6. The demand curve for a market may be different depending on how widely the market is defined.
DIF: Easy TOP: Definition of the market
7. The price elasticity of demand for a product will tend to be higher if fewer good substitutes for it are available.
DIF: Easy TOP: Availability of close substitutes
8. The demand for apples is generally more elastic than the demand for Australian apples.
DIF: Moderate TOP: Availability of close substitutes
9. Over three years the elasticity of demand for oil heaters will be greater than over ten years.
DIF: Moderate TOP: Time horizon
10. The midpoint method will often give you two different values of elasticity depending on whether you calculate the elasticity from point A to point B or point B to point A.
DIF: Moderate TOP: Computing the price elasticity of demand
11. The price of a hamburger increases by 25 per cent and the quantity of hamburgers demanded per week falls by 50 per cent. The price elasticity of demand is two.
DIF: Easy TOP: Computing the price elasticity of demand
12. If the measured elasticity is less than one it means that the demand for this good is inelastic.
DIF: Easy TOP: Total revenue and the price elasticity of demand
13. A good experiences a shift of the demand curve so that it is now flatter than before. Suppose that the market price and quantity demanded does not change. This means that the good has now become inelastic.
DIF: Easy TOP: The variety of demand curves
14. A demand curve that is horizontal is perfectly inelastic. This means the elasticity is equal to one.
DIF: Moderate TOP: The variety of demand curves
15. A linear demand curve always has the same elasticity over its entire length.
DIF: Moderate TOP: The variety of demand curves
16. As price elasticity of demand increases, the demand curve gets steeper and steeper.
DIF: Moderate TOP: The variety of demand curves
17. If the price elasticity of demand is elastic, reduced demand for a good will create a greater fall in revenue than the increase in revenue created by the increase in price.
DIF: Moderate TOP: Total revenue and the price elasticity of demand
18. If the price elasticity of demand is 1.5, a price decrease will cause total revenue to increase.
DIF: Moderate TOP: Total revenue and the price elasticity of demand
19. The income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in income.
DIF: Easy TOP: The income elasticity of demand
20. Normal goods have positive income elasticities of demand, while inferior goods have negative income elasticities of demand.
DIF: Easy TOP: The income elasticity of demand
21. If you enjoy buying luxury goods more than buying groceries, your income elasticity of demand for luxury goods will be less elastic than for groceries.
DIF: Moderate TOP: Necessities versus luxuries
22. The demand for basic foodstuffs such as rice or flour is usually elastic.
DIF: Moderate TOP: Necessities versus luxuries
23. Cross-price elasticity of demand measures how the quantity demanded of one good changes as the price of another good changes.
DIF: Easy TOP: The cross-price elasticity of demand
24. If the price of one good goes up, and this causes the quantity demanded of another good to go down, the cross-price elasticity of demand will be negative.
DIF: Easy TOP: The cross-price elasticity of demand
25. The cross-price elasticity of demand will be positive for complement goods and negative for substitute goods.
DIF: Easy TOP: The cross-price elasticity of demand
26. If price changes and total revenue changes in the opposite direction, we can conclude that demand is relatively elastic.
DIF: Moderate TOP: Total revenue and the price elasticity of demand
27. Slope is the ratio of the changes in two variables, while elasticity is the ratio of the percentage changes in two variables.
DIF: Easy TOP: The variety of demand curves
28. Price elasticity of supply measures how much the quantity supplied responds to changes in demand.
DIF: Easy TOP: The price elasticity of supply and its determinants
29. Supply is said to be inelastic if the quantity supplied responds substantially to changes in the price and elastic if the quantity supplied responds only slightly to price.
DIF: Easy TOP: The price elasticity of supply and its determinants
30. If the price of forest-products rises, the price elasticity of supply will be more responsive in the long run than in the short run.
DIF: Easy TOP: Can good news for farming be bad news for farmers?
31. Price elasticity of supply is defined as the percentage change in quantity supplied divided by the percentage change in price.
DIF: Easy TOP: The price elasticity of supply and its determinants
32. Suppose a coffee plantation in Colombia increases the quantity of coffee beans it supplies by 5% when it learns that the price of a coffee at cafes in Melbourne has risen by 25%. The Colombian producer’s price elasticity of supply of coffee beans is 0.2.
DIF: Easy TOP: Computing the price elasticity of supply
33. If a supply curve is horizontal, it is said to be perfectly elastic, and the price elasticity of supply approaches infinity.
DIF: Easy TOP: The variety of supply curves
34. A government program that reduces land under cultivation hurts farmers but helps consumers.
DIF: Moderate TOP: Can good news for farming be bad news for farmers?
35. While an increase in total agricultural production may benefit farmers as a group, it will not benefit an individual farmer to increase his production.
DIF: Moderate TOP: Can good news for farming be bad news for farmers?
36. In the 1970s OPEC generated high prices for oil but could not sustain this in the mid-80s and 90s. The reason was that both the supply and demand elasticity for oil is less elastic in the short run than in the long run.
DIF: Moderate TOP: Why did OPEC fail to keep the price of oil high?
MULTIPLE CHOICE
1. In general, elasticity is:
A. | the friction that develops between buyer and seller in a market |
B. | a measure of how much government intervention is prevalent in a market |
C. | a measure of how much buyers and sellers respond to changes in markets |
D. | a measure of the competitive nature of a market |
DIF: Easy TOP: The price elasticity of demand and its determinants
2. The price elasticity of demand measures how responsive:
A. | buyers are to a change in price |
B. | buyers are to a change in advertising by sellers |
C. | sellers are to a change in price |
D. | buyers are to a change in their tastes |
DIF: Easy TOP: The price elasticity of demand and its determinants
3. Economists use the concept of price elasticity of demand to measure how much:
A. | sellers respond to changes in the price of the good |
B. | worse off consumers are when the price of the good rises |
C. | demand responds to changes in buyers’ incomes |
D. | buyers respond to changes in the price of the good |
DIF: Easy TOP: The price elasticity of demand and its determinants
4. Demand is said to be elastic if:
A. | the price of the good responds substantially to changes in demand |
B. | the supply of the good responds weakly to changes in demand |
C. | the quantity demanded responds substantially to changes in the quantity supplied of the good |
D. | the quantity demanded responds substantially to changes in the price of the good |
DIF: Easy TOP: The price elasticity of demand and its determinants
5. Demand is said to be inelastic if:
A. | the price of the good responds only slightly to changes in demand |
B. | demand shifts only slightly when the price of the good changes |
C. | buyers respond substantially to changes in the price of the good |
D. | the quantity demanded changes only slightly when the price of the good changes |
DIF: Easy TOP: The price elasticity of demand and its determinants
6. If a good is a necessity, demand for the good would tend to be:
A. | elastic |
B. | unit elastic |
C. | inelastic |
D. | horizontal |
DIF: Easy TOP: Availability of close substitutes
7. The elasticity of demand for a good tends to increase if:
A. | there is an increase in the availability of complements |
B. | there is an increase in the availability of substitutes |
C. | the market is considered over a longer period of time |
D. | the definition of the market is broadened |
DIF: Easy TOP: Availability of close substitutes
8. The price elasticity of demand for toasted muesli would increase if:
A. | there was an increase in complements for toasted muesli |
B. | the definition of the toasted muesli market was made very broad |
C. | toasted muesli was considered a luxury product |
D. | the effect of a price rise was measured over a long period of time |
DIF: Moderate TOP: Time horizon
9. Suppose that there are many substitutes for crocodile-leather handbags. This would mean that the:
A. | demand for crocodile-leather handbags would tend to be income inelastic |
B. | demand for crocodile-leather handbags would tend to be price elastic |
C. | demand for crocodile-leather handbags would tend to be price inelastic |
D. | demand for crocodile-leather handbags would tend to be income elastic |
DIF: Easy TOP: Availability of close substitutes
10. The demand for a good tends to be more elastic:
A. | the longer the period of time |
B. | the greater the availability of close substitutes |
C. | the narrower the definition of the market |
D. | all of the above are correct |
DIF: Easy TOP: The price elasticity of demand and its determinants
11. Economists compute the price elasticity of demand as the:
A. | percentage change in the price divided by the percentage change in quantity demanded |
B. | percentage change in the quantity demanded divided by the percentage change in price |
C. | change in quantity demanded divided by the change in the price |
D. | percentage change in the quantity demanded divided by the percentage change in income |
DIF: Easy TOP: The price elasticity of demand and its determinants
12. Suppose there is a 10 per cent increase in the price of fish and a resulting five per cent decrease in the quantity of fish demanded. The price elasticity of demand for fish is:
A. | 10 |
B. | 5.0 |
C. | 2.0 |
D. | 0.5 |
DIF: Easy TOP: Computing the price elasticity of demand
13. Suppose the price of product X is reduced from $16.00 to $12.00 and, as a result, the quantity of X demanded increases from 300 to 450. Using the midpoint method, the price elasticity of demand for X in the given price range is:
A. | 1.40 |
B. | 1.00 |
C. | 0.40 |
D. | 0.29 |
DIF: Moderate TOP: Computing the price elasticity of demand
14. Suppose the price of product X is increased from $8.00 to $10.00 and as a result, the quantity of X demanded decreases from 1500 to 1000. Using the midpoint method, the price elasticity of demand for X in the given price range is:
A. | 2.00 |
B. | 1.80 |
C. | 1.00 |
D. | 0.40 |
DIF: Moderate TOP: Computing the price elasticity of demand
15. Demand is classed as price inelastic if the elasticity coefficient is:
A. | less than one |
B. | equal to one |
C. | greater than one |
D. | equal to zero |
DIF: Easy TOP: Computing the price elasticity of demand
Graph 5-1
16. In Graph 5-1, the point on the demand curve labelled B represents the:
A. | inelastic section of the demand curve |
B. | unit elastic section of the demand curve |
C. | elastic section of the demand curve |
D. | perfectly elastic section of the demand curve |
DIF: Moderate TOP: The variety of demand curves
17. In Graph 5-1, the section of the demand curve labelled C represents the:
A. | elastic section of the demand curve |
B. | unit elastic section of the demand curve |
C. | perfectly elastic section of the demand curve |
D. | inelastic section of the demand curve |
DIF: Moderate TOP: The variety of demand curves
18. In Graph 5-1, the section of the demand curve labelled A represents the:
A. | inelastic section of the demand curve |
B. | unit elastic section of the demand curve |
C. | elastic section of the demand curve |
D. | perfectly elastic section of the demand curve |
DIF: Moderate TOP: The variety of demand curves
Graph 5-2
19. Refer to Graph 5-2. If there is a four per cent decrease in the price of a good and this leads to a 12 per cent increase in the quantity demanded then the price elasticity is:
A. | 3 and elastic |
B. | 3 and inelastic |
C. | 0.3 and elastic |
D. | 0.3 and inelastic |
DIF: Easy TOP: The variety of demand curves
20. In Graph 5-2, the elasticity of demand from point A to point B, using the midpoint method, would be:
A. | 1 |
B. | 1.5 |
C. | 2 |
D. | 2.5 |
DIF: Moderate TOP: The variety of demand curves
21. In Graph 5-2, the elasticity of demand from point B to point C, using the midpoint method, would be:
A. | 0.5 |
B. | 0.75 |
C. | 1.0 |
D. | 1.3 |
DIF: Moderate TOP: The variety of demand curves
22. A perfectly inelastic demand implies that:
A. | buyers will not respond to any change in price |
B. | any rise in price above that represented by the demand curve will result in no output demanded |
C. | price and quantity demanded respond proportionally |
D. | price will rise by an infinite amount when there is a change in quantity demanded |
DIF: Moderate TOP: The variety of demand curves
23. A perfectly inelastic demand implies that buyers:
A. | enjoy paying more for the good |
B. | increase their quantity demanded of the good when the price rises |
C. | will continue to buy the good no matter how big the change in price |
D. | purchase none of the good when the price rises |
DIF: Moderate TOP: The variety of demand curves
24. Alice says that she likes banana splits, but if the price changed, she would not buy them anymore. If this is the case:
A. | Alice’s demand for banana splits is perfectly inelastic |
B. | Alice’s price elasticity of demand for banana splits is one |
C. | Alice’s income elasticity of demand for banana splits is negative |
D. | Alice’s demand for banana splits is perfectly elastic |
DIF: Moderate TOP: The variety of demand curves
Graph 5-3
25. In Graph 5-3, as price falls from PA to PB, which demand curve is most elastic?
A. | D1 |
B. | D2 |
C. | D3 |
D. | all of the above are equally elastic |
DIF: Moderate TOP: The variety of demand curves
26. In Graph 5-3, as price falls from PA to PB, which demand curve is least elastic?
A. | D1 |
B. | D2 |
C. | D3 |
D. | all of the above are equally elastic |
DIF: Moderate TOP: The variety of demand curves
27. If the demand curve is linear and downward-sloping, which of the following would NOT be correct?
A. | the upper part of the demand curve is more elastic than the lower part |
B. | elasticity will change with a movement down the curve |
C. | the lower part of the demand curve will be less elastic than the upper part |
D. | elasticity and slope will both remain constant along the curve |
DIF: Difficult TOP: The variety of demand curves
28. Suppose the price elasticity of demand for wine is 1.60. A 12 per cent decrease in price will result in:
A. | a 19.2 per cent increase in the quantity of wine demanded |
B. | a 19.2 per cent decrease in the quantity of wine demanded |
C. | a 7.5 per cent increase in the quantity of wine demanded |
D. | a 7.5 per cent decrease in the quantity of wine demanded |
DIF: Difficult TOP: Computing the price elasticity of demand
Table 5-1
Suppose a coffee shop faces the following demand schedule for coffee.
Price per coffee ($) | Quantity demanded |
4.00 | 200 |
3.00 | 600 |
2.50 | 800 |
2.00 | 1000 |
1.50 | 1200 |
1.00 | 1400 |
29. Referring to Table 5-1, comparing the sales at $1.00 and $3.00, which of the statements below is true?
A. | the price elasticity of demand is higher at $3.00 than $1.00 |
B. | the price elasticity of demand is lower at $3.00 than at $1.00 |
C. | the price elasticity of demand is the same at both prices |
D. | the price elasticity of demand at $3.00 is zero |
DIF: Difficult TOP: Computing the price elasticity of demand
30. Refer to Table 5-1. Notice that if the price is lowered from $2.00 to $1.50, total revenue falls from $2000 to $1800. This means that over this price range, the demand for coffee must be:
A. | price elastic |
B. | price inelastic |
C. | price unit elastic |
D. | income elastic |
DIF: Moderate TOP: Total revenue and the price elasticity of demand
31. In any market, total revenue is the price:
A. | divided by the price elasticity of demand |
B. | multiplied by the quantity |
C. | plus the quantity |
D. | divided by the quantity |
DIF: Easy TOP: Total revenue and the price elasticity of demand
32. Referring to Table 5-1, if the shop increases the price from $3.00 to $4.00, the price elasticity of demand will (according to the mid-point method) be:
A. | 0.29 and inelastic |
B. | 0.29 and elastic |
C. | 3.5 and inelastic |
D. | 3.5 and elastic |
DIF: Moderate TOP: Computing the price elasticity of demand
33. How does total revenue change as one moves down a linear demand curve?
A. | it increases |
B. | it decreases |
C. | it first increases, then decreases |
D. | it is unaffected by a movement along the demand curve |
DIF: Moderate TOP: Total revenue and the price elasticity of demand
34. In the case of a downward linear demand curve, total revenue is always maximised at:
A. | the upper end of the demand curve |
B. | the lower end of the demand curve |
C. | the midpoint of the demand curve |
D. | it depends on the cost curve |
DIF: Moderate TOP: Total revenue and the price elasticity of demand
Graph 5-4
35. Refer to Graph 5-4. The total revenue at P1 is represented by area(s):
A. | B + D |
B. | A + B |
C. | C + D |
D. | D |
DIF: Moderate TOP: Total revenue and the price elasticity of demand
36. Refer to Graph 5-4. Total revenue at P2 would be represented by area(s):
A. | B + D |
B. | A + B |
C. | C + D |
D. | D |
DIF: Moderate TOP: Total revenue and the price elasticity of demand
37. The local pizza restaurant makes such great bread sticks that consumers do not respond much to a change in the price. If the owner is only interested in increasing revenue, he should:
A. | lower the price of the bread sticks |
B. | raise the price of the bread sticks |
C. | leave the price of the bread sticks alone |
D. | reduce costs |
DIF: Moderate TOP: Total revenue and the price elasticity of demand
38. Oliver makes guitars. There are four other guitar shops that also make good guitars on the same street. If Oliver wishes to increase his total revenue, he should:
A. | decrease the price of the guitars |
B. | increase the price of the guitars |
C. | not change the price of the guitars |
D. | manufacture pianos instead |
DIF: Moderate TOP: Total revenue and the price elasticity of demand
39. When demand is elastic in the current price range:
A. | an increase in price will increase total revenue because the decrease in quantity demanded is less than the increase in price |
B. | an increase in price will decrease total revenue because the decrease in quantity demanded is greater than the increase in price |
C. | a decrease in price will decrease total revenue because the increase in quantity demanded is smaller than the decrease in price |
D. | a decrease in price will not affect the total revenue |
DIF: Difficult TOP: Total revenue and the price elasticity of demand
40. If a change in the price of a good results in no change in total revenue:
A. | the demand for the good must be elastic |
B. | the demand for the good must be inelastic |
C. | the demand for the good must be unit elastic |
D. | buyers must not respond very much to a change in price |
DIF: Moderate TOP: Total revenue and the price elasticity of demand
41. Income elasticity of demand measures how:
A. | the quantity demanded changes as consumer income changes |
B. | consumer purchasing power is affected by a change in the price of a good |
C. | the price of a good is affected when there is a change in consumer income |
D. | many units of a good a consumer can buy given a certain income level |
DIF: Easy TOP: The income elasticity of demand
42. Last year, Joan bought 50 kg of hamburger mince when the household income was $40 000. This year, the household income was only $30 000 and Joan bought 60 kg of hamburger mince. All else being constant, Joan’s income elasticity of demand for hamburger mince is:
A. | positive, so Joan considers hamburger to be an inferior good |
B. | positive, so Joan considers hamburger to be a normal good and a necessity |
C. | negative, so Joan considers hamburger mince to be an inferior good |
D. | negative, so Joan considers hamburger mince to be a normal good |
DIF: Moderate TOP: The income elasticity of demand
43. If an increase in income results in a decrease in the quantity demanded of a good, then the good is:
A. | a normal good |
B. | a necessity |
C. | an inferior good |
D. | a luxury |
DIF: Easy TOP: The income elasticity of demand
44. Assume that a four per cent decrease in income results in a two per cent increase in the quantity demanded of a good. The income elasticity of demand for the good is:
A. | negative and therefore the good is an inferior good |
B. | negative and therefore the good is a normal good |
C. | positive and therefore the good is an inferior good |
D. | positive and therefore the good is a normal good |
DIF: Moderate TOP: The income elasticity of demand
Table 5-2
Quantities purchased
Income ($) | Good X | Good Y |
30 000 | 2 | 20 |
50 000 | 5 | 10 |
45. Refer to Table 5-2. Using the midpoint method, what is the income elasticity of good Y?
A. | –0.75 |
B. | 0.75 |
C. | –1.33 |
D. | 0 |
DIF: Moderate TOP: Computing the price elasticity of demand
46. Refer to Table 5-2. Good X is:
A. | a normal good |
B. | an inferior good |
C. | underpriced |
D. | very price elastic |
DIF: Difficult TOP: Computing the price elasticity of demand
47. Refer to Table 5-2. Good Y is:
A. | not related to income |
B. | an inferior good |
C. | price inelastic |
D. | a normal good |
DIF: Difficult TOP: The income elasticity of demand
48. The cross-price elasticity of demand measures how the quantity demanded of a good changes:
A. | as its price changes |
B. | as the price of a related good changes |
C. | as income changes |
D. | as the price of an unrelated good changes |
DIF: Easy TOP: The income elasticity of demand
49. Cross-price elasticity of demand is calculated as:
A. | the percentage change in quantity demanded of good one divided by the percentage change in the price of good two |
B. | the total percentage change in quantity demanded divided by the total percentage change in price |
C. | the percentage change in quantity demanded divided by the percentage change in income |
D. | none of the above answers is correct |
DIF: Easy TOP: The cross-price elasticity of demand
50. Coffee and tea are likely to have:
A. | a negative cross-price elasticity of demand because they are substitutes |
B. | a negative cross-price elasticity of demand because they are complements |
C. | a positive cross-price elasticity of demand because they are substitutes |
D. | a positive cross-price elasticity of demand because they are complements |
DIF: Easy TOP: The cross-price elasticity of demand
51. If the cross-price elasticity of demand is 1.25, then the two goods are:
A. | complements |
B. | inferior goods |
C. | normal goods |
D. | substitutes |
DIF: Moderate TOP: The cross-price elasticity of demand
52. The demand for rare butterflies tends to be income:
A. | elastic because they are relatively expensive |
B. | inelastic because butterflies are small animals |
C. | elastic because most buyers feel that they can do without it |
D. | inelastic because butterflies are difficult to breed |
DIF: Moderate TOP: The income elasticity of demand
53. Suppose the government increases the tax on petrol in order to raise revenue. Since raising the petrol tax would increase the price of petrol, the government must be assuming that the:
A. | demand for petrol is price elastic |
B. | demand for petrol is price inelastic |
C. | demand for petrol is price unit elastic |
D. | tax on petrol will not affect the consumption of petrol |
DIF: Difficult TOP: Total revenue and the price elasticity of demand
54. Get Smart University (GSU) is contemplating increasing tuition to enhance revenue. If GSU feels that raising tuition would enhance revenue they are:
A. | assuming that the supply of university education is price inelastic |
B. | assuming that the demand for university education is price elastic |
C. | assuming that the supply of university education is price elastic |
D. | assuming that the demand for university education is price inelastic |
DIF: Moderate TOP: Total revenue and the price elasticity of demand
55. Suppose that 50 candy bars are demanded at a particular price. Using the midpoint method, if the price of candy bars rises by four per cent, the number of candy bars demanded falls to 48 candy bars. This means that the:
A. | demand for candy bars in this price range is elastic |
B. | demand for candy bars in this price range is inelastic |
C. | price elasticity of demand for candy bars is zero |
D. | demand for candy bars is unit elastic |
DIF: Moderate TOP: Computing the price elasticity of demand
56. Last year, Amy bought two lenses for her SLR camera. Her income was $30 000. This year her income is $40 000. She has bought four new lenses for her camera. All else being constant it is obvious:
A. | Amy prefers to photograph with an SLR camera |
B. | Amy considers lenses to be a normal good |
C. | Amy considers SLR cameras to be an inferior good |
D. | Amy considers lenses to be an inferior good |
DIF: Moderate TOP: The income elasticity of demand
57. If the quantity supplied of a good responds strongly to a change in the price of an input:
A. | the price elasticity of demand is inelastic |
B. | the income elasticity of supply is inelastic |
C. | the income elasticity of supply is elastic |
D. | the price elasticity of supply is elastic |
DIF: Easy TOP: The price elasticity of supply and its determinants
58. Suppose that after a five per cent increase in the price of timber, a forestry company increases its supply of timber by 10 per cent in the next three months, and 15 per cent by 12 months. This means that the elasticity of supply is _____.
A. | 3 at three months and 2 at 12 months |
B. | 0.5 at three months and 0.3 at 12 months |
C. | 2 at three months and 3 at 12 months |
D. | 0.3 at three months and 0.5 at 12 months |
DIF: Difficult TOP: Computing the price elasticity of supply
59. If sellers respond substantially to changes in the price, then:
A. | sellers are considered to be relatively price sensitive |
B. | sellers are considered to be relatively price insensitive |
C. | the supply curve will shift substantially when the price rises |
D. | the price elasticity of supply equals one |
DIF: Easy TOP: The variety of supply curves
60. The main determinant of the price elasticity of supply is:
A. | time |
B. | the definition of the market |
C. | the number of close substitutes |
D. | luxuries versus necessities |
DIF: Easy TOP: The price elasticity of supply and its determinants
61. Suppose that an increase in the price of jumping castles from $650 to $850 prompts party shops to increase the quantity of these jumping castles that they offer from 80 to 320. Using the midpoint method, what would be the elasticity of supply?
A. | 0.50 |
B. | 0.24 |
C. | 0.34 |
D. | 1.08 |
DIF: Moderate TOP: Computing the price elasticity of supply
62. In the long run, the quantity supplied of most goods:
A. | can respond substantially to a change in price |
B. | cannot respond much to a change in price |
C. | cannot respond at all to a change in price |
D. | will naturally increase regardless of what happens to price |
DIF: Moderate TOP: The price elasticity of supply and its determinants
63. If for a given price, the supply curve becomes flatter, the elasticity of supply at this point will:
A. | have got relatively more elastic |
B. | have got relatively more inelastic |
C. | be unchanged |
D. | be unitary |
DIF: Easy TOP: The variety of supply curves
64. If sellers do NOT respond at all to a change in price:
A. | supply must be perfectly inelastic |
B. | supply must be perfectly elastic |
C. | a long period of time must have elapsed |
D. | the rate of technological advancement must be great |
DIF: Moderate TOP: The variety of supply curves
65. If an increase in the price of a good results in an increase in total revenue for the firm, then:
A. | the supply of the good must be unit elastic |
B. | the supply of the good must be inelastic |
C. | the supply of the good must be elastic |
D. | nothing can be said about price elasticity of supply from the information given |
DIF: Moderate TOP: The variety of supply curves
66. The discovery of a new hybrid wheat would tend to increase the supply of wheat. Under what conditions would wheat farmers realise an increase in revenue?
A. | if the supply of wheat is elastic |
B. | if the supply of wheat is inelastic |
C. | if the demand for wheat is inelastic |
D. | if the demand for wheat is elastic |
DIF: Difficult TOP: Can good news for farming be bad news for farmers?
67. The development of a new, more productive hybrid wheat would tend to decrease the total revenue of wheat farmers because:
A. | the demand for wheat tends to be elastic |
B. | the supply of wheat tends to be elastic |
C. | the demand for wheat tends to be inelastic |
D. | the supply of wheat tends to be inelastic |
DIF: Difficult TOP: Can good news for farming be bad news for farmers?
68. If the demand for illegal drugs is inelastic, drug education campaigns should:
A. | reduce both drug use and drug-related crime |
B. | reduce drug use and increase drug-related crime |
C. | increase both drug use and drug-related crime unchanged |
D. | increase drug use and reduce drug-related crime |
DIF: Difficult TOP: Do drug bans increase or decrease drug-related crime?
69. If law enforcement agencies prohibit the use of drugs such as heroin, cocaine and crack and the demand for drugs is inelastic, it is possible that:
A. | the price of drugs will fall and drug-related crime will fall |
B. | the price of drugs will fall and drug-related crime will increase |
C. | the price of drugs will rise and drug-related crime will increase |
D. | the price of drugs will rise and drug-related crime will fall |
DIF: Difficult TOP: Do drug bans increase or decrease drug-related crime?
70. A vertical supply curve signifies that:
A. | a change in price will have no effect on quantity supplied |
B. | a change in price will change quantity supplied in the opposite direction |
C. | an infinite quantity will be supplied at a given price |
D. | the relationship between price and quantity supplied is inverse |
DIF: Easy TOP: The variety of supply curves
71. In general, a firm will be able to generate the greatest response to a price increase:
A. | just after the change |
B. | after three years |
C. | in the months following the change |
D. | around one week after the change |
DIF: Moderate TOP: The variety of supply curves
Graph 5-5
72. In Graph 5-5, which supply curve is perfectly inelastic?
A. | S1 |
B. | S2 |
C. | S3 |
D. | it is impossible to tell without more information |
DIF: Moderate TOP: The variety of supply curves
73. In Graph 5-5, which supply curve is most likely the long-run supply curve?
A. | S1 |
B. | S2 |
C. | S3 |
D. | all of the above are equally likely to be the long-run supply curve |
DIF: Difficult TOP: The variety of supply curves
74. Suppose a producer is able to separate customers into two groups, one having a price inelastic demand and the other having a price elastic demand. If the producer’s objective is to increase total revenue, she should:
A. | increase the price charged to customers with the price elastic demand and decrease the price charged to customers with the price inelastic demand |
B. | decrease the price charged to customers with the price elastic demand and increase the price charged to customers with the price inelastic demand |
C. | charge the same price to both groups of customers |
D. | increase the price for both groups of customers |
DIF: Difficult TOP: Total revenue and the price elasticity of demand
75. The price of product X is reduced from $45 to $20 and, as a result, the quantity demanded increases from 20 to 25 units. From this we can conclude that the demand for X in this price range:
A. | has declined |
B. | is of unit elasticity |
C. | is inelastic |
D. | is elastic |
DIF: Moderate TOP: Computing the price elasticity of demand
76. A perfectly inelastic demand curve:
A. | rises upward and to the right but has a constant slope |
B. | can be drawn as a line parallel to the vertical axis |
C. | cannot be shown on a two-dimensional graph |
D. | can be represented by a line parallel to the horizontal axis |
DIF: Moderate TOP: The variety of demand curves
77. If an increase in the demand for Monet paintings increases their equilibrium price but not the equilibrium quantity, this means that:
A. | the price elasticity supply of Monet paintings is perfectly elastic |
B. | the price elasticity supply of Monet paintings is perfectly inelastic |
C. | the price elasticity of demand for Monet paintings is perfectly elastic |
D. | the price elasticity of supply for Monet paintings is perfectly inelastic |
DIF: Difficult TOP: The variety of demand curves
78. In which of the following cases will total revenue increase?
A. | price falls and demand is inelastic |
B. | price falls and supply is elastic |
C. | price rises and demand is inelastic |
D. | price rises and demand is elastic |
DIF: Moderate TOP: Total revenue and the price elasticity of demand
79. If the cross-price elasticity of demand between goods X and Y is 0.9 this me
A. | the two goods are complements and demand is elastic |
B. | the two goods are complements and the demand is inelastic |
C. | the two goods are substitutes and the demand is elastic |
D. | the two goods are substitutes and the demand is inelastic |
DIF: Easy TOP: The cross-price elasticity of demand
SHORT ANSWER
1. What is elasticity and why do economists use the concept?
DIF: Easy TOP: The cross-price elasticity of demand
2. Use the graphs below to answer the following questions.
a. Determine equilibrium price and quantity for each graph.
b. Given demand and supply, what would total revenue be for each graph?
c. Assume that supply shifts to the left on both graphs by 100, raising price. Given the new equilibrium price and equilibrium quantity, what would total revenue be for each graph?
d. What do your answers to part c tell you about the relationship between elasticity of demand and total revenue?
DIF: Difficult TOP: Total revenue and the price elasticity of demand
3. Suppose a demand function yields an equilibrium price of $5.00 and an equilibrium quantity of 50 000 individual units. The equilibrium quantity could also be expressed in units of 1000, yielding an equilibrium of $5.00 and 50 units. How would expressing the quantity in units of 1000 affect the value of the slope and the elasticity?
DIF: Moderate TOP: Computing the price elasticity of demand
4. What are the determinants of price elasticity of demand and how does each affect elasticity?
DIF: Easy TOP: The price elasticity of demand and its determinants
5. Use the graph below to answer the following questions. Put the correct letter in the blank.
a. The elastic section of the graph is represented by section _____.
b. The inelastic section of the graph is represented by section _____.
c. The unit elastic section of the graph is represented by section _____.
d. The portion of the graph in which a decrease in price would cause total revenue to fall is _____.
e. The portion of the graph in which a decrease in price would cause total revenue to rise is _____.
f. The portion of the graph in which a decrease in price would not cause a change in total revenue is _____.
g. The section of the graph in which total revenue would be at a maximum is _____.
h. The section of the graph in which elasticity is greater than one is _____.
i. The section of the graph in which elasticity is equal to one is _____.
j. The section of the graph in which elasticity is less than one is _____.
DIF: Moderate TOP: The variety of demand curves
6. Consider the following pairs of goods. Which would you expect to have the more elastic demand? Why?
a. water or diamonds
b. insulin or nasal decongestant spray
c. food in general or breakfast cereal
d. gasoline over the course of a week or gasoline over the course of a year
e. personal computers or IBM personal computers
DIF: Difficult TOP: The price elasticity of demand and its determinants
7. If two demand curves with different slopes pass through the same point, which demand curve will have the greater price elasticity of demand if the price falls from that point?
DIF: Moderate TOP: The variety of demand curves
8. When the price of digital SLR cameras was $2000, consumers bought 4000. When the price fell to $1200, consumers bought 5000. What was the price elasticity of demand between these two prices, calculated with the midpoint method? Is demand elastic or inelastic?
DIF: Moderate TOP: Computing the price elasticity of demand
9. Using the midpoint method, compute the elasticity of demand between points A and B. Is this portion of the curve elastic or inelastic? Interpret your answer with regard to price and quantity demanded. Now compute the elasticity of demand between points B and C. Is this portion of the curve elastic or inelastic?
DIF: Moderate TOP: Computing the price elasticity of demand
10. Andy has discovered a new way to make clothes pegs more cheaply than his competitors. He believes that since he can now sell his clothes pegs at a lower price than other clothes-peg providers on the market, he will be able to increase his revenue by attracting more customers. He estimates the price elasticity of demand for clothes pegs to be 0.7. What will happen to his total revenue if he decreases the price of his clothes pegs? What should Andy do?
DIF: Difficult TOP: Total revenue and the price elasticity of demand
11. Suppose you are the manager of a theatre. You currently charge the same admission price to all customers, regardless of age. You hire an economist to determine the price elasticity of demand for admissions by age and he tells you that at the current price, demand by adults is inelastic and demand by children is elastic. If you want to increase your total revenue by adjusting admission prices, how should they be adjusted?
DIF: Difficult TOP: Total revenue and the price elasticity of demand
12. The president of the university is concerned about increasing operating costs and decides to raise tuition fees in an attempt to increase university revenue. Do you think the rise in tuition fees will accomplish the president’s goal?
DIF: Moderate TOP: Total revenue and the price elasticity of demand
13. What is the definition of the income elasticity of demand. What does it measure? How can it be used to determine whether a good is normal or inferior. What happens to the demand for an inferior good is income decreases?
DIF: Easy TOP: The income elasticity of demand
14. Define cross-price elasticity of demand. What does it measure? What does it mean if the cross-price elasticity is negative or positive?
DIF: Easy TOP: The cross-price elasticity of demand
15. When Anna was studying at university, she had a monthly income of $900 and bought 4 items of second-hand clothing. Now, she is working full-time with a monthly income of $3000. She now buys 20 items of second-hand clothing a month. Compute Anna’s income elasticity of demand using the midpoint method. What type of goods are second-hand clothes for Anna?
DIF: Moderate TOP: The income elasticity of demand
16. What is the price elasticity of supply?
DIF: Easy TOP: The price elasticity of supply and its determinants
17. At a price of $35, Brent rents out 80 sets of skis in one day. In peak season he can charge $45 per set and so he will rent out up to 150 sets of skis. What is Brent’s price elasticity between the two ski prices, using the midpoint formula?
DIF: Moderate TOP: Computing the price elasticity of supply
18. Rate the supply curves on the graph shown from shortest time frame to longest time frame. Which curve is the most inelastic? Which curve is the most elastic?
DIF: Moderate TOP: The variety of supply curves
19. In the aftermath of the US decision to halt logging of Pacific North-West forests in 1990 to protect spotted owls, the global demand for Australian and New Zealand timber jumped. Predict how Australasian forestry companies responded to the increased demand in the short run and in the long run.
DIF: Difficult TOP: The variety of supply curves
20. The Conservation Reserve Program pays farmers to take out of production highly erodible land. How will this program affect farm income and the wellbeing of consumers?
DIF: Difficult TOP: Can good news for farming be bad news for farmers?
21. How does the price elasticity of demand affect total revenue? In what case will a change in price cause no change in total revenue?
DIF: Moderate TOP: Total revenue and the price elasticity of demand
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