Transcript
Ch05 Elasticity
Multiple Choice Questions
1. The price elasticity of demand measures the:
A. responsiveness of quantity demanded to a change in quantity supplied.
B. responsiveness of price to a change in quantity demanded.
C. responsiveness of quantity demanded to a change in price.
D. responsiveness of quantity demanded to a change in income.
Answer: C Reference:
Explanation:
2. Price elasticity of demand is defined as:
A. the slope of the demand curve.
B. the slope of the demand curve divided by the price.
C. the percentage change in price divided by the percentage change in quantity demanded.
D. the percentage change in quantity demanded divided by the percentage change in price.
Answer: D Reference:
Explanation:
3. Demand is said to be ___________ when the quantity demanded is very responsive to changes in price.
A. elastic
B. unit elastic
C. inelastic
D. independent
Answer: A Reference:
Explanation:
4. Demand is said to be _____________ when the quantity demanded is not very responsive to changes in price.
A. independent
B. inelastic
C. unit elastic
D. elastic
Answer: B Reference:
Explanation:
5. Demand is said to be __________ when the quantity demanded changes at the same proportion as the price.
A. elastic
B. unit elastic
C. inelastic
D. independent
Answer: B Reference:
Explanation:
6. The elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in __________.
A. quantity supplied
B. the slope of the demand curve
C. price
D. the slope in the supply curve
Answer: C Reference:
Explanation:
7. When demand is inelastic:
A. price elasticity of demand is greater than 1.
B. consumers are not very responsive to changes in price.
C. the percentage change in quantity demanded resulting from a price change is greater than the percentage change in price.
D. demand curves appear to be fairly flat.
Answer: B Reference:
Explanation:
8. Billy Bob's Barber Shop knows that a 5 percent increase in the price of their haircuts results in a 15 percent decrease in the number of haircuts purchased. What is the elasticity of demand facing Billy Bob's Barber Shop?
A. 0.15
B. 3.0
C. 0.10
D. 0.05
Answer: B Reference:
Explanation:
9. If the demand curve for a life-saving medicine is perfectly inelastic, then a reduction in supply will cause the equilibrium price to:
A. rise and the equilibrium quantity to fall.
B. rise and the equilibrium quantity to stay the same.
C. rise and the equilibrium quantity to rise.
D. stay the same and the equilibrium quantity to fall.
Answer: B Reference:
Explanation:
10. If the demand curve is perfectly elastic, then an increase in supply will:
A. decrease the price but result in no change in the quantity exchanged.
B. increase the quantity exchanged but result in no change in the price.
C. increase the price but result in no change in the quantity exchanged.
D. increase both the price and the quantity exchanged.
Answer: B Reference:
Explanation:
11. Suppose that Bobo purchases 1 pizza per month when the price is $19 and 3 pizzas per month when the price is $15. What is the price elasticity of Bobo’s demand curve?
A. 0.235
B. 2.00
C. 4.25
D. 6.33
Answer: C Reference:
Explanation:
12. Suppose that Mimi plays golf 5 times per month when the price is $40 and 4 times per month when the price is $50. What is the price elasticity of Mimi’s demand curve?
A. 0.1
B. 0.8
C. 1.0
D. 10.0
Answer: C Reference:
Explanation:
13. A price cut will increase the total revenue a firm receives if the demand for its product is:
A. unit inelastic.
B. unit elastic.
C. inelastic.
D. elastic.
Answer: D Reference:
Explanation:
Figure 7-1
14. Refer to Figure 7-1. With reference to Graph A, at a price of $10, total revenue equals:
A. $1,000.
B. $500.
C. $400.
D. $200.
Answer: C Reference:
Explanation:
15. Refer to Figure 7-1. With reference to Graph A, at a price of $5, total revenue equals:
A. $200.
B. $400.
C. $500.
D. $1,000.
Answer: C Reference:
Explanation:
16. Refer to Figure 7-1. With reference to Graph B, at a price of $5, total revenue equals:
A. $150.
B. $250.
C. $300.
D. $200.
Answer: D Reference:
Explanation:
17. Refer to Figure 7-1. Graph B represents a demand curve that is relatively __________. Total revenue __________ as the price decreases from $10 to $5.
A. inelastic; decreases
B. elastic; decreases
C. elastic; increases
D. inelastic; increases
Answer: A Reference:
Explanation:
18. The demand for a product is unit elastic. At a price of $20, 10 units of a product are sold. If the price is increased to $40, then one would expect sales to equal:
A. 20 units.
B. 10 units.
C. 5 units.
D. 0 units.
Answer: C Reference:
Explanation:
19. A 25 percent decrease in the price of breakfast cereal leads to a 20 percent increase in the quantity of cereal demanded. As a result:
A. total revenue will decrease.
B. total revenue will increase.
C. total revenue will remain constant.
D. the elasticity of demand will increase.
Answer: A Reference:
Explanation:
20. The price elasticity of demand for tickets to local baseball games is estimated to be equal to 0.89. In order to boost ticket revenues, an economist would advise:
A. increasing the price of game tickets because demand is inelastic.
B. not changing the price of game tickets because demand is unit elastic.
C. increasing the price of game tickets because demand is elastic.
D. decreasing the price of game tickets because demand is elastic.
Answer: A Reference:
Explanation:
21. A 10 percent increase in the price of soda leads to a 20 percent increase in the quantity of iced tea demanded. It appears that:
A. elasticity of demand for soda 0.5 and is inelastic.
B. elasticity of demand for iced tea is 2 and is elastic.
C. cross-price elasticity of demand for soda is -0.5.
D. cross-price elasticity of demand for iced tea is -2.
Answer: D Reference:
Explanation:
22. A 10 percent decrease in the price of potato chips leads to a 30 percent increase in the quantity of soda demanded. It appears that:
A. elasticity of demand for potato chips is 3.
B. cross-price elasticity of demand for soda is -3.
C. elasticity of demand for potato chips is 3.
D. elasticity of demand for soda 3.
Answer: B Reference:
Explanation:
23. If cola and iced tea are good substitutes for consumers, then it is likely that:
A. their cross price elasticities are greater than zero.
B. their price elasticities of demand are less than one.
C. their income elasticities are less than zero.
D. their price elasticities of supply are less than one .
Answer: A Reference:
Explanation:
24. A 10 percent increase in income leads to a 15% decrease in the quantity of macaroni and cheese demanded but no change in the price of macaroni and cheese. From this information, we can assume:
A. macaroni is a normal good and price elasticity of demand is greater than 1.
B. macaroni is an inferior good and price elasticity of supply is equal to zero.
C. macaroni is an inferior good and price elasticity of supply is infinite.
D. macaroni is an inferior good and price elasticity of demand is less than 1.
Answer: C Reference:
Explanation:
25. The elasticity of supply is defined as the ________ change in quantity supplied divided by the _______ change in price.
A. total; percentage
B. percentage; marginal
C. marginal; percentage
D. percentage; percentage
Answer: D Reference:
Explanation:
Category: Remember
26. Supply is said to be ____________ when the quantity supplied is very responsive to changes in price.
A. independent
B. inelastic
C. unit elastic
D. elastic
Answer: D Reference:
Explanation:
27. If the supply curve for a product is vertical, then the elasticity of supply is:
A. equal to zero.
B. equal to 1.
C. greater than 1 but less than infinity.
D. equal to infinity.
Answer: A Reference:
Explanation:
28. If the supply curve for a product is horizontal, then the elasticity of supply is:
A. equal to infinity.
B. greater than 1 but less than infinity.
C. equal to 1.
D. equal to zero.
Answer: A Reference:
Explanation:
29. A perfectly elastic supply curve is:
A. upward sloping to the right.
B. downward sloping to the left.
C. horizontal.
D. vertical.
Answer: C Reference:
Explanation:
30. When economists are sketching examples of demand and supply, it is common to sketch a demand or supply curve that is close to vertical, and then to refer to that curve as _________.
A. inelastic
B. elastic
C. unitary elasticity
D. income elasticity
Answer: A Reference:
Explanation:
31. When economists are sketching examples of a demand or supply curve that is close to horizontal, they refer to that demand or supply curve as ____________.
A. elastic
B. inelastic
C. having zero elasticity
D. price inelasticity
Answer: A Reference:
Explanation:
32. __________ is the change in what is on the horizontal axis (quantity) divided by the change in what is on the vertical axis (price).
A. Elasticity
B. Demand
C. Supply
D. Revenue
Answer: A Reference:
Explanation:
33. The longer the time period considered, the more the elasticity of supply tends to:
A. decrease
B. remain constant
C. increase
D. converge to zero
Answer: C Reference:
Explanation:
Category: Remember
34. Taxes on goods with __________ demand curves will tend to raise more tax revenue for the government than taxes on goods with __________ demand curves.
A. elastic; unit elastic
B. elastic; inelastic
C. inelastic; elastic
D. unit elastic; inelastic
Answer: C Reference:
Explanation:
35. If the supply curve for aspirin is perfectly elastic, then a reduction in demand will cause the equilibrium price to:
A. stay the same and the equilibrium quantity to fall.
B. fall and the equilibrium quantity to fall.
C. rise and the equilibrium quantity to stay the same.
D. rise and the equilibrium quantity to fall.
Answer: A Reference:
Explanation:
Category: Evaluate
36. A demand or supply curve with ______________ would be horizontal in appearance.
A. unitary elasticity
B. zero elasticity
C. infinite elasticity
D. infinite cost elasticity
Answer: C Reference:
Explanation:
37. If the supply curve for housing is perfectly inelastic, then a reduction in demand will cause the equilibrium price to:
A. rise and the equilibrium quantity to fall.
B. rise and the equilibrium quantity to stay the same.
C. fall and the equilibrium quantity to fall.
D. fall and the equilibrium quantity to stay the same.
Answer: D Reference:
Explanation:
38. Youth smoking seems to be more __________ than adult smoking—that is, the quantity of youth smoking will fall by a greater percentage than the quantity of adult smoking in response to a given percentage increase in price.
A. unitary elastic
B. inelastic
C. elastic
D. cross-price elastic
Answer: C Reference:
Explanation:
39. If the supply curve for housing is perfectly inelastic, then a reduction in demand will cause the equilibrium price to:
A. rise and the equilibrium quantity to fall.
B. rise and the equilibrium quantity to stay the same.
C. fall and the equilibrium quantity to fall.
D. fall and the equilibrium quantity to stay the same.
Answer: D Reference:
Explanation:
40. The evidence on the supply curve of financial capital is controversial, but at least in the short run, the elasticity of savings with respect to the interest rate appears to be __________.
A. elastic
B. inelastic
C. perfectly elastic
D. negative
Answer: B Reference:
Explanation:
Essay Questions
1. Suppose that a 20% increase in the price of gasoline causes a 5% decrease in the consumption of gasoline and a 30% drop in the sales of SUVs. What can you say about elasticities?
Reference:
Explanation: The elasticity of demand for gasoline is 0.25 (inelastic) and the cross-price elasticity of SUVs with respect to the price of gasoline is -1.5. Gasoline and SUVs are complements.
2. Define the elasticity of labor supply.
Reference:
Explanation: The percentage change in hours worked divided by the percentage change in wages
3. What are normal goods and inferior goods? Discuss within the context of income elasticity of demand.
Reference:
Explanation: For most products, most of the time, the income elasticity of demand is positive: that is, a rise in income will cause an increase in the quantity demanded. This pattern is common enough that these goods are referred to as normal goods. However, for a few goods, an increase in income means that one might purchase less of the good; for example, a person with a higher income might buy fewer hamburgers, because they are buying more steak instead, or a person with a higher income might buy less cheap wine and more imported beer. When the income elasticity of demand is negative, the good is called an inferior good.
4. Define cross-price elasticity of demand and discuss within the context of complementary goods and substitute goods.
Reference:
Explanation: The term “cross-price” refers to the idea that the price of one good is affecting the quantity demanded of a different good. Specifically, the cross-price elasticity of demand is the percentage change in the quantity of good A that is demanded as a result of a percentage change in the price of good B.
Cross-price elasticity of demand = % change in quantity demanded of good A/
% change in price of good B
If good A is a substitute for good B, like coffee and tea, then a higher price for B will mean a greater quantity consumed of good A. But if good A is a complement for good B, like coffee and sugar, then a higher price for good B will mean a lower quantity consumed of good A.
5. Define wage elasticity of labor supply and differentiate the elasticity between teenage workers and that of middle-aged adult workers in the workforce.
Reference:
Explanation: The income elasticity of demand is the percentage change in quantity demanded divided by the percentage change in income.
Income elasticity of demand = % change in quantity demanded/
% change in income
The wage elasticity of labor supply for teenage workers is generally thought to be fairly elastic: that is a certain percentage change in wages will lead to a larger percentage change in the quantity of hours worked. Conversely, the wage elasticity of labor supply for adult workers in their 30s and 40s is thought to be fairly inelastic. When wages move up or down by a certain percentage amount, the quantity of hours that adults in their prime earning years are willing to supply changes but by a lesser percentage amount.
6. If the question is whether a shift in supply will have a greater effect on equilibrium price or quantity, the answer lies not with the elasticity of supply, but with the elasticity of demand. Why is this?
Reference:
Explanation: The shifting supply curve is moving along a fixed demand curve—and the shape of that demand curve will determine the eventual outcome.
7. Define zero elasticity and describe the resultant demand curve.
Reference:
Explanation: Zero elasticity refers to the highly inelastic case in which a percentage change in price, no matter how large, results in zero change in quantity. Zero elasticity refers to curves that are vertical.
8. A 10% increase in the price of pizza causes a 10% drop in the quantity of both pizza and beer sold. Describe elasticities and the nature of the two products.
Reference:
Explanation: The price elasticity of demand for pizza is equal to (-)1 and the cross price elasticity of beer with respect to the price of pizza is also -1. In this example, beer and pizza complements.
9. How does the slope of a supply or demand curve differ from elasticity of supply or demand?
Reference:
Explanation: This calculation differs from elasticity in two ways. First, elasticity is the change in what is on the horizontal axis (quantity) divided by the change in what is on the vertical axis (price). Thus, elasticity involves run/rise, not rise/run. Second, elasticity is the percentage change, which is a different calculation from slope. A straight line has only one slope, but as the example in the chapter shows, a straight-line demand curve has a different elasticity at every point.
10. The elasticity of supply and demand determines whether a shift in supply or demand will have a larger effect on quantity or price. Discuss the four scenario outcomes and the various effects on price and quantity.
Reference:
Explanation: If demand is elastic, then shifts in supply will have a larger effect on quantity than on price. If demand is inelastic, then shifts in supply will have a larger effect on price than on quantity. If supply is elastic, then shifts in demand will have a larger effect on quantity than on price. If supply is inelastic, then shifts in demand will have a larger effect on price than on quantity.
