Economics (McConnell), AP Edition, 20th Edition Chapter (4)

Chapter 6: Elasticity Multiple-Choice Questions 1. If customers buy a quantity of seven products per week, regardless of the price, the numeric value of the price elasticity of demand for the product is (A) infinity (B) greater than one (C) equal to one (D) less than one (E) zero (E) If quantity does not change, the numerator in the formula is zero. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Microeconomics: Elasticity Book Section: The Price-Elasticity Coefficient and Formula 2. The cable television company increases its monthly price for basic service. The firm's revenues will only increase if (A) demand for cable television is price elastic (B) demand for cable television is income elastic (C) supply of cable television is price elastic (D) demand for cable television is price inelastic (E) supply of cable television is unit elastic (D) If the price increases when the demand is price inelastic, the percentage decrease in quantity demanded will be less than the percentage increase in price. Thus, if a price increase results in an increase in total revenue, the range between the two points is said to be price inelastic. When demand is price inelastic, consumers continue to buy at the higher price. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Elasticity Book Section: The Total-Revenue Test 3. A local baseball team's concession stand sells hot dogs for $2 and earns $600 in revenue. The next week, the price is raised to $3, and the concession stand still earns $600 in revenue. In this situation, the price elasticity of demand is (A) perfectly elastic (B) elastic (C) unit elastic (D) inelastic (E) perfectly inelastic (C) If the product price changes and total revenue remains the same, demand is unit elastic between those two points. More precisely, if the price increases and the total revenue remains constant, the percentage decrease in quantity demanded will equal the percentage increase in price, and total revenue will remain constant. If this happens, the price elasticity of demand is said to be unit elastic between the two points. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Elasticity Book Section: Unit Elasticity 4. In the elastic portion of a firm's demand curve, the firm can raise its revenue by (A) reducing the product price (B) hiring additional workers (C) lowering the quantity produced (D) raising the product price (E) increasing its cost of production (A) When consumers are very sensitive to price changes, a lower price increases the quantity sold so significantly that total revenue rises. More precisely, if price decreases in the range where the demand is price elastic, the percentage increase in quantity demanded will be greater than the percentage decrease in price. Thus, if a price decrease results in an increase in total revenue, the range between the two points is said to be price elastic. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Elasticity Book Section: Elastic Demand 5. Demand for a product tends to be more price inelastic if (A) the consumer can find many available substitutes for the product (B) the product is expensive in relation to the consumer's income (C) the product is a necessity (D) the consumer's income is falling (E) the consumer rarely buys complements for the product (C) If the consumer must buy the item regardless of price, demand is inelastic. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Elasticity Book Section: Determinants of Price Elasticity of Demand 6. If golf clubs and golf balls are complementary goods, and the price of golf clubs increases significantly (A) the quantity of golf clubs purchased will increase (B) the demand for golf balls will decrease (C) the demand for tee times at golf courses will increase (D) the price of golf balls will increase (E) the quantity of golf balls purchased will increase (B) If golf clubs are more expensive, fewer people will buy them, reducing the demand for golf balls to go with the clubs. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Price, Income, and Cross-Price Elasticities of Demand Book Section: Cross Elasticity of Demand 7. A change in consumer income is least likely to affect the quantity demanded of (A) cars (B) DVDs (C) restaurant meals (D) piano lessons (E) toothpaste (E) Most consumers will continue to buy toothpaste, a necessity, even if their income falls. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Price, Income, and Cross-Price Elasticities of Demand Book Section: Income Elasticity of Demand 8. Elasticity of supply is greater in the long run than in the short run because I. business owners have more time to expand factories and buy equipment II. consumers have more time to compare quality and prices of products III. more competitors are able to enter the industry (A) I only (B) II only (C) I and III only (D) II and III only (E) I, II, and III (C) In the short run, producers can expand output by a limited amount because they cannot change their plant size; it is also too soon for competitors to enter or leave the industry. But in the long run, plant sizes and the number of competitors in the industry can change, causing significant changes in the quantity of products supplied. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Price Elasticity of Supply Book Section: Price Elasticity of Supply: The Long Run Use the table below to answer questions 9-10. Table: Price Elasticity of Demand for Movie Tickets as Measured by the Elasticity Coefficient Total Quantity Price per Ticket Elasticity Coefficient (Ed) 1 $8 5.00 2 7 2.60 3 6 1.57 4 5 1.00 5 4 0.64 6 3 0.38 7 2 9. If the price per ticket were to decrease from $5 to $4, because the price elasticity of demand is (A) inelastic, total revenue will increase (B) elastic, total revenue will increase (C) inelastic, total revenue will decrease (D) unit elastic, total revenue will increase (E) unit elastic, total revenue will be unchanged (E) Because the elasticity coefficient is equal to one in the per-ticket price range of $5 to $4, the price elasticity of demand is unit elastic and total revenue will remain the same at $20. Difficulty: Medium Style: Applied AP Economics Curricular Requirement Microeconomics: Elasticity Book Section: Unit Elasticity 10. The price per theater ticket was $2. In an effort to increase total revenue, the theater company raised the per-ticket price to $3. This decision was (A) advisable because demand was in the price-inelastic range (B) inadvisable because the elasticity coefficient was less than 1 (C) advisable only if the elasticity coefficient were greater than 1 (D) inadvisable because demand was in the price-elastic range (E) advisable because demand was in the price-elastic range (A) The demand was in the price-inelastic range (Ed<1). By raising the price from $2 to $3, total revenue increased. Difficulty: Medium Style: Applied AP Economics Curricular Requirement Microeconomics: Elasticity Book Section: Inelastic Demand 11. The determinants of price elasticity of demand generally include I. substitutability II. time III. proportion of income IV. luxuries versus necessities (A) I and II only (B) I, II, and III only (C) I, II, and IV only (D) I, III, and IV only (E) I, II, III, and IV (E) The price elasticity of demand for any good or service generally depends on the degree and availability of substitutes, the amount of time considered, the proportion of the consumer’s income dedicated to the good or service, and whether the good or service is a necessity or luxury. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Elasticity Book Section: Determinants of Price Elasticity of Demand 12. Generally, the lower the value of the coefficient of price elasticity of demand, (A) the greater the number of substitutes and time available for consumers (B) the greater the proportion of income and the greater the time available for consumers (C) the smaller the proportion of income and the greater the necessity (D) the greater the luxury and the greater the time available for consumers (E) the smaller the proportion of income and the greater the substitutability (C) Generally, price inelasticity of demand occurs when dealing with goods and services that are perceived as necessities and take a relatively smaller percentage of consumer incomes. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Elasticity Book Section: Determinants of Price Elasticity of Demand 13. If the price elasticity of supply is elastic, then (A) the coefficient of elasticity of supply is less than 1 (B) the coefficient of elasticity of supply is equal to 1 (C) the coefficient of elasticity of supply is greater than 1 (D) the coefficient of elasticity of supply is negative (E) the coefficient of elasticity of supply is positive but less than 1 (C) Using the coefficient of supply formula, the value of the coefficient of supply will be greater than one (ES>1). This is because the percentage change in quantity supplied will be greater than the percentage change in price. Difficulty: Medium Style: Factual AP Economics Curricular Requirement Microeconomics: Price Elasticity of Supply Book Section: Price Elasticity of Supply 14. A straight-line demand curve that is neither perfectly elastic nor perfectly inelastic will have (A) constant slope and constant price elasticity of demand (B) no slope and no price of elasticity of demand (C) varying slope and constant price elasticity of demand (D) constant slope and varying price elasticity of demand (E) varying slope and varying price elasticity of demand (D) While a straight-line will have a constant slope, a straight-line that is neither perfectly elastic (horizontal) nor perfectly inelastic (vertical) will have varying price elasticity of demand. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Elasticity Book Section: Price Elasticity along a Linear Demand Curve 15. The government decides to increase the per-unit tax on the producers of a good only to find that total tax revenue generated by the tax declines. Then, in that range, (A) the demand is inelastic and the coefficient of price elasticity of demand is less than 1 (B) the demand is elastic and the coefficient of price elasticity of demand is greater than 1 (C) the demand is inelastic and the coefficient of price elasticity of demand is greater than 1 (D) the demand is elastic and the coefficient of price elasticity of demand is less than 1 (E) the demand is elastic and the coefficient of price elasticity of demand is equal to 1 (B) As the per-unit tax increase leads to a greater percent decrease in quantity demanded than the percent change in price, the tax increase will generate less total tax revenue. In that range, the demand is price elastic. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Elasticity Book Section: The Total-Revenue Test 16. In the immediate period, a farmer who sells only freshly harvested, perishable peas faces a supply curve that is (A) perfectly elastic (B) perfectly inelastic (C) unit elastic (D) unit elastic or elastic but not inelastic (E) neither perfectly elastic nor perfectly inelastic (B) The farmer, having already harvested the peas, will sell all that was harvested at the market price. If the price is favorable, the farmer will profit by selling all to maximize profits. If the price is unfavorable, the farmer will sell all to minimize losses. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Elasticity Book Section: Price Elasticity of Supply: The Immediate Market Period 17. In the short run, the supply curve that a producer faces (A) is perfectly elastic because the producer can adjust all factor inputs in response to market conditions (B) is perfectly inelastic because the producer cannot adjust any factor inputs in response to market conditions (C) is more elastic than in the immediate period because the producer can adjust all factor inputs in response to market conditions (D) is more elastic than in the immediate period because the producer can adjust some, but not all, factor inputs in response to market conditions (E) is more elastic than in the long run because the producer can adjust some, but not all, factor inputs in response to market conditions (D) In the short run, unlike in the immediate period, the farmer can adjust such factors as labor, fertilizer, and degree of irrigation. While land, physical plant, and farm machinery remain fixed, the farmer can change the supply curve to be more responsive (elastic) to changes in price. In the long run, all factors of production can be changed. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Price Elasticity of Supply Book Section: Price Elasticity of Supply: The Short Run 18. If between two related goods X and Y, the coefficient of cross-price elasticity of demand is positive, then those two goods (A) are complementary goods; if the price of one increases, the demand for the other will decrease (B) are substitute goods; if the price of one increases, the demand for the other will increase (C) are complementary goods; if the price of one increases, the quantity demanded for the other will increase (D) are substitute goods; if the price of one increases, the quantity demanded for the other will increase (E) could be either substitutes or complements (B) If the coefficient of cross-elasticity of demand is positive, then the goods X and Y are substitute goods. The total sales of Good X move in the same direction as the price of Good Y. Thus, if the price of Good X increases, more of substitute Good Y will be purchased, and the coefficient of cross-elasticity of demand will be positive. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Price, Income, and Cross-Price Elasticities of Demand Book Section: Cross Elasticity of Demand 19. If between two related goods X and Y, the coefficient of cross-price elasticity of demand is negative, then those two goods (A) are complementary goods; if the price of one increases the demand for the other will increase (B) are substitute goods; if the price of one increase, the demand for the other will decrease (C) are complementary goods; if the price of one increases, the quantity demanded for the other will increase (D) are substitute goods; if the price of one increases, the quantity demanded for the other will increase (E) could be either substitutes or complements (A) If the coefficient of cross-elasticity of demand is negative, the goods X and Y are complementary goods. The total sales of Good X will move in the opposite direction of the price of Good Y. Thus, if the price of Good X increases, less of complementary Good Y will be purchased and the coefficient of cross-elasticity of demand will be negative. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Cross-Price Elasticities of Demand Book Section: Cross Elasticity of Demand 20. The two goods X and Y are related, the coefficient of income elasticity of demand for Good X is positive, and the coefficient of income elasticity of demand for Good Y is negative. Then, as income increases (A) more of Y and less of X will purchased, with Good Y being the inferior good (B) more of X and less of Y will purchased, with Good X being the inferior good (C) more of X and less of Y will purchased, with Good Y being the inferior good (D) more of X and Y will purchased, with Good Y being the inferior good (E) more of X and Y will purchased, with goods X and Y being normal goods (C) Good X has a coefficient of income elasticity that is positive, while Good Y has a coefficient of income elasticity that is negative. Therefore, as income increases, more of Good X is purchased and is the normal (superior) good. Because Good Y has a negative coefficient of income elasticity, less of Good Y will be bought and is the inferior good. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Price, Income, and Cross-Price Elasticities of Demand Book Section: Income Elasticity of Demand 21. Assume that when the price of candy increases by 10%, the quantity sold decreases by 20%. The elasticity of demand for candy is (A) 2, indicating that demand is elastic (B) 2, indicating that demand is inelastic (C) 0.5, indicating that demand is elastic (D) 0.5, indicating that demand is inelastic (E) 0.5, indicating that demand is unit elastic (A) The formula for elasticity is the percentage change in quantity demanded, divided by the percentage change in price. 20% / 10% = 2. If elasticity is greater than 1, demand is elastic. Difficulty: Medium Style: Application AP Economics Curricular Requirement Microeconomics: Elasticity Book Section: The Price-Elasticity Coefficient and Formula 22. The government places excise taxes on products which have inelastic demand because (A) consumers are more sensitive to the change in price of inelastic-demand products (B) most consumers will continue to buy the product even at the higher price (C) federal law requires consumers to buy products that have inelastic demand (D) as the price increases, consumers buy a significantly lower quantity of the product (E) it is attempting to entice consumers to buy elastic-demand products as substitutes (B) Consumers are not very sensitive to price changes for inelastic-demand products, so when the price increases due to the tax, the quantity demanded falls very little. As a result, government receives more revenue by taxing inelastic-demand products than it would by taxing elastic-demand products. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Elasticity Book Section: Applications of Price Elasticity of Demand 23. If a percentage change in price causes a larger percentage change in the quantity demanded, the demand is (A) perfectly inelastic (B) inelastic (C) unit elastic (D) elastic (E) perfectly elastic (D) This is the definition of elastic demand. If the coefficient of elasticity were infinity, demand would be perfectly elastic. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Microeconomics: Elasticity Book Section: Interpretations of Ed 24. A 10% increase in price is least likely to affect the quantity demanded of (A) movie tickets (B) cars (C) gasoline (D) ice cream (E) toys (C) The demand for gasoline is more inelastic than the demand for the other products because gasoline is a necessity with no good substitutes for car owners. So when the price increases, the quantity demanded falls by a smaller amount. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Microeconomics: Elasticity Book Section: Determinants of Price Elasticity of Demand 25. Assume that a major research study determines that consumption of apples significantly reduces the risk of cancer. Each of the following statements accurately describes the effect in the market for apples EXCEPT (A) The demand for apples will increase. (B) In the immediate period, the quantity of apples supplied will not increase. (C) In the short run, the quantity of apples will increase. (D) In the long run, the quantity of apples will increase by a greater amount than it will in the short run. (E) The supply of apples will increase. (E) The increase in demand causes movement along the supply curve, not a shift in the supply curve. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Price Elasticity of Supply Book Section: Price Elasticity of Supply Free-Response Question Paintings by Pablo Picasso have significantly increased in value since the artist's death in 1973. Picasso paintings are often sold through an auction house, allowing many potential buyers to bid on them. (a) Using a correctly labeled supply and demand graph, illustrate the market for Picasso paintings. (i) Determine the elasticity of supply for Picasso's paintings. (ii) Explain why that level of elasticity exists for the paintings. (b) Now assume that incomes increase significantly. Illustrate the effect of the change in incomes on your graph. Explain the effect of higher incomes on each of the following. (i) The price of Picasso paintings, which are normal goods (ii) The quantity of Picasso paintings produced Free-Response Explanation 6 points (3 + 3) (a) 3 points: 1 point is earned for a correctly labeled graph with a vertical supply curve. 1 point is earned for stating that supply is perfectly inelastic. 1 point is earned for explaining that the producer cannot increase the quantity supplied in response to a higher price because the artist has died. (b) 3 points: 1 point is earned for showing a rightward shift of the demand curve (with higher incomes, consumers buy more normal goods). 1 point is earned for stating that the price will increase. 1 point is earned for stating that the quantity produced will not change. Difficulty: Medium Style: Applied AP Economics Curricular Requirement Microeconomics: Price Elasticity of Supply Book Section: Price Elasticity of Supply