Deck 3: Markets in Action

Question 1

If the owner of an ice cream van charges $2.00 for an ice cream cone, her total revenue is $800.00 a day. If she lowers the price to $1.75 her total revenue is $750.00 a day. The demand for ice cream is:

A) unit elastic
B) elastic
C) neither elastic nor inelastic because this situation violates the law of demand
D) inelastic

Answer 1

D

Question 2

Bumbling University decides to raise tuition fees to increase its total revenue. This strategy will work if the demand for a Bumbling education is:

A) inelastic
B) inversely related to price
C) elastic
D) unit elastic

Answer 2

A

Question 3

If the cross- price elasticity of demand between two goods is negative, then the two goods are:

A) complements
B) normal goods
C) substitutes
D) unrelated goods

Answer 3

A

Question 4

If the government imposed a legal minimum (price floor) on a product, this could lead to:

A) the government having to subsidise producers to increase supply
B) a surplus of the product
C) producers entering the black market to sell the product at a higher price
D) a shortage of the product

Question 5

A demand relationship in which the percentage change in quantity demanded is the same as the percentage change in price is:

A) perfectly inelastic
B) relatively inelastic
C) unit elastic
D) perfectly elastic

Question 6

If demand drops to zero at the slightest increase in price, demand is:

A) unit elastic
B) relatively inelastic
C) totally inelastic
D) infinitely elastic

Question 7

Suppose the government decides to implement a maximum price level on vegetables. The effect will be to:

A) increase the quantity demanded of vegetables
B) decrease the demand for vegetables
C) increase the quantity of vegetables supplied
D) lead to a new equilibrium price and output level

Question 8

If the cross- price elasticity between X and Y is negative, then:

A) X and Y are unrelated
B) X and Y are substitutes
C) X and Y are complements
D) consumer income has increased

Question 9

Cross- price elasticity of demand measures the response in:

A) the income of consumers to the change in the price of goods
B) the quantity of one good demanded to a change in the price of another good
C) the price of a good to a change in the quantity of another good demanded
D) quantity of one good demanded when the quantity demanded of another good changes

Question 10

If total revenue increases after a price increase, demand is:

A) perfectly elastic
B) unit elastic
C) inelastic
D) elastic

Question 11

Tennis balls cost $20 a packet and tennis rackets cost $350 each. Which of the following statements is true?

A) The demand for tennis balls is likely to be less elastic than the demand for tennis rackets.
B) The price elasticity of demand must be the same for both tennis balls and tennis rackets since they are complements.
C) The demand for tennis balls is likely to be more elastic than the demand for tennis rackets.
D) The demand for tennis balls is perfectly inelastic since they can be used only if you own a tennis racket.

Question 12

If a price ceiling is implemented:

A) all buyers of the product will benefit from the higher price
B) some sellers will not be able to sell their product
C) all buyers of the product will benefit from the lower price
D) some buyers will not be able to purchase the product at all

Question 13

If total revenue remains constant after price is increased, demand is:

A) perfectly inelastic
B) unit elastic
C) perfectly elastic
D) inelastic

Question 14

Price elasticity of supply is the:

A) ratio of the change in quantity supplied to the change in price
B) ratio of the percentage change in price to the percentage change in quantity supplied
C) ratio of the change in price to the change in quantity supplied
D) ratio of the percentage change in quantity supplied to the percentage change in price

Question 15

Which of the following is likely to have the most elastic demand?

A) Pepsi
B) beverages
C) soft drinks
D) non- alcoholic beverages

Question 16

If a minimum price is set above the equilibrium price:

A) quantity demanded will be greater than quantity supplied
B) quantity supplied will be less than quantity demanded
C) quantity demanded will be less than quantity supplied
D) quantity demanded will equal quantity supplied

Question 17

The price of insulin increases by 5% and quantity demanded of insulin remains unchanged. The demand for insulin is:

A) infinitely elastic
B) totally inelastic
C) income elastic
D) unit elastic

Question 18

The price of petrol increases by 20% and remains at the new higher level. Which of the following statements is true?

A) Demand for petrol will increase after people adjust to the new higher price.
B) The price elasticity of demand for petrol will not be affected by the change in the price of petrol over the long run.
C) Initially after the price change the price elasticity of demand will be less elastic than it will be a few years after the price change.
D) Initially after the price change the price elasticity of demand will be more elastic than it will be a few years after the price change.

Question 19

The government imposes a maximum rent on flats and apartments that is below the equilibrium rent. You accurately predict that:

A) the new law will create a surplus of flats and apartments to rent
B) renters will find that landlords start offering to furnish the flats
C) landlords are less likely to do routine maintenance work in the flats
D) the new law will have no economic impact

Question 20

The income elasticity of chocolate is 0.8. A 2% increase in income will cause:

A) a 0.8% increase in the quantity demanded of chocolate
B) a 2% decrease in the quantity demanded of chocolate
C) a 2.5% increase in the quantity demanded of chocolate
D) a 1.6% increase in the quantity demanded of chocolate

Question 21

If your income increased by 5% and the quantity of jeans you demanded decreased by 4%, your income elasticity of demand for jeans is:

A) 1.25 and jeans are a normal good
B) 0.8 and jeans are a normal good
C) - 0.8 and jeans are an inferior good
D) - 1.25 and jeans are an inferior good

Question 22

If the cross- price elasticity of demand between fish and chicken is 2, then a 2% increase in the price of fish will result in:

A) a 4% increase in the quantity of chicken demanded
B) a 10% increase in the quantity of chicken demanded
C) a 20% decrease in the quantity of chicken demanded
D) a 1% increase in the quantity of chicken demanded

Question 23

If the government wants to reduce the consumption of water by 5%, and the price elasticity of demand for water is - 0.4, the government should:

A) raise the price of water by 0.08%
B) raise the price of water by 2%
C) lower the price of water by 0.4%
D) raise the price of water by 12.5%

Question 24

If a price ceiling is imposed on oranges, the result would be:

A) a new equilibrium price and quantity would be established
B) the quantity of oranges would be less than the quantity supplied
C) the quantity of oranges demanded would be greater than the quantity supplied
D) there would be a surplus of oranges

Question 25

In which of the following markets is speculation common?

A) the market for apples
B) the Australian housing market
C) the market for designer jeans
D) the market for jeans

Question 26

If there are very few substitutes available for a product, demand for that product is likely to be:

A) perfectly inelastic
B) quite inelastic
C) very elastic
D) either elastic or inelastic, since the number of substitutes available does not affect the elasticity of demand

Question 27

The price of movie tickets increases by 10% and the demand for movie tickets falls by 12.5%. The price elasticity of demand for movie tickets is:

A) perfectly inelastic
B) elastic
C) inelastic
D) perfectly elastic

Question 28

If the price elasticity of demand is 0, then demand must be:

A) totally inelastic
B) unit elastic
C) inelastic
D) infinitely elastic

Question 29

Which of the following is a factor determining price elasticity of supply for a good?

A) the available capacity of the firm/s producing the good
B) the profit levels of producers
C) the number of consumers purchasing the good
D) the price of the good

Question 30

Price elasticity of supply will be greater in:

A) the immediate time period
B) the long run
C) the very short term
D) the short term

Question 31

The ABC Computer Company wants to increase the quantity of computers it sells by 5%. If the price elasticity of demand is 2.5 the company must:

A) decrease price by 2.0%
B) decrease price by 0.5%
C) increase price by 2.0%
D) increase price by 0.5%

Question 32

The charge for a long- distance telephone call is higher between 8 am and 7 pm Monday to Friday than between 7 pm and 8 am. This can be explained by the fact that the demand for long- distance telephone calls is between 8 am and 7 pm and the demand for long- distance telephone calls is between 7 pm and 8 am.

A) zero; one
B) less elastic; more elastic
C) perfectly elastic; perfectly inelastic
D) more elastic; less elastic

Question 33

The income elasticity of demand for calculators is 0.2. A 5% increase in income will cause:

A) a 25% increase in the quantity demanded of calculators
B) a 1% increase in the quantity demanded of calculators
C) a 25% decrease in the quantity demanded of calculators
D) a 10% increase in the quantity demanded of calculators

Question 34

Speculation of price changes tends to:

A) have a destabilising effect on prices if the change is expected to be temporary
B) be self- fulfilling
C) have a stabilising effect on prices if the change is expected to be permanent
D) have no actual effect on prices, as speculation does not cause any real changes

Question 35

If the quantity of tea demanded increases by 2% when the price of coffee increases by 8%, the cross- price elasticity of demand between tea and coffee is:

A) 4
B) - 25
C) - 4
D) 0.25

Question 36

Price and total revenue are inversely related when demand is:

A) inelastic
B) elastic
C) unit elastic
D) perfectly inelastic

Question 37

At a price of $200.00, a store can sell 24 watches a day. At a price of $180.00 the store can sell 33 watches a day. Using the midpoint formula, the price elasticity of demand is:

A) 0.90
B) 3.00
C) 0.33
D) 3.75

Question 38

The price of apples falls by 5% and the quantity demanded increases by 10%. This means that the price elasticity of demand for apples is:

A) 2.0
B) 0.5
C) 1.0
D) 1.5

Question 39

When people have more time to respond to price changes, demand becomes:

A) neither more nor less elastic because time has no effect on demand
B) more elastic
C) less elastic
D) unit elastic

Question 40

The government will be able to raise more revenue by raising the petrol tax if the demand for petrol is:

A) perfectly elastic
B) relatively elastic
C) unit elastic
D) relatively inelastic

Question 41

Income elasticity of demand is defined as:

A) the percentage change in quantity demanded divided by the percentage change in income
B) the change in demand divided by change in income
C) the percentage change in demand divided by the percentage change in income
D) the change in quantity demanded divided by the change in income

Question 42

The price of a newspaper increases by 10% and quantity demanded of newspapers falls by 10%. The demand for newspapers is:

A) elastic
B) perfectly elastic
C) inelastic
D) unit elastic

Question 43

If the income elasticity of demand for a good is negative, then the good is:

A) a luxury good
B) a normal good
C) a substitute good
D) an inferior good

Question 44

The more substitutes there are for a product:

A) the more price elastic the demand for the product is
B) the greater the income elasticity for the product
C) the less price elastic the demand for the product is
D) the smaller the income elasticity for the product

Question 45

Arguments used to justify support for agriculture include:

A) stabilising farm incomes
B) protecting Australian farmers from overwork
C) protecting traditional Australian agriculture
D) providing cheap food for developing countries

Question 46

Total consumer expenditure will increase if price:

A) falls and demand is inelastic
B) rises and demand is elastic
C) rises and demand is unit elastic
D) falls and demand is elastic

Question 47

Assume you earn $50 000 a year and your favourite sports magazine costs you $10 a year. Your demand for the sports magazine is likely to be:

A) inelastic
B) perfectly elastic
C) elastic
D) perfectly inelastic

Question 48

If the income elasticity for instant noodles is - 1.5, then instant noodles are:

A) an inferior good
B) a normal good
C) a substitute good
D) a luxury good

Question 49

If the cross- price elasticity of demand between two goods is positive, then the goods are:

A) complements
B) perfect substitutes
C) substitutes
D) normal goods

Question 50

The price elasticity of supply will tend to be inelastic in the short run when:

A) inputs are readily available
B) the industry does not have to pay overtime if additional working hours are required
C) firms have spare capacity
D) inputs are not readily available

Question 51

The price of tomatoes falls by 5% and quantity demanded increases by 6%. This means that the demand for tomatoes is:

A) inelastic
B) perfectly elastic
C) perfectly inelastic
D) elastic

Question 52

If the demand for oranges is unit elastic, the price elasticity of demand for oranges is equal to:

A) 100
B) 1
C) 0
D) 0.5

Question 53

The government is considering placing a tax on cigarettes to raise revenue to finance health- care benefits. Which of the following statements is TRUE?

A) This tax will not raise much revenue in the short term since demand is price inelastic.
B) This is a very good way to raise revenue both in the short term and in the long term because there are no substitutes for cigarettes.
C) The tax on cigarettes may not raise as much revenue as anticipated in the years to come because the demand for cigarettes is likely to become less elastic over time.
D) No tax revenue can be raised in this way because sellers of cigarettes will just lower their price by the amount of the tax and therefore the price of cigarettes to consumers will not change.

Question 54

The price elasticity of demand for bottled water in Perth is 2, while the price elasticity of demand for bottled water in Melbourne is 0.8. In other words, demand in Perth is and demand in Melbourne is .

A) inelastic; unit inelastic
B) elastic; unit elastic
C) inelastic; elastic
D) elastic; inelastic

Question 55

Price elasticity of demand is the:

A) ratio of the change in price to the change in quantity demanded
B) ratio of the change in quantity demanded to the change in price
C) ratio of the percentage change in price to the percentage change in quantity demanded
D) ratio of the percentage change in quantity demanded to the percentage change in price

Question 56

Which of the following will have the least elastic demand?

A) a golden delicious apple
B) fruit
C) apples
D) a golden delicious apple grown in Adelaide

Question 57

If demand is inelastic:

A) total revenue remains constant regardless of the price charged
B) an increase in price will increase total revenue
C) an increase in price will cause revenue to fall to zero
D) a decrease in price will increase total revenue

Question 58

Which of the following will have the most elastic demand?

A) chocolate chip ice cream
B) ice cream
C) Smith's chocolate chip ice cream
D) frozen desserts

Question 59

The owner of a local hot dog stand has estimated that if he lowers the price of hot dogs from $2.50 to $2.00, he will increase sales from 400 to 500 hot dogs per day. The demand for hot dogs is:

A) perfectly elastic
B) inelastic
C) elastic
D) unit elastic

Question 60

If your income increased by 10% and the quantity of pizza you demanded increased by 5%, your income elasticity of demand for pizza is:

A) 0.5
B) 2.0
C) 0.2
D) 1.0

Question 61

Why is the demand for rental housing inelastic and the demand for owner- occupied housing elastic?

Question 62

Match the correct answer to each statement.
(a) The income elasticity of an inferior good is:
(b) The elasticity of supply in the long term is likely to be:
(c) The cross price elasticity of substitute goods is:

(i) positive
(ii) greater than one
(iii) negative

Question 63

An increase in supply caused no change in equilibrium quantity bought and sold. Thus demand must be:

A) unit elastic
B) inelastic
C) totally inelastic
D) elastic

Question 64

If two goods have a positive cross- price elasticity of demand they are substitutes.

Question 65

Explain why the demand for cigarettes is likely to be very inelastic in the short run, but relatively more elastic in the longer term.

Question 66

A university needs to increase total revenue. The vice chancellor suggests that by raising fees for overseas students by 15%, total revenue will increase. However, after the fees increase, total revenue actually falls. What can you infer about the price elasticity of demand? Why is this likely to be true?

Question 67

Provide two reasons that might be used to argue in favour of minimum prices for some agricultural goods.

Question 68

The ABC Computer Company spends a lot of money on advertising. If the ABC Company's advertising strategy is successful:

A) the demand for ABC personal computers and the demand for other firms' personal computers will both become more price elastic
B) the demand for ABC personal computers will become less price elastic but the demand for other firms' personal computers will become more price elastic
C) the demand for ABC personal computers will become more price elastic but the demand for other firms' personal computers will become less price elastic
D) the demand for ABC personal computers and the demand for other firms' personal computers will both become less price elastic

Question 69

You have to decide whether to buy shares in a company selling surfboards or a company selling roller skates. The income elasticity for roller skates is - 0.2 and the income elasticity for surfboards 0.9. Most economists are predicting that consumer income will rise over the next few years. Which company should you invest in and why?

Question 70

If the percentage change in quantity demanded for a product is less than infinite but greater than the percentage change in price, then the demand for the good is:

A) infinitely elastic
B) elastic
C) inelastic
D) unit elastic

Question 71

Fill in the missing words.
Statement
a() A price ceiling is a _ price, which may cause a .
b() A black market may be the result of a price, due to a legal price _.
c() A price floor is a price, which may cause a .
Answer

Question 72

Speculation of price changes will always have a destabilising effect on prices.

Question 73

The Sofa Corporation's economist predicts that 'ceteris paribus, if incomes rise next year then we will have to invest in extra production capacity'. The economist is relying on the fact that the company's sofas:

A) will benefit from the sales of complementary products
B) have few substitutes
C) are normal goods
D) have few complementary products

Question 74

If the quantity demanded of beef increases by 10% when the price of chicken goes up by 8%, the cross- price elasticity of demand between beef and chicken is:

A) + 1.25
B) - 0.8
C) + 0.8
D) - 1.25

Question 75

The price of train travel increases by 10% and the demand for train travel falls by 12.5%. The price elasticity of demand for train travel is:

A) 1.25
B) 0.50
C) 0.75
D) 1.00

Question 76

Can producers and consumers reduce the problem of uncertainty, or is it simply part of the risk of the free market?

Question 77

If your income increases by 20% and as a result your quantity demanded of DVDs increases by 10%, your income elasticity of demand for DVDs is:

A) 2
B) 0.5
C) - 1
D) 0.1

Question 78

Match the correct answer to each statement.
Statement
a() What effect will an increase in price of a price inelastic good have on total revenue from sales?
b() What effect will a decrease in price of a price inelastic good have on total revenue from sales?
c() What effect will a decrease in price of a unit elastic good have on total revenue from sales?
Answer

Question 79

Explain the terms 'elastic' and 'inelastic' demand.

Question 80

Draw a supply curve that has a zero elasticity of supply. What might be an example of a good with a zero elasticity of supply?