Question 1

Suppose the demand for roses increases from 500 to 600 stems when income rises from $10,000 to $20,000. Income elasticity for roses is:

Accepted Answer

The answer of Suppose the demand for roses increases from...

Question 2

If milk and cookies are complements and the price of cookies falls, we would expect to see:

Accepted Answer

If the price of cookies falls, consumers will likely increase their demand for cookies. As milk and cookies are complements, this increase in demand for cookies will lead to an increase in the demand for milk, as people tend to consume milk with their cookies. Therefore, choice A is the correct answer.

Question 3

If milk and cookies are complements and the price of cookies rises, we would expect to see:

Accepted Answer

When the price of cookies rises, people will buy less cookies. As cookies are a complement to milk, the decrease in cookies bought will lead to a decrease in the demand for milk as well. Therefore, we would expect to see a decrease in the demand for milk.

Question 4

College students tend to eat more ramen noodles than do recent college graduates. A primary reason for this is that:

Accepted Answer

Ramen noodles are an inferior good, meaning as income levels increase, individuals tend to purchase higher quality, more expensive food. College students, who may have limited budgets, may choose to purchase ramen noodles as a cheaper alternative to other food options. Recent college graduates, who likely have higher incomes, may opt for higher quality food and not rely as heavily on ramen noodles.

Question 5

For substitutes:

Accepted Answer

For substitutes, the cross-price elasticity of demand is positive because as the price of one good increases, the demand for its substitute increases.

Question 6

For complements:

Accepted Answer

A negative cross-price elasticity of demand indicates that the two products are complements. When the price of one product increases, the demand for the other product decreases, indicating that they are consumed together in a complementary fashion.

Question 7

If an economist observed that higher hot dog prices lead to an increase in the demand for chili, she most likely would conclude that:

Accepted Answer

When the price of hot dogs increases and the demand for chili increases, it indicates that consumers are turning to chili as an alternative to hot dogs. This behavior suggests that chili and hot dogs are substitutes for each other, as an increase in the price of one leads to an increase in the demand for the other.

Question 8

Repeated hurricanes in Florida have caused some retirees to choose to retire to Arizona instead. Based on this information, retirement housing in Florida and that in Arizona are what kinds of goods?

Accepted Answer

Since retirees are switching from Florida to Arizona as a result of repeated hurricanes, it suggests that housing in these two states are substitutes. This means that the demand for housing in Florida is negatively related to the demand for housing in Arizona. As one increases, the other decreases.

Question 9

If Portuguese wines are an inferior good, higher incomes will cause:

Accepted Answer

According to the law of demand, when a good is inferior, an increase in income will lead to a decrease in the demand for the good. Therefore, higher incomes would cause a decrease in the demand for Portuguese wines, making Option B the correct choice.

Question 10

An economist estimates that for every 1 percent increase in the price of natural Christmas trees, the demand for artificial trees rises by .2 percent. From this information one can conclude that:

Accepted Answer

The fact that there is a positive relationship between the price of natural Christmas trees and the demand for artificial trees indicates that they are substitutes. As the price of natural trees goes up, consumers are more likely to switch to the cheaper alternative of artificial trees. The information given does not allow us to determine the income elasticity of demand or whether natural trees are luxuries, so choices A and B can be eliminated. Additionally, the fact that the two types of trees are substitutes suggests that they are not complements (i.e. they are not typically used together).

Question 11

Suppose the demand for butter increases from 800 to 1,000 pounds when income falls from $40,000 to 30,000. Income elasticity is:

Accepted Answer

Income elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in income. In this case, the percentage change in quantity demanded is (1000-800)/800 = 0.25 or 25% and the percentage change in income is (40000-30000)/40000 = 0.25 or 25%. Therefore, income elasticity of demand = 0.25/0.25 = 1. However, the negative sign indicates that butter is an inferior good. Thus, the income elasticity of demand is -1, which is equivalent to -0.77 (rounded off to two decimal places).

Question 12

If an economist observed that higher hot dog prices lead to a decrease in the demand for chili, she most likely would conclude that:

Accepted Answer

Chili and hot dogs are complements because the demand for chili decreases when the price of hot dogs increases, indicating that they are often used together.

Question 13

It is estimated that a 3 percent drop in the price of Asian and European cars will decrease the demand for American cars by 0.84 percent. From this information one can conclude that:

Accepted Answer

The fact that a decrease in the price of European and Asian cars leads to a decrease in the demand for American cars suggests that these cars are substitutes. If they were complements, a decrease in the price of one would lead to an increase in the demand for the other. The elasticity of demand being less than 1 suggests that American cars are a necessity for some consumers, as a 1 percent decrease in price did not lead to a 1 percent increase in demand. The information provided does not give any indication that European and Asian cars are luxuries.

Question 14

Refer to the following table to answer the question. Which of the following statements is true? $$\begin{array} { | c | c | c | c | } 
\hline \text { Price of } \mathbf { A } & \begin{array} { c } 
\text { Quantity Demanded } \
\text { of } \mathbf { A }
\end{array} & \begin{array} { c } 
\text { Quantity Demanded of } \
\mathbf { B }
\end{array} & \begin{array} { c } 
\text { Quantity Demanded } \
\text { of } \mathbf { C }
\end{array} \
\hline \$ 1.00 & 80 & 100 & 5 \
\hline \$ 1.50 & 60 & 98 & 10 \
\hline \$ 2.00 & 40 & 96 & 15 \
\hline \$ 2.50 & 20 & 94 & 20 \
\hline \$ 3.00 & 0 & 92 & 25 \
\hline
\end{array}$$

Accepted Answer

A and B are complements because as the price of A increases, the quantity demanded of B decreases. A and C are substitutes because as the price of A increases, the quantity demanded of C increases.

Question 15

If macaroni and cheese is an inferior good, falling incomes will tend to:

Accepted Answer

Inferior goods are those for which demand increases as consumer income decreases. Therefore, if incomes fall, more people will buy macaroni and cheese, putting upward pressure on both its price and quantity demanded.

Question 16

When the price of a good increases, what would we expect to see in the markets for its complements?

Accepted Answer

The answer of When the price of a good increases,...

Question 17

Online music streaming services, such as Spotify, have decimated the market for CDs. Based on this information, you can conclude that streaming services:

Accepted Answer

Streaming services and CDs are substitutes, as the rise of streaming services has resulted in a decrease in demand for CDs. This suggests that consumers view the two products as alternatives for one another.

Question 18

It is estimated that a 5 percent decline in income will reduce health care purchases by 2.5 percent and reduce dental service purchases by 8 percent. From this information, one can conclude that:

Accepted Answer

The income elasticity of demand for health care is lower than 1 (0.5), indicating it is a necessity, while the higher elasticity for dental services (1.6) suggests they are considered a luxury.

Question 19

If pizzas and quesadillas are substitutes and the price of pizzas decreases, we would expect to see:

Accepted Answer

If the price of pizzas decreases, consumers will be more inclined to purchase pizzas instead of quesadillas, leading to a decrease in the demand for quesadillas.

Question 20

When the price of a good increases, what would we expect to see in the markets for its substitutes?

Accepted Answer

When the price of a good increases, consumers will look for alternatives, leading to higher demand for its substitutes. This increased demand can push up the prices and sales of the substitutes.

Quiz 6: Describing Supply and Demand: Elasticities