Question 1

Information on the price elasticity of demand is particularly important to managerial decision making because:
A) the higher the price elasticity of demand for a product is, the more profitable it will be to produce more of it.
B) depending on the elasticity coefficient, decision makers will immediately know if a price change will cause profits to increase or decrease.
C) it allows one to predict how total revenue will respond, i.e., increase or decrease, to a change in price.
D) as the price elasticity coefficient approaches one, profits will increase.

Accepted Answer

Price elasticity of demand helps decision makers predict how total revenue will respond to a change in price. This is important for making pricing decisions that will maximize profits. Option A is incorrect because the profitability of increasing production depends on both the price elasticity of demand and the cost of production. Option B is incorrect because the elasticity coefficient alone cannot determine the effect on profits. Option D is incorrect because there is no direct relationship between the price elasticity coefficient and profits.

Question 2

When demand is inelastic and price is decreased:
A) the effect of the decrease in price on total revenue dominates the effect of the increase in quantity demanded on total revenue; overall total revenue declines.
B) the effect of the increase in quantity demanded on total revenue dominates the effect of the decrease in price on total revenue; overall total revenue increases.
C) the effects of the decrease in price on total revenue and the corresponding increase in quantity demanded on total revenue perfectly offset one another; overall total revenue remains unchanged.
D) quantity demanded and total revenue fall to zero.

Accepted Answer

When demand is inelastic, a decrease in price leads to a proportionally smaller increase in quantity demanded, causing total revenue to decline.

Question 3

Suppose the demand for meals at a medium-priced restaurant is elastic. If the management of the restaurant is considering raising prices, it can expect the total revenues the restaurant earns to:
A) increase.
B) stay the same.
C) decrease.
D) cannot be determined with the information given.

Accepted Answer

If the demand for meals at a medium-priced restaurant is elastic, it means that customers are very responsive to changes in price. As a result, if the restaurant raises its prices, it can expect to see a significant decrease in the quantity of meals demanded, which will more than offset the gain from the higher price per meal. Therefore, total revenues the restaurant earns will decrease.

Question 4

At a price of $5, consumers buy 200 units of good X. When the price falls to $4, quantity demanded increases to 250 units. We can conclude that over this range, demand is:
A) elastic.
B) unit elastic.
C) inelastic.
D) perfectly inelastic.

Accepted Answer

The answer of At a price of $5, consumers buy...

Question 5

For a particular product, a demand elasticity is a quantitative measure that shows:
A) the percentage change in quantity demanded relative to the absolute change in any of the other variables included in the demand function for that product.
B) the absolute change in quantity demanded relative to the percentage change in any of the other variables included in the demand function for that product.
C) the percentage change in quantity demanded relative to the percentage change in any of the other variables included in the demand function for that product.
D) the absolute change in quantity demanded relative to the absolute change in any of the other variables included in the demand function for that product.

Accepted Answer

Demand elasticity measures the responsiveness of quantity demanded to changes in any of the other variables included in the demand function. The percentage change in quantity demanded relative to the percentage change in any of the other variables (such as price, income, etc.) is the best measure of this responsiveness. Therefore, option C is the correct answer.

Question 6

If the percentage change in quantity demanded is greater than the percentage change in price, we would say that over this range, demand is:
A) elastic.
B) unit elastic.
C) inelastic.
D) perfectly inelastic.

Accepted Answer

If the percentage change in quantity demanded is greater than the percentage change in price, demand is considered elastic. This means that a small change in price results in a relatively larger change in quantity demanded, indicating that consumers are highly sensitive to changes in price.

Question 7

According to the text, the price elasticity of demand for bath tissue has been estimated to be -2.42. This implies that a 10 percent decrease in the price of bath tissue would cause the quantity demanded of bath tissue to:
A) increase by 2.4 percent.
B) decrease by 2.4 percent.
C) increase by 24.2 percent.
D) decrease by 24.2 percent.

Accepted Answer

A price elasticity of demand of -2.42 means that a 10% decrease in price would cause a 24.2% increase in quantity demanded (since the absolute value of the elasticity is greater than 1). Therefore, the correct answer is C, that a 10 percent decrease in the price of bath tissue would cause the quantity demanded of bath tissue to increase by 24.2 percent.

Question 8

An increase in price will result in no change in total revenue if:
A) the percentage change in price is large enough to cause quantity demanded to fall to zero.
B) the coefficient of elasticity is equal to zero.
C) the percentage change in quantity demanded is equal to the percentage change in price.
D) the demand function is perfectly elastic.

Accepted Answer

When the percentage change in quantity demanded is equal to the percentage change in price, the demand is unit elastic, and total revenue remains unchanged.

Question 9

If the percentage change in quantity demanded is less than the percentage change in price, we would say that over this range, demand is:
A) elastic.
B) unit elastic.
C) inelastic.
D) perfectly elastic.

Accepted Answer

If the percentage change in quantity demanded is less than the percentage change in price, then demand is considered inelastic. This means that consumers are not very responsive to changes in price and will still continue to demand the product even if the price increases.

Question 10

Why is the price elasticity of demand a relative measure? That is, why is elasticity measured in percentage terms rather than in absolute terms?
A) So the coefficient of elasticity will not be dependent on the physical units of the good.
B) Because absolute measures do not account for the direction of the change in quantity.
C) So that the coefficient of elasticity will not be negative.
D) Because the absolute price or quantity demanded of a product is irrelevant to the elasticity measure.

Accepted Answer

Price elasticity of demand is a relative measure because it is calculated by comparing the percentage change in quantity demanded with the percentage change in price. Using percentage terms allows for the coefficient of elasticity to be independent of the physical units of the good, which enables comparisons between different products and markets.

Question 11

A decrease in price will result in an increase in total revenue if:
A) the percentage change in quantity demanded is less than the percentage change in price.
B) the percentage change in quantity demanded is greater than the percentage change in price.
C) demand is inelastic.
D) the consumer is operating along a linear demand curve at a point at which the price is very low and the quantity demanded is very high.

Accepted Answer

The correct answer is B because when the percentage change in quantity demanded is greater than the percentage change in price, it indicates that demand is elastic. In such cases, a decrease in price leads to a proportionally larger increase in quantity demanded, which increases total revenue.

Question 12

An increase in price will result in an increase in total revenue if demand is:
A) perfectly elastic.
B) relatively elastic.
C) inelastic.
D) unit elastic.

Accepted Answer

When demand is inelastic, an increase in price will result in a proportionately smaller decrease in quantity demanded. Therefore, the increase in unit price will result in a more than proportional increase in total revenue.

Question 13

According to the text, the price elasticity of demand for oranges has been estimated to be -0.62. This implies that a doubling of the price of oranges would cause the quantity demanded of oranges to:
A) increase by 6.2 percent.
B) decrease by 6.2 percent.
C) increase by 62 percent.
D) decrease by 62 percent.

Accepted Answer

A price elasticity of -0.62 indicates that the quantity demanded of oranges is relatively unresponsive to changes in price. In this case, a doubling of the price would lead to a 62 percent decrease in the quantity demanded. Therefore, the correct answer is D, decrease by 62 percent.

Question 14

Assume that when the price of good Z is increased from $5 to $6, the total revenue earned increases from $600 to $690. Based on this information, we can conclude that over this range, demand for Z is:
A) elastic.
B) unit elastic.
C) inelastic.
D) perfectly inelastic.

Accepted Answer

When the price of good Z is increased from $5 to $6, the percentage increase in price is 20%. However, the total revenue increased only by 15%. This suggests that the demand for good Z is inelastic, which means that a change in price has a proportionately smaller effect on the quantity demanded.

Question 15

When calculating the price elasticity of demand, which of the following conditions must be satisfied?
A) All other factors that influence demand must be held constant.
B) Prices of related goods must be held constant but all other factors must be allowed to vary.
C) Prices of related goods must be allowed to vary but all other factors must be held constant.
D) All other factors than influence demand must be allowed to vary.

Accepted Answer

When calculating the price elasticity of demand, all other factors that influence demand must be held constant in order to isolate the effect of price changes on quantity demanded. This allows for a more accurate measurement of the responsiveness of demand to changes in price. Holding prices of related goods constant (option B) or allowing them to vary (option C) would not necessarily affect the calculation of price elasticity of demand, as the focus is on the relationship between price and quantity demanded. Allowing all other factors to vary (option D) would make it difficult to determine the specific impact of price on demand.

Question 16

Assuming we are considering a normal good, the calculated price elasticity of demand is:
A) always positive.
B) always negative.
C) positive if demand is elastic and negative if demand is inelastic.
D) positive if demand is inelastic and negative if demand is elastic.

Accepted Answer

The price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in its price. It is always negative for normal goods because as the price increases, the quantity demanded decreases, and vice versa, reflecting an inverse relationship.

Question 17

Assume the demand for a good is price inelastic, i.e., e_d< 1. This means that if price decreases by 50 percent, quantity demanded will: A) increase by more than 50 percent. B) decrease by more than 50 percent. C) increase by less than 50 percent. D) decrease by less than 50 percent.

Accepted Answer

When demand is price inelastic, the percentage change in quantity demanded is less than the percentage change in price.

Question 18

If electricity demand is inelastic, and electric rates increase, which of the following is likely to occur?
A) Quantity demanded will fall by a relatively large amount.
B) Quantity demanded will fall by a relatively small amount.
C) Quantity demanded will rise in the short run, but fall in the long run.
D) Quantity demanded will fall in the short run, but rise in the long run.

Accepted Answer

If electricity demand is inelastic, it means that consumers are less responsive to changes in price. Therefore, if electric rates increase, quantity demanded will fall by a relatively small amount. This is because consumers still need electricity for their daily activities, and may not have many substitutes or alternatives to switch to.

Question 19

The price elasticity of demand is calculated as:
A) the change in price divided by the change in quantity demanded.
B) the change in quantity demanded divided by the change in 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.

Accepted Answer

The price elasticity of demand measures how much the quantity demanded of a good responds to a change in the price of that good. It is calculated as the percentage change in quantity demanded divided by the percentage change in price, making option D correct.

Question 20

Suppose the demand for meals at a medium-priced restaurant is elastic. If the management of the restaurant is considering raising prices, it can expect a relatively:
A) large decrease in quantity demanded.
B) large decrease in demand.
C) small decrease in quantity demanded.
D) small decrease in demand.

Accepted Answer

Since the demand for meals is elastic, a price increase will lead to a relatively larger decrease in quantity demanded. This is because consumers are sensitive to changes in price and may choose to dine at a cheaper restaurant or cook at home. Therefore, the restaurant can expect a significant decline in its sales if it raises prices.

Quiz 3: Demand Elasticities

Information on the price elasticity of demand is particularly important to managerial decision making because:

When demand is inelastic and price is decreased:

Suppose the demand for meals at a medium-priced restaurant is elastic. If the management of the restaurant is considering raising prices, it can expect the total revenues the restaurant earns to:

At a price of $5, consumers buy 200 units of good X. When the price falls to $4, quantity demanded increases to 250 units. We can conclude that over this range, demand is:

For a particular product, a demand elasticity is a quantitative measure that shows:

If the percentage change in quantity demanded is greater than the percentage change in price, we would say that over this range, demand is:

According to the text, the price elasticity of demand for bath tissue has been estimated to be -2.42. This implies that a 10 percent decrease in the price of bath tissue would cause the quantity demanded of bath tissue to:

An increase in price will result in no change in total revenue if:

If the percentage change in quantity demanded is less than the percentage change in price, we would say that over this range, demand is:

Why is the price elasticity of demand a relative measure? That is, why is elasticity measured in percentage terms rather than in absolute terms?

A decrease in price will result in an increase in total revenue if:

An increase in price will result in an increase in total revenue if demand is:

According to the text, the price elasticity of demand for oranges has been estimated to be -0.62. This implies that a doubling of the price of oranges would cause the quantity demanded of oranges to:

Assume that when the price of good Z is increased from $5 to $6, the total revenue earned increases from $600 to $690. Based on this information, we can conclude that over this range, demand for Z is:

When calculating the price elasticity of demand, which of the following conditions must be satisfied?

Assuming we are considering a normal good, the calculated price elasticity of demand is:

Assume the demand for a good is price inelastic, i.e., ed < 1. This means that if price decreases by 50 percent, quantity demanded will:

If electricity demand is inelastic, and electric rates increase, which of the following is likely to occur?

The price elasticity of demand is calculated as:

Suppose the demand for meals at a medium-priced restaurant is elastic. If the management of the restaurant is considering raising prices, it can expect a relatively:

Assume the demand for a good is price inelastic, i.e., e_d< 1. This means that if price decreases by 50 percent, quantity demanded will: