Question 1

It is Valentine's Day and Jason is desperately looking all over town for a dozen roses to give to Judy. Most likely, Jason's price elasticity of demand is:
A) infinitely large.
B) negative.
C) equal to one.
D) greater than one.
E) less than one.

Accepted Answer

The fact that Jason is desperately looking for roses indicates that he has a strong desire or need for them, which suggests that his demand for roses is relatively inelastic. Additionally, since he is specifically looking for a dozen roses, it is likely that he has a specific quantity in mind that he wants to purchase, further supporting the idea of inelastic demand. Therefore, his price elasticity of demand is likely less than one.

Question 2

If demand is price elastic, then when price decreases, total revenue:
A) decreases.
B) increases.
C) does not change.
D) is less than one.
E) is negative.

Accepted Answer

When demand is price elastic, a decrease in price will lead to a proportionately larger increase in quantity demanded, resulting in an overall increase in total revenue. This is because the increase in quantity demanded outweighs the decrease in price, resulting in a net gain in revenue.

Question 3

Avital and Joshua each have their own business selling lemonade in front of their houses. When they each charge 25 cents per glass, their total revenues are equal. However, when they each charge 40 cents per glass, Avital's revenues are bigger than Joshua's revenues. This is because:
A) Joshua faces a more inelastic demand curve.
B) Avital faces a more elastic demand curve.
C) Joshua faces a more elastic demand curve.
D) Avital faces a less inelastic demand curve.
E) there is a market failure.

Accepted Answer

When the price increases from 25 cents to 40 cents, Avital's revenues increase more than Joshua's, indicating that Joshua's demand is more elastic. This means that Joshua's customers are more sensitive to price changes, leading to a larger decrease in quantity demanded when the price increases.

Question 4

Exhibit 5-2 Price and quantity demanded data $$\begin{array} { | c | c | } 
\hline \text { Price } & \text { Quantity Demanded } \
\hline 5 & 20 \
4 & 25 \
3 & 30 \
2 & 35 \
1 & 40 \
\hline
\end{array}$$
-The data in Exhibit 5-2 shows that price elasticity of demand is:
A) increasing as the price decreases.
B) decreasing as the price increases.
C) increasing as the quantity increases.
D) decreasing as the quantity decreases.
E) decreasing as the quantity increases.

Accepted Answer

As the quantity demanded increases, the price elasticity of demand decreases, indicating that demand becomes less responsive to price changes.

Question 5

If a supplier faces a perfectly horizontal demand curve and sets his price slightly higher than the demand curve itself, he can expect:
A) no change in his total revenues.
B) everyone to begin buying his product.
C) a complete loss of revenues.
D) a new demand curve.
E) a relative increase in income.

Accepted Answer

A perfectly horizontal demand curve indicates perfectly elastic demand, meaning consumers will not buy the product at any price higher than the market price. Thus, setting a price even slightly higher results in a complete loss of sales and revenues.

Question 6

If demand for a good is price elastic, then the price elasticity will be:
A) equal to one.
B) equal to zero.
C) greater than one.
D) less than one.
E) less than zero.

Accepted Answer

If demand for a good is price elastic, it means that a small change in price leads to a relatively larger change in quantity demanded. This is reflected in the formula for price elasticity of demand, which is the percentage change in quantity demanded divided by the percentage change in price. If this ratio is greater than one, it indicates that demand is price elastic. Therefore, the answer is C, greater than one.

Question 7

On a part of the demand curve where the price elasticity of demand is less than 1, a decrease in price:
A) is impossible.
B) will increase total revenue.
C) will decrease total revenue.
D) raises the price elasticity of demand.
E) decreases quantity demanded.

Accepted Answer

When the price elasticity of demand is less than 1, it means that the percentage change in quantity demanded is less than the percentage change in price. In other words, a decrease in price will lead to a proportionally smaller increase in quantity demanded. Therefore, the decrease in revenue due to the lower price will not be offset by the increase in revenue due to the higher quantity demanded, resulting in a decrease in total revenue.

Question 8

Which statement about price elasticity of demand along a linear demand curve is true?
A) As the quantity demanded increases, so does the buyer's sensitivity to price.
B) When price elasticity of demand is equal to 1, consumers are indifferent to subtle price changes.
C) The ratio of current price to quantity demanded is a good estimate of the elasticity of demand.
D) As the prices of goods increase, the elasticity of demand increases.
E) When an individual buys 4 units of a good his/her elasticity of demand for each unit increases.

Accepted Answer

As prices increase along a linear demand curve, the elasticity of demand increases because the percentage change in quantity demanded becomes smaller relative to the percentage change in price.

Question 9

Sally is an average shopper, with average income. When she is in the store she buys a few items which cost more than $20, several items which cost between $5 and $20, and many items which cost less than $1. The price elasticity of Sally's demand for these goods most likely ____.
A) increases as the price decreases
B) decreases as the price decreases
C) increases as the price increases
D) decreases as the price increases
E) remains constant over all price ranges

Accepted Answer

Price elasticity of demand tends to increase as the price increases because consumers are more sensitive to price changes for more expensive items.

Question 10

A health club sells 50 memberships when the monthly price is $60 and 70 memberships when the monthly price is $40. The price elasticity of demand for memberships at this health club is (using the average values method):
A) 0.25.
B) 0.6.
C) 1.0.
D) 1.1.
E) 0.83

Accepted Answer

The price elasticity of demand is calculated using the formula: [(Q2 - Q1) / ((Q2 + Q1) / 2)] / [(P2 - P1) / ((P2 + P1) / 2)]. Substituting the given values: [(70 - 50) / (70 + 50) / 2] / [(40 - 60) / (40 + 60) / 2] = 20/60 / -20/50 = 0.33 / -0.4 = -0.83. The absolute value is 0.83.

Question 11

One of the reasons that price elasticities of demand are always stated as positive numbers is because:
A) the numerators and denominators of the formula are both negative.
B) the numerators and denominators of the formula are both positive.
C) price increases always lead to increases in quantity demanded.
D) price decreases always lead to decreases in quantity demanded.
E) price elasticities are always negative, so we ignore the sign.

Accepted Answer

Price elasticities of demand are typically negative due to the inverse relationship between price and quantity demanded, but they are expressed as positive numbers by taking the absolute value to simplify interpretation.

Question 12

Exhibit 5-2 Price and quantity demanded data $$\begin{array} { | c | c | } 
\hline \text { Price } & \text { Quantity Demanded } \
\hline 5 & 20 \
4 & 25 \
3 & 30 \
2 & 35 \
1 & 40 \
\hline
\end{array}$$
-Using Exhibit 5-2, what is the price elasticity of demand when the price falls from five dollars to four?
A) 1.
B) 1.25.
C) 0.8.
D) 2.0.
E) 0.4.

Accepted Answer

The answer of Exhibit 5-2 Price and quantity demanded data...

Question 13

The short-run price elasticity of demand for airline travel is .05, while the long-run elasticity is 2.36. This means that a significant increase in airline ticket prices will cause airline companies to:
A) collect less revenue from short-notice travelers.
B) collect more revenue from travelers who book well in advance.
C) lose money on short-notice travelers.
D) collect less revenue from travelers who book well in advance.
E) lose many of its short-notice travelers.

Accepted Answer

The short-run price elasticity of demand for airline travel is low at .05, meaning that a significant increase in airline ticket prices will not cause a large decrease in demand. However, in the long-run, the elasticity increases to 2.36, indicating that consumers have more options and can switch to alternative modes of transportation or adjust their travel plans to avoid high prices. Therefore, airline companies will collect less revenue from travelers who book well in advance, as they are more price-sensitive and have more alternative travel options available to them.

Question 14

Larissa is a famous attorney with a great reputation in court. She charges her clients $300 for each hour she spends working on their cases. If she earned $450,000 in hourly wages last year, and by raising her rates to $350 per hour her income increased to $490,000 what can we say about the elasticity of demand for Larissa's legal services?
A) It is approximately equal to 2.3.
B) It is approximately equal to 1.6.
C) It is approximately equal to 1.0.
D) It is approximately equal to 0.45.
E) It is approximately equal to 0.1.

Accepted Answer

The elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. Larissa increased her rate from $300 to $350, a 16.67% increase. Her income increased from $450,000 to $490,000, an 8.89% increase. The elasticity is approximately 0.45, indicating inelastic demand.

Question 15

Looking at the relationship between elasticity and total revenue, we can see that ____.
A) b and c
B) when demand is unit elastic, small price changes don't change total revenue
C) when a good is price inelastic, revenue increases when prices increase
D) when a good is price elastic, revenue increases when prices increase
E) total revenue is maximized when the elasticity has stopped changing

Accepted Answer

When demand is unit elastic, total revenue remains unchanged with small price changes. For price inelastic goods, revenue increases with price increases.

Question 16

An economist estimates that .67 is the price elasticity of demand for disposable diapers. This suggests that disposable diaper producers could:
A) advertise more to raise the price elasticity of demand.
B) encourage more parents to use cloth diapers.
C) lower the price of disposable diapers to raise more revenue.
D) raise the price of disposable diapers to raise more revenue.
E) maximize revenues by staying at the current price.

Accepted Answer

Since the price elasticity of demand is less than 1 (inelastic), raising the price will increase total revenue because the percentage decrease in quantity demanded will be less than the percentage increase in price.

Question 17

When a 2 percent increase in price generates a greater than 2 percent decrease in quantity demanded, then:
A) demand is price inelastic.
B) total revenue increases.
C) demand is positively sloped.
D) demand is unit elastic.
E) total revenue decreases.

Accepted Answer

This scenario describes a situation where demand is price elastic, meaning consumers are very sensitive to changes in price. As a result, when the price increases by 2%, there is a greater than 2% decrease in quantity demanded. This leads to a decrease in total revenue, as the increase in price is not enough to offset the decrease in quantity demanded.

Question 18

Within different price ranges along a linear demand curve, elasticities are:
A) constant.
B) different.
C) equal.
D) the same as slope.
E) negative 1.

Accepted Answer

Along a linear demand curve, elasticities are different within different price ranges. This is because elasticity is dependent on the price range and the slope of the curve. As the price increases or decreases from a certain point, the elasticity changes. Therefore, the elasticities are not constant or equal along the curve, but vary within different price ranges.

Question 19

Dana is an art historian who needs to travel to Italy to do research. Art historians usually don't have a lot of money, and therefore are very sensitive to price changes. Dana's funding agency pays her a fixed amount to travel. At current exchange rates, Dana can stay in Italy for 35 days. If the exchange rate improves by 10 percent, she can stay for 40 days. What is Dana's price elasticity of demand for days spent in Italy?
A) It is approximately equal to 2.3.
B) It is approximately equal to 1.6.
C) It is approximately equal to 1.4.
D) It is approximately equal to 0.4.
E) It is approximately equal to 0.1.

Accepted Answer

We can use the formula for price elasticity of demand:
% change in quantity demanded / % change in price

First, we need to calculate the percentage change in price:
(1 + 10%) = 1.1, which means the exchange rate has improved by 10%. So the percentage change in price is:
(1/1.1) - 1 = -0.0909 or -9.09%

Next, we need to calculate the percentage change in quantity demanded:
(40-35)/35 = 0.1429 or 14.29%

Now we can calculate the price elasticity of demand:
% change in quantity demanded / % change in price 
= 14.29% / -9.09%
= -1.5714

Since the result is negative, we take the absolute value to get the magnitude of the elasticity:
| -1.5714 | = 1.5714

Therefore, Dana's price elasticity of demand for days spent in Italy is approximately equal to 1.4.

Question 20

A public transit company finds that when it reduces the price of a bus ticket, total revenues remain the same. One can conclude from this that:
A) the demand curve is horizontal, reflecting infinite price elasticity.
B) the company sells the same number of bus tickets both before and after the price change.
C) the demand curve for bus tickets must have shifted to the right.
D) the firm is operating in a range of the demand curve that is unit elastic.
E) the price should be lowered further so that a larger quantity can be sold.

Accepted Answer

When total revenue remains the same after a price change, it indicates that the demand is unit elastic, meaning the percentage change in quantity demanded is equal to the percentage change in price.

Quiz 5: Price Elasticity of Demand and Supply

It is Valentine's Day and Jason is desperately looking all over town for a dozen roses to give to Judy. Most likely, Jason's price elasticity of demand is:

If demand is price elastic, then when price decreases, total revenue:

Avital and Joshua each have their own business selling lemonade in front of their houses. When they each charge 25 cents per glass, their total revenues are equal. However, when they each charge 40 cents per glass, Avital's revenues are bigger than Joshua's revenues. This is because:

Exhibit 5-2 Price and quantity demanded data $\begin{array} { | c | c | } \hline \text { Price } & \text { Quantity Demanded } \\\hline 5 & 20 \\4 & 25 \\3 & 30 \\2 & 35 \\1 & 40 \\\hline\end{array}$ -The data in Exhibit 5-2 shows that price elasticity of demand is:

If a supplier faces a perfectly horizontal demand curve and sets his price slightly higher than the demand curve itself, he can expect:

If demand for a good is price elastic, then the price elasticity will be:

On a part of the demand curve where the price elasticity of demand is less than 1, a decrease in price:

Which statement about price elasticity of demand along a linear demand curve is true?

Sally is an average shopper, with average income. When she is in the store she buys a few items which cost more than $20, several items which cost between $5 and $20, and many items which cost less than $1. The price elasticity of Sally's demand for these goods most likely ____.

A health club sells 50 memberships when the monthly price is $60 and 70 memberships when the monthly price is $40. The price elasticity of demand for memberships at this health club is (using the average values method) :

One of the reasons that price elasticities of demand are always stated as positive numbers is because:

The short-run price elasticity of demand for airline travel is .05, while the long-run elasticity is 2.36. This means that a significant increase in airline ticket prices will cause airline companies to:

Looking at the relationship between elasticity and total revenue, we can see that ____.

An economist estimates that .67 is the price elasticity of demand for disposable diapers. This suggests that disposable diaper producers could:

When a 2 percent increase in price generates a greater than 2 percent decrease in quantity demanded, then:

Within different price ranges along a linear demand curve, elasticities are:

A public transit company finds that when it reduces the price of a bus ticket, total revenues remain the same. One can conclude from this that: