Question 1

If the cross-elasticity of demand for two goods is positive, this means that the goods are:

Accepted Answer

A positive cross-elasticity of demand means that as the price of one good increases, the demand for the other good also increases. This suggests that the two goods are substitutes for each other, meaning that consumers can easily switch between the two if the price of one becomes too high.

Question 2

If the cross-elasticity of demand for two goods is negative, this means that:

Accepted Answer

A negative cross-elasticity of demand means that the two goods are complements, which implies that the demand for one good increases when the price of the other good decreases.

Question 3

If a good is inferior in an economic sense, income elasticity will:

Accepted Answer

Income elasticity measures the responsiveness of quantity demanded to changes in income. When a good is inferior, as income increases, consumers switch to superior goods, so the quantity demanded of the inferior good decreases. Therefore, the sign of income elasticity is negative.

Question 4

When economists look at the percentage change in quantity demanded generated by a change in income, they are looking at:

Accepted Answer

The percentage change in quantity demanded generated by a change in income is known as income elasticity of demand, which measures the responsiveness of quantity demanded to a change in income. Therefore, the correct answer is B.

Question 5

The Smith family buys much more macaroni when someone in the family is laid off. This means that the Smiths' ____ is negative.

Accepted Answer

Income elasticity measures the percentage change in the quantity demanded of a good in response to a percentage change in income. In this scenario, when someone in the Smith family is laid off, their income decreases and their demand for macaroni increases, indicating a positive income elasticity. Therefore, the opposite holds true, making the Smiths' income elasticity for macaroni negative.

Question 6

If automobiles and gasoline are complements, then their cross-elasticity coefficient will be:

Accepted Answer

When two goods are complements, the cross-elasticity of demand is negative, indicating that an increase in the price of one good leads to a decrease in the demand for the other.

Question 7

The number of cases of Coca-Cola bought increased by 50 percent when the price of pretzels declined by 10 percent. Assuming other factors are held constant, Coca-Cola and pretzels are classified as:

Accepted Answer

Coca-Cola and pretzels are complementary goods. The increase in the quantity demanded of Coca-Cola shows that it is typically consumed together with pretzels. The inverse relationship between the price of pretzels and the quantity demanded of Coca-Cola confirms that both goods are complements.

Question 8

The number of satellite dishes increased by 50 percent when the average monthly price of cable TV increased by 10 percent. Assuming that other factors are held constant, satellite dishes and cable TV are classified as:

Accepted Answer

Satellite dishes and cable TV are substitutes, as people chose to switch from cable TV to satellite dishes when the price of cable TV increased.

Question 9

If a 1 percent decrease in the price of product A brings about a 3 percent increase in the sales of product B, then:

Accepted Answer

The answer of If a 1 percent decrease in the...

Question 10

If a 1 percent change in income generates a greater than 1 percent change in quantity demanded of boating expenditures, then boating is an:

Accepted Answer

Boating is considered an income elastic good because a 1 percent change in income produces a greater than 1 percent change in quantity demanded of boating expenditures. This indicates that boating is a luxury item that is more sensitive to changes in income, and consumers are more likely to increase their spending on boating as their income increases.

Question 11

The cross elasticity of demand for substitute products must:

Accepted Answer

The cross elasticity of demand for substitute products measures the responsiveness of demand for one product in relation to a change in the price of another product. When the price of a substitute product increases, the demand for the original product will also increase (and vice versa). Therefore, the cross elasticity of demand for substitute products must exceed zero.

Question 12

The cross elasticity of demand for complementary products must:

Accepted Answer

The cross elasticity of demand for complementary products is negative, meaning that as the price of one product (e.g. hot dogs) increases, the demand for the other product (e.g. hot dog buns) will decrease. Therefore, the answer is E, which is the only choice that indicates a negative cross elasticity.

Question 13

Suppose the value of income elasticity of demand for a private college education is equal to 1.5. This means that:

Accepted Answer

The answer of Suppose the value of income elasticity of...

Question 14

To determine whether two goods are substitutes or complements, an economist would estimate the:

Accepted Answer

The cross-elasticity of demand measures the responsiveness of the quantity demanded of one good to changes in the price of another good. If the two goods are substitutes, an increase in the price of one will increase the demand for the other, resulting in a positive cross-elasticity. If the two goods are complements, an increase in the price of one will decrease the demand for the other, resulting in a negative cross-elasticity. Therefore, estimating the cross-elasticity of demand can help determine whether two goods are substitutes or complements.

Question 15

The number of computers bought increased by 20 percent when the price of on-line services declined by 10 percent. Assuming other factors are held constant, computers and on-line services are classified as:

Accepted Answer

When the price of on-line services decreased, the demand for computers increased, indicating that the two goods are complements. Complements are goods that are consumed together, where the price change of one good affects the demand for the other in the opposite direction. In this case, on-line services and computers are consumed together, and a decrease in the price of on-line services caused an increase in the demand for computers.

Question 16

If a 10 percent decrease in the price of product A brings about a 3 percent increase in the sales of product B, then:

Accepted Answer

The answer of If a 10 percent decrease in the...

Question 17

If a consumer's purchases of a product increases as income increases, this good is classified as a(n):

Accepted Answer

When a consumer's purchases of a product increase as income increases, it is classified as a normal good. This means that as a consumer's budget increases, they are able to buy more of the good, as they have more money to spend.

Question 18

If the income elasticity of demand for a good is .59, then it is what type of good?

Accepted Answer

Income elasticity of demand of 0.59 indicates that the good is income inelastic, meaning demand changes less than proportionately with income changes.

Question 19

If we measure the income elasticity of a good as −1.8, this means this good is a(n):

Accepted Answer

A negative income elasticity means that as income increases, demand decreases. This is characteristic of an inferior good.

Question 20

Two goods are complementary if:

Accepted Answer

Two goods are complementary if they are used together. For example, peanut butter and jelly or cars and gasoline. When the price of one good increases, the demand for the other good decreases because they are typically used together. This is shown by a negative cross elasticity of demand.

Quiz 5: Price Elasticity of Demand and Supply