Question 1

To avoid an increase in the local property tax, Sullivan County, New York, proposed a 2 percent hotel tax, which presumably would be passed on to tourists.The hotel industry argued that the tax would hurt hotel business.They are really arguing that
A) tourist and convention demand is inelastic, so hotel bookings will decline.
B) tourist and convention demand is very elastic, so hotel bookings will decline.
C) they would prefer a property tax increase instead.
D) it is unfair to tax people who do not live in the area.

Accepted Answer

The hotel industry's argument suggests that they believe tourist and convention demand is very elastic, meaning that a small increase in prices (such as a 2 percent tax) would cause a significant decrease in hotel bookings. This would hurt hotel business, as fewer bookings would mean less revenue.

Question 2

Julia knows the price elasticity of movie rentals is 3.She knows, therefore, that if she raises her price from $2 to $2.50, her rentals will drop by approximately
A) 150 percent.
B) 100 percent.
C) 75 percent.
D) 33 percent.

Accepted Answer

The formula for price elasticity of demand is % change in quantity demanded / % change in price. Using this formula and the given price elasticity of 3, we can estimate the percentage change in quantity demanded if the price increases from $2 to $2.50.

% change in quantity demanded / % change in price = 3
% change in quantity demanded / (0.50 / 2) = 3
% change in quantity demanded = 3 * (0.50 / 2) = 75%

Therefore, if Julia raises her price from $2 to $2.50, we can expect her rentals to drop by approximately 75%. The answer is C.

Question 3

If the marginal cost of producing vanity license plates is virtually zero (by prison inmates with little else to do), then states would maximize their profits on plate sales at the point on a linear demand curve where
A) demand is inelastic.
B) demand is elastic.
C) demand is unit elastic.
D) the demand curve crosses the horizontal axis.

Accepted Answer

Since the marginal cost of producing vanity license plates is virtually zero, the state can keep producing plates as long as there is any demand. Therefore, the state will maximize its profits at the point where demand is unit elastic. At this point, the state can charge a price that will generate the maximum revenue without fearing any decrease in demand.

Question 4

Tele-Com, Inc., the nation's largest cable TV company, tested the effect of a price reduction for the Disney Channel.It lowered prices from $10.75 to $7.95 and found that the number of customers more than doubled.This means the
A) demand curve for the Disney Channel shifted to the right.
B) supply curve of the Disney Channel shifted to the left.
C) demand for the Disney Channel is elastic in this price range.
D) demand for the Disney Channel is inelastic in this price range.

Accepted Answer

The significant increase in the number of customers in response to a price reduction indicates that the demand for the Disney Channel is elastic in this price range, meaning consumers are highly responsive to price changes.

Question 5

John's Bait Shop was surprised to learn that when it raised prices by 10 percent, total revenue was unaffected.This is because the elasticity for bait is
A) unit elastic.
B) inelastic.
C) elastic.
D) Not enough information is given.

Accepted Answer

If total revenue is unaffected by a 10% price increase, it means that the percentage change in quantity demanded is equal to the percentage change in price (i.e. elasticity is 1). This is known as unit elasticity.

Question 6

Figure 6-8
 
-Libya sold more crude oil in 1985 than it sold five years earlier, but revenues were 17 percent less.Which graph in Figure 6-8 is consistent with this set of facts?
A) 1
B) 2
C) 3
D) 4

Accepted Answer

Graph 3 shows an increase in the quantity of oil sold (from 200 million to 225 million barrels) but a decrease in revenue (from $10 billion to $8.3 billion), which matches the given facts. The other graphs either show an increase in both quantity and revenue, or a decrease in both quantity and revenue, which is not consistent with the given information.

Question 7

When the price of penicillin tablets increases by $5 per dozen, the drug company's revenue increases by $6 million.Its elasticity of demand (in absolute terms) must be
A) zero.
B) greater than one.
C) less than one.
D) infinitely large.

Accepted Answer

Since the drug company's revenue increases as the price of penicillin tablets increases, demand is not very sensitive to price changes (i.e. relatively inelastic). Hence, the absolute value of elasticity of demand is less than one.

Question 8

The demand for Exxon gasoline is ____ the demand for all gasoline.
A) exactly as elastic as, and of a different slope from
B) more elastic than
C) less elastic than
D) exactly as elastic and of a different slope from

Accepted Answer

Exxon gasoline is a specific brand of gasoline, therefore it has close substitutes in terms of other brands of gasoline. Therefore, the demand for Exxon gasoline is more elastic than the demand for all gasoline, which includes different brands and has a more inelastic demand.

Question 9

Would a profit-maximizing firm sell where demand is inelastic?
A) No, this would not follow the rule of MC = MR.
B) No, the firm could not profitably raise price.
C) Yes, the firm could profitably lower price to attract sales.
D) Yes, in this case there are few substitutes for the good.

Accepted Answer

The answer of Would a profit-maximizing firm sell where demand...

Question 10

If demand is unit elastic, revenue
A) and price rise and fall together.
B) rises as price falls.
C) falls as price rises.
D) remains constant as price rises or falls.

Accepted Answer

When demand is unit elastic, a change in price will result in a proportional change in quantity demanded, meaning that the percentage change in revenue will be the same as the percentage change in price. This results in a constant revenue as price rises and falls.

Question 11

If, as price increases by 10 percent, total revenue decreases by 10 percent demand is
A) elastic.
B) unit elastic.
C) inelastic.
D) perfectly inelastic.

Accepted Answer

The answer of If, as price increases by 10 percent,...

Question 12

The local symphony recently raised its price for tickets to their summer concerts in the park.At the end of the summer season, the symphony was surprised to see that total revenue had actually decreased.The reason was that the elasticity of demand for tickets was
A) unit elastic.
B) inelastic.
C) elastic.
D) Not enough information is given.

Accepted Answer

The decrease in revenue despite the increase in price suggests that the demand for tickets was responsive to the change in price, i.e. elastic demand.

Question 13

Suppose that the supply of insulin is perfectly elastic and the demand for insulin perfectly inelastic.Then the result of an excise tax would be
A) a significant increase in government revenue and a significant decrease in the quantity consumed.
B) a significant decrease in the quantity consumed with no change in government revenue.
C) a significant increase in government revenue and no change in the quantity consumed.
D) no increase in government revenue and no change in the quantity consumed.

Accepted Answer

Since the supply of insulin is perfectly elastic and the demand for insulin is perfectly inelastic, the burden of the excise tax falls entirely on the consumers, who have no choice but to continue purchasing insulin at the same quantity. Therefore, the government would be able to collect a significant amount of revenue from the tax without causing a significant decrease in the quantity consumed, resulting in a significant increase in government revenue and no change in the quantity consumed.

Question 14

A recent study on enrollment at a liberal arts college concluded that demand elasticity is 0.91.The administration is considering a tuition increase to help balance the budget.The revenue-maximizing decision is to
A) decrease tuition, which should boost enrollment enough to balance the budget.
B) decrease tuition, which would bring in more revenue.
C) leave tuition as is-an increase would not help balance the budget.
D) increase tuition, which would bring in more revenue.

Accepted Answer

The demand elasticity of 0.91 suggests that a tuition increase would result in a decrease in enrollment, but the revenue gained from the increased tuition would outweigh the loss in enrollment. Therefore, the revenue-maximizing decision would be to increase tuition.

Question 15

Figure 6-7
 
-In Figure 6-7, which total expenditure curve belongs to a demand curve that is unit elastic throughout?
A) 1
B) 2
C) 3
D) 4

Accepted Answer

A demand curve is said to be unit elastic when the quantity demanded changes by the same percentage as the price. The total expenditure curve for a unit elastic demand curve is a straight line passing through the origin. In Figure 6-7, curve 3 is the only one that passes through the origin, indicating a unit elastic demand curve. Therefore, choice C is the best answer.

Question 16

The demand for French Roast coffee is likely to be
A) elastic.
B) inelastic.
C) unit elastic.
D) perfectly inelastic.

Accepted Answer

French Roast coffee, being a specific type of coffee among many others, means consumers can easily switch to other types if the price of French Roast increases, indicating its demand is elastic.

Question 17

The demand for potatoes at current prices is likely to be
A) elastic.
B) inelastic.
C) unit elastic.
D) perfectly elastic.

Accepted Answer

The demand for potatoes is likely to be inelastic because potatoes are a staple food and have few substitutes. Consumers are likely to continue buying potatoes even if the price increases, because they need them to meet their basic needs for nutrition. Therefore, the percentage change in quantity demanded is likely to be less than the percentage change in price, making demand inelastic.

Question 18

Big Alice Ice Cream Parlor reduced its price of an ice cream cone from $1 to 90 cents.Sales consequently increased from 1,000 cones per week to 1,050.The approximate price elasticity is
A) 0.20.
B) 0.46.
C) 2.16.
D) 5.00.

Accepted Answer

% Change in Quantity Demanded = ((New Quantity Demanded-Old Quantity Demanded) / Old Quantity Demanded) x 100%
% Change in Price = ((New Price-Old Price) / Old Price) x 100%

% Change in Quantity Demanded = ((1,050-1,000) / 1,000) x 100% = 5%
% Change in Price = ((0.90-1) / 1) x 100% = -10%

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price = 5% / -10% = -0.5

Since the price elasticity of demand is negative, we take the absolute value of it to get 0.5. Therefore, the approximate price elasticity is 0.5 or 0.46 (rounded to two decimal places). The best choice is B.

Question 19

When Scuba, Inc., lowered the price of a tank of compressed air by 20 percent, it sold 10 percent more tankfuls.The price elasticity for compressed air is
A) 2.
B) 1/2.
C) 1.
D) 20.

Accepted Answer

The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. Here, the percentage change in quantity demanded is +10%, and the percentage change in price is -20%. Thus, the price elasticity of demand is 10% / 20% = 1/2 or 0.5.

Question 20

The price elasticity of demand for widgets at any particular price is determined by
A) whether widgets are luxuries or necessities.
B) how much of their budgets consumers spend on widgets.
C) whether there are any good substitutes for widgets.
D) All of the above are correct.

Accepted Answer

The price elasticity of demand for widgets is influenced by all three factors mentioned in the options. If widgets are luxuries, consumers may be less sensitive to changes in price, making demand less elastic. However, if widgets are necessities, consumers may have few alternatives, making demand more inelastic. The more of their budgets consumers spend on widgets, the more sensitive they are likely to be to changes in price, making demand more elastic. Finally, the presence of good substitutes for widgets can make demand more elastic, as consumers can easily switch to alternative products if the price of widgets increases. Therefore, all three factors are important in determining the price elasticity of demand for widgets.

Quiz 6: Demand and Elasticity

To avoid an increase in the local property tax, Sullivan County, New York, proposed a 2 percent hotel tax, which presumably would be passed on to tourists.The hotel industry argued that the tax would hurt hotel business.They are really arguing that

Julia knows the price elasticity of movie rentals is 3.She knows, therefore, that if she raises her price from $2 to $2.50, her rentals will drop by approximately

If the marginal cost of producing vanity license plates is virtually zero (by prison inmates with little else to do) , then states would maximize their profits on plate sales at the point on a linear demand curve where

Tele-Com, Inc., the nation's largest cable TV company, tested the effect of a price reduction for the Disney Channel.It lowered prices from $10.75 to $7.95 and found that the number of customers more than doubled.This means the

John's Bait Shop was surprised to learn that when it raised prices by 10 percent, total revenue was unaffected.This is because the elasticity for bait is

Figure 6-8 -Libya sold more crude oil in 1985 than it sold five years earlier, but revenues were 17 percent less.Which graph in Figure 6-8 is consistent with this set of facts?

When the price of penicillin tablets increases by $5 per dozen, the drug company's revenue increases by $6 million.Its elasticity of demand (in absolute terms) must be

The demand for Exxon gasoline is ____ the demand for all gasoline.

Would a profit-maximizing firm sell where demand is inelastic?

If demand is unit elastic, revenue

If, as price increases by 10 percent, total revenue decreases by 10 percent demand is

The local symphony recently raised its price for tickets to their summer concerts in the park.At the end of the summer season, the symphony was surprised to see that total revenue had actually decreased.The reason was that the elasticity of demand for tickets was

Suppose that the supply of insulin is perfectly elastic and the demand for insulin perfectly inelastic.Then the result of an excise tax would be

A recent study on enrollment at a liberal arts college concluded that demand elasticity is 0.91.The administration is considering a tuition increase to help balance the budget.The revenue-maximizing decision is to

Figure 6-7 -In Figure 6-7, which total expenditure curve belongs to a demand curve that is unit elastic throughout?

The demand for French Roast coffee is likely to be

The demand for potatoes at current prices is likely to be

Big Alice Ice Cream Parlor reduced its price of an ice cream cone from $1 to 90 cents.Sales consequently increased from 1,000 cones per week to 1,050.The approximate price elasticity is

When Scuba, Inc., lowered the price of a tank of compressed air by 20 percent, it sold 10 percent more tankfuls.The price elasticity for compressed air is

The price elasticity of demand for widgets at any particular price is determined by