Question 1

Apple, the consumer electronics giant, on Tuesday rolled out new versions of its popular iPhone. The CEO decided to decrease the price of iPhones in an attempt to increase total revenue from iPhone sales. One of his employees, Jess, disagrees and suggests that an iPhone price increase will increase total revenue. Who is CORRECT?

Accepted Answer

If demand is price elastic, a decrease in price will lead to a proportionally larger increase in quantity demanded, thus increasing total revenue.

Question 2

In Brazil, the income elasticity of demand for dairy is 0.7 and for fruit and vegetables it is 0.5. These elasticities mean that if the income of Brazilians decreases, they will purchase ________ dairy and ________ fruits and vegetables.

Accepted Answer

Income elasticity of demand measures how the quantity demanded of a good responds to a change in income. Positive elasticities (like 0.7 and 0.5) indicate that both dairy and fruits and vegetables are normal goods, meaning that a decrease in income will lead to a decrease in the quantity demanded for both goods.

Question 3

"The price elasticity of demand is a measure of how sensitive demanders are to changes in the price of a product." Is this statement true or false?

Accepted Answer

The answer of "The price elasticity of demand is a...

Question 4

"The Department of Agriculture came out today with its prediction for food price next year-4 to 5 percent increases on top of this year's already steep gains… Eggs, dairy products and cereals are up 10 percent... But the USDA says another big part of the American diet has seen only moderate price increases. Beef, poultry and pork will be up only 3 percent this year." Suppose the price elasticity of demand for beef is elastic. Consumption would then

Accepted Answer

If the price elasticity of demand for beef is elastic, a 3 percent increase in price would lead to a greater than 3 percent decrease in quantity demanded.

Question 5

Of the following items, which has the most inelastic demand?

Accepted Answer

Food has the most inelastic demand because it is a necessity and has fewer substitutes compared to more specific categories like fruit, apples, or Gala apples.

Question 6

Redbox rents DVDs for $1 per day via self-service kiosks located across the United States. The CFO of Redbox wants to identify how responsive consumers are to an increase or decrease in the daily price of a rental. The economic concept the CFO wants to understand is

Accepted Answer

The CFO is interested in understanding how changes in price affect the quantity demanded, which is measured by the price elasticity of demand.

Question 7

Netflix is the largest online streaming service. Currently, there are approximately 110 million subscribers. Suppose Netflix decreases its price by 10 percent and an additional 1 million people subscribe. This information means that Netflix's demand is

Accepted Answer

The demand is inelastic because the percentage change in quantity demanded (approximately 0.91%) is less than the percentage change in price (10%).

Question 8

Most college courses have a required textbook. Previously, textbooks were only available through the campus bookstore, but now, these texts can be purchased from online retailers, other bookstores, or students can buy an electronic version of the text. Because of this, we can predict the price elasticity of demand for textbooks from the campus bookstore is

Accepted Answer

The availability of textbooks from multiple sources increases competition, making the demand for textbooks from the campus bookstore more elastic.

Question 9

The price elasticity of demand for movies is approximately 1 and 500,000 tickets are sold per day. If the average price of a movie ticket increases by 20 percent, the number of tickets sold each day decreases to

Accepted Answer

Price elasticity of demand of 1 indicates unitary elasticity, meaning a 20% increase in price will lead to a 20% decrease in quantity demanded. Therefore, 20% of 500,000 is 100,000, so the new quantity is 500,000 - 100,000 = 400,000 tickets.

Question 10

"The Department of Agriculture came out today with its prediction for food price next year-4 to 5 percent increases on top of this year's already steep gains… Eggs, dairy products and cereals are up 10 percent... But the USDA says another big part of the American diet has seen only moderate price increases. Beef, poultry and pork will be up only 3 percent this year." If Raul's demand for dairy products is unit elastic, his expenditure on dairy will

Accepted Answer

If Raul's demand for dairy products is unit elastic, a 10% increase in price will lead to a 10% decrease in quantity demanded. Therefore, his expenditure on dairy will not change.

Question 11

"The Department of Agriculture came out today with its prediction for food price next year-4 to 5 percent increases on top of this year's already steep gains… Eggs, dairy products and cereals are up 10 percent... But the USDA says another big part of the American diet has seen only moderate price increases. Beef, poultry and pork will be up only 3 percent this year." Suppose a cattle producer increased the quantity of beef he supplies by 2 percent when the price of beef increased by 3 percent. His elasticity of supply is

Accepted Answer

The elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price. Here, the elasticity is 2% / 3% = 0.67, which is less than 1, indicating inelastic supply.

Question 12

Propecia was developed to treat mild to moderate male pattern hair loss in men. Marco has hair loss and he is willing to pay any amount of money to be able to buy this drug each month. Marco's price elasticity of demand is

Accepted Answer

Marco's willingness to pay any amount for Propecia indicates that his quantity demanded does not change with price, which is characteristic of perfectly inelastic demand.

Question 13

Apple, the consumer electronics giant, on Tuesday rolled out new versions of its popular iPad tablet. Suppose when the price of an iPad decreases by 20 percent, the number of songs downloaded on iTunes increases by 30 percent. Based on this information iTunes are

Accepted Answer

When the price of iPads decreases and the number of songs downloaded on iTunes increases, it suggests that iPads and iTunes are complements. This is because the decrease in price of one leads to an increase in demand for the other.

Question 14

Grape juice prices increased by 20 percent in 2007. Suppose in response grape growers did not increase or decrease their grape production. The elasticity of supply is best described as

Accepted Answer

The elasticity of supply is perfectly inelastic when the quantity supplied does not change in response to a change in price. Since grape growers did not change their production despite the price increase, the supply is perfectly inelastic.

Question 15

California is the sole producer of almonds in the United States. Suppose the price for a pound of almonds has increased during the past year. It is also predicted that almond prices will remain high. Over time, we predict that the

Accepted Answer

Over time, producers can adjust their production processes, invest in new technology, or plant more almond trees, which increases the elasticity of supply.

Question 16

Redbox rents DVDs for $1 per day via self-service kiosks located across the United States. In 2007, each kiosk averaged about 50 rentals per day. Suppose Redbox increases their daily price to $1.50. What is the price elasticity of demand if rentals decrease by 20 per day?

Accepted Answer

The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. The quantity decreases from 50 to 30, a 40% decrease. The price increases from $1 to $1.50, a 50% increase. Elasticity = 40% / 50% = 0.8.

Question 17

Netflix is the largest online streaming service. Currently, there are approximately 110 million subscribers. Suppose Netflix increases its price by 10 percent and observes that its total revenue increases. Based on this information, the

Accepted Answer

When total revenue increases after a price increase, it indicates that the demand is inelastic, meaning consumers are not highly sensitive to price changes.

Question 18

What is the price elasticity of demand and how is it measured?

Accepted Answer

The answer of What is the price elasticity of demand...

Question 19

Apple, the consumer electronics giant, on Tuesday rolled out new versions of its popular iPod music player. CEO Steve Jobs also unveiled cheaper models of its Touch music player, a touchscreen-only device. An 8-gigabyte version now costs $230, down from $300. A 32-gigabyte model costs $400, down from $500. Calculate the price elasticity of demand for a 32 gigabyte Touch player if the quantity demanded increases from 850,000 to 950,000 the month after the price decrease.

Accepted Answer

The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. In this case, the quantity demanded increased from 850,000 to 950,000, a 11.76% increase. The price decreased from $500 to $400, a 20% decrease. Therefore, the price elasticity of demand is 11.76% / 20% = 0.59, which is closest to choice A, 0.5.

Question 20

"The Department of Agriculture came out today with its prediction for food price next year-4 to 5 percent increases on top of this year's already steep gains… Eggs, dairy products and cereals are up 10 percent... But the USDA says another big part of the American diet has seen only moderate price increases. Beef, poultry and pork will be up only 3 percent this year." Calculate Jennika's price elasticity of demand for pork if she decreases her consumption by 4 percent.

Accepted Answer

Price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. Here, the price of pork increases by 3%, and Jennika decreases her consumption by 4%. Thus, elasticity = -4% / 3% = -1.33. The closest positive value is 1.25, indicating Jennika's demand is elastic.

Quiz 4: Elasticity

In Brazil, the income elasticity of demand for dairy is 0.7 and for fruit and vegetables it is 0.5. These elasticities mean that if the income of Brazilians decreases, they will purchase dairy and fruits and vegetables.