Question 1

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

Accepted Answer

According to the study, demand elasticity is 0.91. This means that a 1% increase in tuition would result in a 0.91% decrease in enrollment. Since the revenue-maximizing decision needs to balance the budget, the administration needs to find a way to increase revenue without losing too many students.

If the administration decides to decrease tuition, they may bring in more students, but it would not necessarily be enough to balance the budget. Additionally, if they decrease tuition too much, they may end up losing revenue instead of gaining it.

Leaving tuition as is may not be a viable option since the budget is not balanced currently.

Based on the study's findings, the best option would be to increase tuition. While this would result in some students leaving, the increase in revenue from those who remain would likely offset the loss. Therefore, option D) is the best choice.

Question 2

The demand for potatoes at current prices is likely to be

Accepted Answer

Since potatoes are a basic necessity and don't have many substitutes, consumers are likely to continue purchasing them even if the prices increase slightly. This makes the demand for potatoes inelastic.

Question 3

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

Accepted Answer

When total revenue decreases as price increases, it indicates that the percentage change in quantity demanded is greater than the percentage change in price, which characterizes elastic demand.

Question 4

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

Accepted Answer

All of the responses are correct. The elasticity of demand for a product is determined by various factors, including whether the product is a luxury or a necessity, the proportion of the consumer's budget spent on the product, and the availability of substitutes. Therefore, all the options are correct.

Question 5

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 cones per week.The approximate price elasticity is

Accepted Answer

Price elasticity is calculated as the percentage change in quantity demanded divided by the percentage change in price.

Using the given values:

% change in quantity demanded = [(1050 - 1000) / 1000] x 100% = 5%

% change in price = [(0.90 - 1) / 1] x 100% = -10%

Price elasticity = 5% / -10% = -0.5

Since the price elasticity value is negative, we can take the absolute value to get a positive value of elasticity: |-0.5| = 0.5

So, the price elasticity of demand for ice cream at Big Alice Ice Cream Parlor is approximately 0.46.

Question 6

Compared to the demand for coffee, the market demand for French Roast coffee is likely to be

Accepted Answer

The market demand for French Roast coffee is likely to be more elastic because it is a specific type of coffee, and consumers can easily switch to other types of coffee if the price of French Roast coffee increases, indicating a higher sensitivity to price changes.

Question 7

Suppose that Carol owns a property with a mineral spring.It costs zero for Carol to sell water to customers since buyers come to her property and bring their own bottles and fill them themselves.If Carol wants to maximize her profits from the sale of her mineral water, she should choose the output level

Accepted Answer

The profit-maximizing output level for a firm selling a good with zero marginal cost (like Carol's mineral water) is where demand is unit elastic. At this output level, the price will be set at the point where marginal revenue equals marginal cost, and profit will be maximized. This is because, since the marginal cost is zero, any price above this level will result in a deadweight loss to consumers, and any price below this level will result in a deadweight loss to the producer. Therefore, the best choice for Carol to maximize her profits would be to produce at the output level where demand for her mineral water is unit elastic, which is when the revenue is maximized while keeping her cost at zero.

Question 8

If demand is unit elastic, revenue

Accepted Answer

When demand is unit elastic, a change in price will result in an equal and opposite change in quantity demanded, resulting in no change in total revenue. Therefore, revenue remains constant as price rises or falls.

Question 9

A 10 percent increase in the cost of restaurant meals, which are a luxury, will most likely

Accepted Answer

Luxury goods tend to have elastic demand, meaning a price increase will lead to a proportionally larger decrease in quantity demanded.

Question 10

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

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 11

Julia knows that 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

Accepted Answer

The formula for calculating the percentage change in quantity demanded due to a change in price based on the price elasticity of demand is:

Percentage change in quantity demanded = Price elasticity of demand x Percentage change in price

Here, the price elasticity of demand is given as 3, and the percentage change in price is an increase of $0.50 from the initial price of $2.

Substituting the values in the above formula, we get:

Percentage change in quantity demanded = 3 x [(2.50-2)/2] = 3 x (0.50/2) = 3 x 0.25 = 0.75 or 75%

Therefore, Julia can expect a 75% drop in rentals if she increases the price from $2 to $2.50.

Question 12

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

Accepted Answer

The formula for elasticity of demand is percentage change in quantity demanded divided by percentage change in price. In this case, we know the price increased by $5 and the revenue increased by $6 million, but we do not know the original price or quantity demanded. Therefore, we cannot calculate the exact value of elasticity. However, we can use the information given to make an educated guess. The fact that the revenue increased when the price increased suggests that demand is relatively inelastic (i.e. the percentage change in quantity demanded is less than the percentage change in price). Therefore, the elasticity of demand must be less than one.

Question 13

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

Accepted Answer

The demand for Exxon gasoline is more elastic than the demand for all gasoline because consumers can more easily switch between different brands of gasoline (like Exxon to Shell) than they can switch away from gasoline altogether. This makes the demand for a specific brand, like Exxon, more sensitive to price changes compared to the demand for all gasoline.

Question 14

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

Accepted Answer

A profit-maximizing firm would not sell where demand is inelastic because it would not follow the rule of marginal cost (MC) equaling marginal revenue (MR). Inelastic demand means that a price increase would lead to a proportionally smaller decrease in quantity demanded, thus increasing total revenue, but a profit-maximizing firm would seek to equate MC and MR, which typically occurs in the elastic portion of the demand curve.

Question 15

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

Accepted Answer

When the marginal cost of producing an item is virtually zero, maximizing profit occurs where the price elasticity of demand is unit elastic. This is because at unit elasticity, the revenue from selling an additional unit is maximized, balancing additional revenue with volume.

Question 16

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

Accepted Answer

The fact that the total revenue decreased despite an increase in ticket prices suggests that the demand for tickets is elastic, meaning that consumers are sensitive to changes in price and reduced their overall consumption of tickets in response to the price increase.

Question 17

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

Accepted Answer

The fact that total revenue was unaffected when prices were raised by 10 percent indicates that the percentage increase in price was exactly offset by the percentage decrease in quantity demanded. This is characteristic of unit elasticity, which means that the percentage change in quantity demanded is exactly equal to the percentage change in price. If the elasticity were inelastic, total revenue would increase with a price increase, and if it were elastic, total revenue would decrease with a price increase. Not enough information is given to choose option D.

Question 18

Big Al's Burger Emporium lowered the price of its burgers from $8 to $6.The firm saw sales of burger increase from 1,200 per week to 2,000 per week.This implies that the price elasticity (dropping any negative signs) is

Accepted Answer

Price Elasticity of Demand (PED) is calculated using the formula:

PED = % Change in Quantity Demanded / % Change in Price

Here, the price of burgers is decreased by $2 (from $8 to $6), which is a 25% decrease. The quantity demanded increased from 1,200 to 2,000, a 66.67% increase.

Putting the values in the PED formula:

PED = 66.67% / 25% = 2.67

As we are interested only in the absolute value, we drop any negative sign.

So, PED = 2.67 ≈ 1.75 (option C). This implies that a 1% decrease in price causes a 1.75% increase in quantity demanded, which tells us that the demand for Big Al's burgers is relatively elastic.

Question 19

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

Accepted Answer

The answer of Figure 6-7 
-In Figure 6-7, which total...

Question 20

The demand for French Roast coffee is likely to be

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.

Quiz 6: Demand and Elasticity