Question 1

The relationship between a consumer's monthly income and monthly consumption of four products, A-D, is shown below.  Which product listed is an example of an inferior good?
A)A
B)B
C)C
D)D

Accepted Answer

The answer of The relationship between a consumer's monthly income...

Question 2

The income elasticity of demand for food is roughly 1. Suppose a consumer's monthly income is $2,000, of which 20 percent is spent on food. If the income of this consumer doubles, the amount she'll spend on food will be
A)$400 per month.
B)$500 per month.
C)$800 per month.
D)$1,000 per month.

Accepted Answer

If the income elasticity of demand for food is 1, then a 100% increase in income would lead to a 100% increase in the amount spent on food. 
Currently, the consumer spends 20% of their $2,000 income on food, which is $400 per month. 
If their income doubles to $4,000, then they would spend 20% of that on food, which is $800 per month. 
Therefore, the correct answer is C.

Question 3

Refer to the above table. Which product would be an inferior good?
A)Product W
B)Product X
C)Product Y
D)Both products W and Y

Accepted Answer

The answer of  Refer to the above table. Which...

Question 4

Suppose the income elasticity of demand for jewelry is 2. Other things equal, a 10 percent increase in consumer income will
A)decrease the quantity of jewelry purchased by 20 percent.
B)increase the quantity of jewelry purchased by 5 percent.
C)decrease the quantity of jewelry purchased by 5 percent.
D)increase the quantity of jewelry purchased by 20 percent.

Accepted Answer

A positive income elasticity of demand for jewelry means that as consumer income increases, the quantity demanded of jewelry also increases. The numerical value of 2 means that for every 1% increase in income, there will be a 2% increase in quantity demanded. Therefore, a 10% increase in income will lead to a 20% increase in quantity demanded (10% x 2 = 20%).

Question 5

The cross elasticity of demand for product X with respect to the price of product Y is −1.2. It can be inferred that X and Y are
A)substitute products.
B)complementary products.
C)luxury products.
D)unrelated products.

Accepted Answer

The negative cross elasticity of demand indicates that as the price of product Y increases, the demand for product X decreases, suggesting that products X and Y are complementary products.

Question 6

A 3 percent increase in the price of tea causes 6 percent increase in the demand for coffee. The cross elasticity of demand for coffee with respect to the price of tea is
A)−0.5.
B)0.5.
C)−2.
D)2.

Accepted Answer

Cross elasticity of demand is calculated as the percentage change in quantity demanded of one good divided by the percentage change in price of another good. Here, it is 6% / 3% = 2.

Question 7

A negative income elasticity of demand coefficient indicates that
A)the product is an inferior good.
B)the product follows the law of demand.
C)the product is a complementary good.
D)the product is a substitute good.

Accepted Answer

A negative income elasticity of demand indicates that as income increases, the demand for the product decreases, which is characteristic of an inferior good.

Question 8

Refer to the above table. Which product is a normal good but least responsive to a change in income?
A)Product W
B)Product X
C)Product Y
D)Product Z

Accepted Answer

The answer of  Refer to the above table. Which...

Question 9

A consumer's weekly income is $300, and the consumer buys 5 bars of chocolate per week. When weekly income increases to $330, the consumer buys 6 bars per week. The income elasticity of demand for chocolate by this consumer is about
A)0.
B)0.52.
C)2.
D)1.91.

Accepted Answer

Income elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in income. The percentage change in quantity demanded is (6-5)/5 = 0.2, and the percentage change in income is (330-300)/300 = 0.1. Thus, the income elasticity is 0.2/0.1 = 2.

Question 10

Refer to the above table. Which product is most responsive to a change in income?
A)Product W
B)Product X
C)Product Y
D)Product Z

Accepted Answer

The answer of  Refer to the above table. Which...

Question 11

Which of the following is not an example of pricing based on group differences in elasticity of demand?
A)senior-citizen discounts at restaurants and motels
B)cash rebates for purchases of automobiles
C)child discounts for admission to theme parks
D)discounted student prices for visits to museums

Accepted Answer

Cash rebates for purchases of automobiles are not specifically targeted based on group differences in elasticity of demand but are generally available to all customers, unlike the other options which target specific groups known to have different price sensitivities.

Question 12

Microsoft charges a substantially lower price for a software upgrade than for the initial purchase of the software. This implies that Microsoft views the demand curve for the software upgrade to be
A)more elastic than the demand for the original software.
B)upsloping rather than downsloping.
C)less elastic than the demand for the original software.
D)of less value than the original software.

Accepted Answer

The demand curve for the software upgrade is considered more elastic because consumers are more sensitive to price changes for upgrades than they are for the initial purchase. If the price of the upgrade were too high, consumers might opt not to purchase it, whereas they are more likely to pay a higher initial price for the original software due to its necessity or lack of alternatives.

Question 13

For which product is the income elasticity of demand most likely to be negative?
A)computer software
B)used clothing
C)apps for iPhones
D)bread

Accepted Answer

The income elasticity of demand is negative for inferior goods, meaning that as income increases, the demand for these goods decreases. Used clothing is considered an inferior good because people tend to buy less of it as their income rises, preferring new clothing instead.

Question 14

If the demand for a product increases proportionately faster than the increase in consumers' incomes, then the income elasticity of demand for the product is
A)zero.
B)greater than zero.
C)less than zero.
D)equal to 1.

Accepted Answer

The income elasticity of demand measures how the quantity demanded of a good responds to a change in income. If demand increases more than proportionately as income increases, the income elasticity of demand is greater than zero, indicating the product is a normal good with strong income elasticity.

Question 15

Which of these pairs of concepts can be positively, as well as negatively, related?
A)the income of consumers and the demand for a product
B)the price of a product and the quantity of that product demanded
C)the price of a product and the demand for a complementary product
D)the cost of resources required to make a product and its supply

Accepted Answer

The income of consumers and the demand for a product can be positively related if the product is a normal good, and negatively related if the product is an inferior good.

Question 16

Suppose that a firm has "pricing power" and can segregate its market into two distinct groups based on differences in elasticities of demand. The firm might charge
A)a lower price to the group that has the less elastic demand.
B)a higher price to the group that has the less elastic demand.
C)the same price to both groups but include a "free" related product for the group that has an inelastic demand.
D)the same price to both groups but make it difficult for the group with the more elastic demand to gain access to the product.

Accepted Answer

A firm with pricing power and the ability to segment its market based on demand elasticity will charge a higher price to the group with less elastic demand. This is because consumers in this group are less sensitive to price changes and are willing to pay more for the product.

Question 17

In markets entered by Southwest Airlines, gains in passenger traffic and profits
A)went primarily to airlines already in those markets.
B)were evenly distributed among airlines in those markets.
C)went almost entirely to Southwest.
D)were minimal, as the highly inelastic demand for air travel meant reduced revenues for all airlines in those markets.

Accepted Answer

Southwest Airlines is known for its low-cost model, which often leads to significant increases in passenger traffic and profits for the airline itself when it enters new markets. This phenomenon, known as the "Southwest Effect," typically results in lower fares and increased flight options, attracting more passengers to Southwest at the expense of other airlines in those markets.

Question 18

Based on the concept of price elasticity of demand, which of the following cases is most likely to occur?
A)golf courses charging higher prices for golf during the week than on weekends
B)movie theaters charging higher prices for senior citizens
C)colleges charging lower tuition for low-income students
D)airlines charging lower fares for business travelers

Accepted Answer

Price elasticity of demand refers to how sensitive the quantity demanded of a good is to a change in its price. Colleges charging lower tuition for low-income students is most likely because it addresses price sensitivity and affordability, aiming to increase demand among a demographic that is more price elastic.

Question 19

Most goods can be classified as normal goods rather than inferior goods. The definition of a normal good suggests that
A)the income elasticity of demand for the good is negative.
B)the price elasticity of demand for the good is negative.
C)the income elasticity for the good is greater than 0.
D)the cross elasticity of demand for the good is positive.

Accepted Answer

Normal goods have a positive income elasticity of demand, meaning that as income increases, demand for these goods also increases. This contrasts with inferior goods, where demand decreases as income increases.

Question 20

Which of the following statements is true about the history of Southwest Airlines entering new markets?
A)Southwest's entry caused the demand for each carrier to become more inelastic as customers increased their loyalty to particular airlines.
B)Southwest's entry into new markets had little impact on either the markets or airlines already serving those markets.
C)Southwest's low price strategy tapped into existing elastic demand in the market, increasing the airline's revenue.
D)Southwest's highly inelastic supply made it difficult for them to take advantage of demand in the market.

Accepted Answer

Southwest Airlines' strategy of entering new markets with low prices tapped into the existing elastic demand, meaning that as prices decreased, the quantity of demand increased, thereby increasing the airline's revenue. This approach allowed Southwest to quickly gain market share and disrupt existing competition.

Quiz 6: Elasticity

The relationship between a consumer's monthly income and monthly consumption of four products, A-D, is shown below. Which product listed is an example of an inferior good?

The income elasticity of demand for food is roughly 1. Suppose a consumer's monthly income is $2,000, of which 20 percent is spent on food. If the income of this consumer doubles, the amount she'll spend on food will be

Refer to the above table. Which product would be an inferior good?

Suppose the income elasticity of demand for jewelry is 2. Other things equal, a 10 percent increase in consumer income will

The cross elasticity of demand for product X with respect to the price of product Y is −1.2. It can be inferred that X and Y are

A 3 percent increase in the price of tea causes 6 percent increase in the demand for coffee. The cross elasticity of demand for coffee with respect to the price of tea is

A negative income elasticity of demand coefficient indicates that

Refer to the above table. Which product is a normal good but least responsive to a change in income?

A consumer's weekly income is $300, and the consumer buys 5 bars of chocolate per week. When weekly income increases to $330, the consumer buys 6 bars per week. The income elasticity of demand for chocolate by this consumer is about

Refer to the above table. Which product is most responsive to a change in income?

Which of the following is not an example of pricing based on group differences in elasticity of demand?

Microsoft charges a substantially lower price for a software upgrade than for the initial purchase of the software. This implies that Microsoft views the demand curve for the software upgrade to be

For which product is the income elasticity of demand most likely to be negative?

If the demand for a product increases proportionately faster than the increase in consumers' incomes, then the income elasticity of demand for the product is

Which of these pairs of concepts can be positively, as well as negatively, related?

Suppose that a firm has "pricing power" and can segregate its market into two distinct groups based on differences in elasticities of demand. The firm might charge

In markets entered by Southwest Airlines, gains in passenger traffic and profits

Based on the concept of price elasticity of demand, which of the following cases is most likely to occur?

Most goods can be classified as normal goods rather than inferior goods. The definition of a normal good suggests that

Which of the following statements is true about the history of Southwest Airlines entering new markets?