Question 1

Which of the following best describes the relationship between the elasticity of demand and the availability of substitutes?
A) The elasticity of demand will remain constant as the availability of substitutes decrease.
B) The elasticity of demand will increase as the availability of substitutes decreases.
C) The elasticity of demand will decrease as the availability of substitutes remains constant.
D) The elasticity of demand will increase as the availability of substitutes increases.

Accepted Answer

The elasticity of demand tends to increase with the availability of substitutes because consumers can more easily switch to alternative products if the price of the original product increases, making the demand for the original product more sensitive to price changes.

Question 2

What tends to happen to the price elasticity of demand as the time period considered grows longer?
A) It converges to zero.
B) It increases.
C) It remains constant.
D) It decreases.

Accepted Answer

The price elasticity of demand tends to increase over time because consumers have more time to find substitutes or adjust their consumption habits in response to price changes.

Question 3

Suppose that Percy eats a 200-gram steak eight times per month when the price is $10 and six times per month when the price is $12. What is the price elasticity of Percy's demand curve?
A) 0.636
B) 1.0
C) 1.25
D) 1.57

Accepted Answer

First, we need to calculate the average quantity of steak consumed by Percy per month:

Average quantity = (8 times per month x 200 grams per time) + (6 times per month x 200 grams per time) / 2 = 1600 grams per month / 2 = 800 grams per month.

Next, we need to calculate the percentage change in quantity demanded divided by the percentage change in price:

Price elasticity = ((1600 - 960) / ((1600 + 960) / 2)) / ((12 - 10) / ((12 + 10) / 2)) = 0.636.

Therefore, the price elasticity of Percy's demand curve is 0.636, which indicates that his demand is relatively inelastic.

Question 4

Which of the following statements best describes the demand for toothpaste?
A) It will likely be income elastic and price elastic.
B) It will likely be income inelastic and price elastic.
C) It will likely be income inelastic and price inelastic.
D) It will likely be income elastic and price inelastic.

Accepted Answer

Toothpaste is a necessity with few substitutes, making its demand less sensitive to income changes (income inelastic) and price changes (price inelastic).

Question 5

The larger the proportion of income spent on a product, other things equal, what is indicated?
A) The consumer's demand is more inelastic.
B) The consumer's demand curve is more vertical.
C) The consumer's demand is more elastic.
D) The consumer's demand is more unit elastic.

Accepted Answer

When a larger proportion of income is spent on a product, the consumer becomes more price-sensitive and hence, their demand becomes more elastic. This means that a change in price will have a greater impact on their willingness to purchase the product.

Question 6

Suppose that Joan plays golf five times per month when the price is $40 and four times per month when the price is $50. What is the price elasticity of Joan's demand curve?
A) 0.1
B) 0.8
C) 1.0
D) 10.0

Accepted Answer

The price elasticity of demand is calculated using the formula: (percentage change in quantity demanded) / (percentage change in price). The percentage change in quantity demanded is ((4-5)/5) = -0.2, and the percentage change in price is ((50-40)/40) = 0.25. Thus, the elasticity is |-0.2/0.25| = 0.8. However, the closest choice to this calculation is 1.0, which is a common approximation for unit elasticity.

Question 7

Which of the following will have the most elastic demand?
A) pizza from a restaurant
B) Pizza Hut pizza
C) pizza from Pizza Hut on the corner of Main Street and 8th Avenue
D) pizza

Accepted Answer

The demand for a specific product at a specific location, like pizza from Pizza Hut on the corner of Main Street and 8th Avenue, is more elastic because consumers can easily switch to other nearby pizza options if the price changes.

Question 8

When is price elasticity of demand said to be greater?
A) when there are fewer available substitutes
B) the longer the period of time consumers have to adjust to price changes
C) the shorter the period of time consumers have to adjust to price changes
D) when the elasticity of supply is greater

Accepted Answer

Price elasticity of demand is said to be greater when consumers have a longer period of time to adjust to price changes. This is because consumers have more time to find substitutes or adjust their spending habits.

Question 9

If makers of snake anti-venom implement significant price increases, it is unlikely to significantly affect the use of anti-venom for treating poisonous snakebites. What term accurately describes the demand for anti-venom among users?
A) unit elastic
B) unit inelastic
C) elastic
D) inelastic

Accepted Answer

Inelastic demand means that the quantity demanded is not very responsive to changes in price. In the case of snake anti-venom, it is a critical and sometimes life-saving treatment for individuals bitten by poisonous snakes. Therefore, even if makers of snake anti-venom implement significant price increases, users are unlikely to significantly reduce their demand for anti-venom, making the demand inelastic.

Question 10

When the price of ulcer medication increased by $20 per 100 tablets, a drug company's revenue increased by $10 million. What must its elasticity of demand coefficient (in absolute terms) be?
A) zero
B) less than one
C) greater than one
D) infinitely large

Accepted Answer

The elasticity of demand coefficient being less than one indicates that the demand for the ulcer medication is inelastic. This means that the percentage change in quantity demanded is less than the percentage change in price, which leads to an increase in total revenue when prices are raised.

Question 11

A jeweller cut prices in his store by 20 percent and the dollar value of his sales fell by 20 percent. What is this indicative of?
A) inelastic demand
B) elastic demand
C) a vertical demand curve
D) a horizontal demand curve

Accepted Answer

The answer of A jeweller cut prices in his store...

Question 12

What term accurately describes demand when the quantity demanded changes in the same proportion as the price?
A) inelastic
B) independent
C) elastic
D) unit elastic

Accepted Answer

When the quantity demanded changes in the same proportion as the price, it is known as unit elastic demand. This means that the percentage change in quantity demanded is equal to the percentage change in price, resulting in a demand curve with an elasticity of 1.

Question 13

A recent study at a liberal arts college concluded that demand elasticity is 0.91 for college courses. The administration is considering a tuition increase to help balance the budget. What might an economist advise the school to do?
A) Leave tuition unchanged, as a change in tuition is unlikely to enhance the school's budget by increasing revenue.
B) Decrease tuition because demand for courses is elastic.
C) Decrease tuition in order to increase revenue by boosting enrolment.
D) Increase tuition in order to increase revenue.

Accepted Answer

A demand elasticity of 0.91 indicates that demand for college courses is relatively elastic, meaning that a change in price will have a significant impact on enrolment. Therefore, an economist would likely advise the school to increase tuition in order to increase revenue. However, the increase should be carefully considered and not too steep, as a drastic increase could decrease enrolment enough to offset the revenue increase.

Question 14

The elasticity in the vicinity of five different points along a demand curve varies as follows:
TABLE 5-3
 
-Refer to Table 5-3. At what points would a price increase be accompanied by an increase in total revenue?
A) A, C, and E
B) A and E
C) B and D
D) A and D

Accepted Answer

At points B and D, the demand is elastic, meaning that the quantity demanded changes more than proportionately to a change in price. Therefore, a price increase in these regions would lead to a decrease in total revenue. Conversely, at points A, C, and E, the demand is inelastic, meaning that the quantity demanded changes less than proportionately to a change in price, which is not the scenario described in the question.

Question 15

Suppose that Lance purchases one pizza per month when the price is $19 and three pizzas per month when the price is $15. What is the price elasticity of Lance's demand curve?
A) 0.235
B) 2.00
C) 4.25
D) 6.33

Accepted Answer

We can use the midpoint formula to calculate the price elasticity of demand:

Elasticity = [(Q2 - Q1)/((Q1 + Q2)/2)] / [(P2 - P1)/((P1 + P2)/2)]

Let's say that Lance's initial quantity demanded (when the price is $19) is Q1 = 1 pizza per month and the initial price is P1 = $19. When the price drops to $15, his quantity demanded increases to Q2 = 3 pizzas per month and the new price is P2 = $15.

Elasticity = [(3 - 1)/((3+1)/2)] / [($15 - $19)/(($15+$19)/2)] = [2/2] / [-$4/($34/2)] ≈ 4.24

Therefore, the price elasticity of Lance's demand curve is approximately 4.25, which means his demand is relatively elastic. A 1% decrease in price would lead to a greater than 1% increase in quantity demanded.

Question 16

Which of the following is likely to have the most inelastic demand?
A) insulin, for diabetics
B) pizza from a restaurant
C) a one-week vacation at Disney World
D) a new Land Rover

Accepted Answer

Insulin is a life-saving medication that is essential for diabetics. It has no close substitute, and the demand for it is highly inelastic because people are willing to pay any price for it to maintain their health and quality of life.

Question 17

The following schedule represents a portion of Kate's demand for sandwiches.
TABLE 5-1
 
-Refer to Table 5-1. Along this portion of Kate's demand curve for sandwiches, what is the price elasticity of demand?
A) equal to zero
B) less than one
C) equal to one
D) greater than one

Accepted Answer

The price elasticity of demand along this portion of Kate's demand curve is greater than one. This is because the percentage change in quantity demanded is greater than the percentage change in price. Therefore, Kate's demand for sandwiches is elastic.

Question 18

The following schedule represents a portion of Tim's demand for video rentals each month.
TABLE 5-2
 
-Refer to Table 5-2. Along this portion of Tim's demand curve for video rentals, what is the price elasticity of demand?
A) equal to zero
B) less than one
C) equal to one
D) greater than one

Accepted Answer

The price elasticity of demand is less than one because the percentage change in quantity demanded is less than the percentage change in price.

Question 19

When the local symphony recently raised its price for tickets to their summer concerts in the park, the symphony's total revenue actually decreased. What does this indicate about the elasticity of demand for symphony tickets?
A) It is elastic.
B) It is unit elastic.
C) It is unit inelastic.
D) It is inelastic.

Accepted Answer

When demand is elastic, an increase in price leads to a more than proportional decrease in quantity demanded, resulting in lower total revenue. This is what happened with the symphony tickets.

Question 20

When will a price cut increase the total revenue a firm receives?
A) when demand for its product is inelastic
B) when demand for its product is unit inelastic
C) when demand for its product is unit elastic
D) when demand for its product is elastic

Accepted Answer

A price cut will increase total revenue when demand for the product is elastic. This is because when demand is elastic, consumers are very sensitive to changes in price and a lower price will lead to a significant increase in the quantity demanded, resulting in an overall increase in total revenue. When demand is inelastic, consumers are less sensitive to price changes, and a price cut will have little effect on the quantity demanded, resulting in a decrease in total revenue. When demand is unit elastic, a price cut will have no effect on total revenue as the percentage change in price is exactly offset by the percentage change in quantity demanded.

Quiz 5: Elasticity

Which of the following best describes the relationship between the elasticity of demand and the availability of substitutes?

What tends to happen to the price elasticity of demand as the time period considered grows longer?

Suppose that Percy eats a 200-gram steak eight times per month when the price is $10 and six times per month when the price is $12. What is the price elasticity of Percy's demand curve?

Which of the following statements best describes the demand for toothpaste?

The larger the proportion of income spent on a product, other things equal, what is indicated?

Suppose that Joan plays golf five times per month when the price is $40 and four times per month when the price is $50. What is the price elasticity of Joan's demand curve?

Which of the following will have the most elastic demand?

When is price elasticity of demand said to be greater?

If makers of snake anti-venom implement significant price increases, it is unlikely to significantly affect the use of anti-venom for treating poisonous snakebites. What term accurately describes the demand for anti-venom among users?

When the price of ulcer medication increased by $20 per 100 tablets, a drug company's revenue increased by $10 million. What must its elasticity of demand coefficient (in absolute terms) be?

A jeweller cut prices in his store by 20 percent and the dollar value of his sales fell by 20 percent. What is this indicative of?

What term accurately describes demand when the quantity demanded changes in the same proportion as the price?

A recent study at a liberal arts college concluded that demand elasticity is 0.91 for college courses. The administration is considering a tuition increase to help balance the budget. What might an economist advise the school to do?

The elasticity in the vicinity of five different points along a demand curve varies as follows: TABLE 5-3 -Refer to Table 5-3. At what points would a price increase be accompanied by an increase in total revenue?

Suppose that Lance purchases one pizza per month when the price is $19 and three pizzas per month when the price is $15. What is the price elasticity of Lance's demand curve?

Which of the following is likely to have the most inelastic demand?

The following schedule represents a portion of Kate's demand for sandwiches. TABLE 5-1 -Refer to Table 5-1. Along this portion of Kate's demand curve for sandwiches, what is the price elasticity of demand?

The following schedule represents a portion of Tim's demand for video rentals each month. TABLE 5-2 -Refer to Table 5-2. Along this portion of Tim's demand curve for video rentals, what is the price elasticity of demand?

When the local symphony recently raised its price for tickets to their summer concerts in the park, the symphony's total revenue actually decreased. What does this indicate about the elasticity of demand for symphony tickets?

When will a price cut increase the total revenue a firm receives?