Question 1

You have been hired by the city to determine whether or not an increase in the price of tickets for the mass transit system would raise system revenues. The debate has been heated and the city council seems to be divided. One side argues that in order to increase revenues from the transit system, prices must be increased. The opposing side argues that a price increase at this time will lower revenues. What assumptions are each side making about the price elasticity of demand, and how might you determine the best course of action?

Accepted Answer

The answer of You have been hired by the city...

Question 2

Suppose that a 20 percent increase in the price of gasoline causes a 5 percent decrease in the consumption of gasoline and a 30 percent drop in the sales of SUVs. What can you say about elasticities?

Accepted Answer

The answer of Suppose that a 20 percent increase in...

Question 3

Given an upward sloping supply curve, the more inelastic is demand, the greater the fraction of the burden of taxation that is borne by the consumer.

Accepted Answer

When demand is inelastic, consumers are less responsive to changes in price and are likely to continue purchasing the good even when the price increases due to taxation. As a result, the burden of taxation falls more heavily on them and less so on suppliers.

Question 4

After a drought in Alberta, the availability of water (the supply curve) declines by 30 percent. If the elasticity of demand for water equals 0.75, by how much would the price of water have to rise in order for quantity demanded to equal the quantity of water available? (Assume that the supply curve for water is perfectly inelastic.)

Accepted Answer

The answer of After a drought in Alberta, the availability...

Question 5

The cross-price elasticity between soda and salty chips is -3. From this we can tell that the demand for salty chips is elastic.

Accepted Answer

The cross-price elasticity of -3 indicates that soda and salty chips are complements, not the elasticity of demand for salty chips. Elasticity of demand is measured by price elasticity of demand, not cross-price elasticity.

Question 6

If the income elasticity of demand for lobster is +1.5, a 5 percent increase in price will cause a 7.5 percent reduction in the quantity of lobster consumed.

Accepted Answer

The income elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in income. It is not related to the price elasticity of demand, which measures the responsiveness of the quantity demanded to a change in price. Therefore, the given statement is not accurate.

Question 7

The cross-price elasticity between soda and salty chips is -3. From this we can tell that soda and salty chips are complements.

Accepted Answer

A negative cross-price elasticity of demand indicates that as the price of one good increases, the demand for the other good decreases, which is characteristic of complementary goods.

Question 8

A perfectly inelastic supply curve is vertical.

Accepted Answer

A perfectly inelastic supply curve means that quantity supplied remains the same regardless of changes in price, which results in a vertical supply curve.

Question 9

If the income elasticity of demand for lobster is +1.5, a 5 percent increase in income will cause a 7.5 percent increase in the demand for lobster.

Accepted Answer

This is true. A positive income elasticity of demand means that as income increases, the demand for the good also increases. The size of the increase in demand is given by the income elasticity coefficient. In this case, a 5 percent increase in income would lead to a 7.5 percent increase in the demand for lobster, which corresponds to an income elasticity coefficient of 1.5.

Question 10

Arrange the following goods from least to most elastic, explaining your ordering: gasoline, Shell gasoline, and Shell gasoline at a particular gas station.

Accepted Answer

The answer of Arrange the following goods from least to...

Question 11

Apples and oranges are substitute goods. The cross-price elasticity of apples with respect to the price of oranges is positive.

Accepted Answer

The cross-price elasticity of demand is positive when the two goods are substitutes. This means that an increase in the price of oranges will lead to an increase in the demand for apples, as consumers may switch to buying apples instead of oranges.

Question 12

When demand is more elastic than supply, the largest portion of a tax is paid by the consumer.

Accepted Answer

When demand is more elastic than supply, producers bear a larger portion of the tax burden because consumers are more responsive to price changes and can more easily reduce quantity demanded, shifting the tax burden to producers.

Question 13

Among the following pairs, which is likely to have the greatest price elasticity of demand? Why?
a.cars or Toyotas
b.electricity usage during a month or during a year
c.cable television or an apartment rental

Accepted Answer

The answer of Among the following pairs, which is likely...

Question 14

In a recent fare war, WestJet reduced the price of its one-way airfare from Vancouver to Winnipeg from $198 to $138 to match Air Canada. WestJet matched the fare reluctantly, saying it would cost the company millions of dollars in revenue for those tickets to be sold for less. Air Canada, on the other hand, believed the fare cut would increase its revenue even if rival airlines matched the lower fares. What different assumptions about the underlying price elasticity of demand for airline tickets on that route did each airline believe True?

Accepted Answer

The answer of In a recent fare war, WestJet reduced...

Question 15

A 5 percent increase in the price of pizza causes a 5 percent drop in the quantity of both pizza and beer sold. What can you say about elasticities?

Accepted Answer

The answer of A 5 percent increase in the price...

Question 16

A perfectly elastic demand curve is vertical.

Accepted Answer

A perfectly elastic demand curve is horizontal, indicating that any small change in price will lead to an infinite change in quantity demanded.

Quiz 5: Elasticity