Question 1

The demand for French Roast coffee is likely to be
A)elastic.
B)inelastic.
C)unit elastic.
D)perfectly inelastic.

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.

Question 2

If, as price increases by 10 percent, total revenue decreases by 10 percent, demand is
A)elastic.
B)unit elastic.
C)inelastic.
D)perfectly inelastic.

Accepted Answer

If a 10% increase in price leads to a 10% decrease in total revenue, it means that the percentage change in quantity demanded is equal to the percentage change in price, resulting in a price elasticity of demand greater than 1, which is elastic.

Question 3

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
A)0.20.
B)0.46.
C)2.16.
D)5.00.

Accepted Answer

% Change in Price = (1 - 0.90)/1 = 0.10/1 = 10%
% Change in Quantity Demanded = (1050 - 1000)/1000 = 50/1000 = 5%

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
= 5% / 10%
= 0.5

Since the price elasticity is less than 1, demand for ice cream at Big Alice's is inelastic, meaning that the change in price had a smaller impact on the quantity demanded. The best choice, therefore, is B (0.46).

Question 4

Figure 6-7

In Figure 6-7, which total expenditure curve belongs to a demand curve that is unit elastic throughout?
A)1
B)2
C)3
D)4

Accepted Answer

A demand curve is unit elastic throughout when its elasticity is equal to 1. Looking at the graph, we can see that curve C has an elasticity of 1 at every point along the curve. Therefore, the total expenditure curve that belongs to a demand curve that is unit elastic throughout is curve C.

Question 5

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
A)decrease tuition, which should boost enrollment enough to balance the budget.
B)decrease tuition, which would bring in more revenue.
C)leave tuition as is-an increase would not help balance the budget.
D)increase tuition, which would bring in more revenue.

Accepted Answer

Based on the demand elasticity of 0.91, the college can increase tuition without suffering a significant decrease in enrollment. This means that increasing tuition will bring in more revenue and help balance the budget. Therefore, the revenue-maximizing decision is to increase tuition.

Question 6

Compared to the demand for coffee, the market demand for French Roast coffee is likely to be
A)more elastic.
B)more inelastic.
C)perfectly elastic.
D)perfectly inelastic.

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

Figure 6-8

Libya sold more crude oil in 1985 than it sold five years earlier, but revenues were 17 percent less. Which graph in Figure 6-8 is consistent with this set of facts?
A)1
B)2
C)3
D)4

Accepted Answer

The answer of Figure 6-8

Libya sold more crude oil in...

Question 8

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
A)150 percent.
B)100 percent.
C)75 percent.
D)33 percent.

Accepted Answer

The price elasticity of 3 indicates that for every 1% increase in price, there will be a 3% decrease in quantity demanded (rentals in this case). Therefore, if the price increases by 25% (from $2 to $2.50), the quantity demanded will decrease by approximately 75%.

Question 9

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
A)demand is inelastic.
B)demand is elastic.
C)demand is unit elastic.
D)the demand curve crosses the horizontal axis.

Accepted Answer

If the marginal cost of producing vanity license plates is virtually zero, then the states will generate the most profits by selling as many plates as possible at the highest price. This would be achieved at the point on the demand curve where demand is unit elastic, as this is where a small change in price will lead to a proportional change in the quantity demanded, maximizing revenue for the state. If demand was inelastic or elastic, the state would not be able to maximize profits as easily, as either a price increase or decrease would lead to a decrease in revenue. If the demand curve crosses the horizontal axis, it means that at a certain price point, there is no demand for the product, so the state would not be able to maximize profits in this scenario.

Question 10

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
A)unit elastic.
B)inelastic.
C)elastic.
D)Not enough information is given.

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 11

Suppose that the supply of insulin is perfectly elastic and the demand for insulin perfectly inelastic. Then the result of an excise tax would be
A)a significant increase in government revenue and a significant decrease in the quantity consumed.
B)a significant decrease in the quantity consumed with no change in government revenue.
C)a significant increase in government revenue and no change in the quantity consumed.
D)no increase in government revenue and no change in the quantity consumed.

Accepted Answer

When the supply of a good is perfectly elastic and the demand is perfectly inelastic, the burden of the excise tax falls entirely on the consumer, resulting in no change in the quantity consumed. Therefore, the government would generate higher revenue without affecting the market equilibrium.

Question 12

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
A)where the demand curve for water hits the vertical axis.
B)where demand is inelastic.
C)where demand is unit elastic.
D)demand is exhausted.

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 13

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
A)0.29
B)0.57
C)1.75
D)0.50

Accepted Answer

% change in quantity demanded = ((new quantity - old quantity)/old quantity) x 100% = ((2000-1200)/1200) x 100% = 66.67%
% change in price = ((new price - old price)/old price) x 100% = ((6-8)/8) x 100% = -25%

Price elasticity = % change in quantity demanded / % change in price = (66.67%)/(-25%) = 2.67 (dropping any negative signs)

Since the price elasticity of demand is greater than 1, this implies that the demand for Big Al's burgers is elastic. Therefore, a decrease in price leads to a more than proportionate increase in quantity demanded.

Question 14

To avoid an increase in the local property tax, Sullivan County, New York, proposed a 2 percent hotel tax, which presumably would be passed on to tourists. The hotel industry argued that the tax would hurt hotel business. They are really arguing that
A)tourist and convention demand is inelastic, so hotel bookings will decline.
B)tourist and convention demand is very elastic, so hotel bookings will decline.
C)they would prefer a property tax increase instead.
D)it is unfair to tax people who do not live in the area.

Accepted Answer

The hotel industry's argument suggests that they believe the demand for hotel bookings is highly elastic, meaning that even a small increase in price (in this case, due to the hotel tax) will result in a significant decline in demand. If they believed demand was inelastic (choice A), they would not be as concerned about the impact of the tax. They do not suggest that they would prefer a property tax increase (choice C) and do not mention fairness (choice D) as a concern.

Question 15

Would a profit-maximizing firm sell where demand is inelastic?
A)No, this would not follow the rule of MC = MR.
B)No, the firm could not profitably raise price.
C)Yes, the firm could profitably lower price to attract sales.
D)Yes, in this case there are few substitutes for the good.

Accepted Answer

The answer of Would a profit-maximizing firm sell where demand...

Question 16

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
A)demand curve for the Disney Channel shifted to the right.
B)supply curve of the Disney Channel shifted to the left.
C)demand for the Disney Channel is elastic in this price range.
D)demand for the Disney Channel is inelastic in this price range.

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 17

If demand is unit elastic, revenue
A)and price rise and fall together.
B)rises as price falls.
C)falls as price rises.
D)remains constant as price rises or falls.

Accepted Answer

When demand is unit elastic, a change in price leads to an equal change in quantity demanded. As a result, the percentage change in quantity demanded offsets the percentage change in price, leading to no change in total revenue. Therefore, revenue remains constant as price rises or falls.

Question 18

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
A)unit elastic.
B)inelastic.
C)elastic.
D)Not enough information is given.

Accepted Answer

Since the symphony raised its ticket prices and total revenue decreased, it suggests that demand for tickets was elastic. This means that the percentage decrease in quantity demanded was greater than the percentage increase in price, leading to a decrease in total revenue.

Question 19

The demand for Exxon gasoline is ____ the demand for all gasoline.
A)exactly as elastic as and has a different slope than
B)more elastic than
C)less elastic than
D)exactly as elastic and has the same slope as

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 20

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
A)zero.
B)greater than one.
C)less than one.
D)infinitely large.

Accepted Answer

Since the price increase resulted in an increase in revenue, we know that the demand for penicillin tablets is inelastic (meaning a change in price causes a relatively smaller change in quantity demanded). Therefore, the elasticity of demand must be less than one in absolute terms.

Quiz 6: Demand and Elasticity

The demand for French Roast coffee is likely to be

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

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

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

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

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

Figure 6-8 Libya sold more crude oil in 1985 than it sold five years earlier, but revenues were 17 percent less. Which graph in Figure 6-8 is consistent with this set of facts?

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

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

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

Suppose that the supply of insulin is perfectly elastic and the demand for insulin perfectly inelastic. Then the result of an excise tax would be

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

To avoid an increase in the local property tax, Sullivan County, New York, proposed a 2 percent hotel tax, which presumably would be passed on to tourists. The hotel industry argued that the tax would hurt hotel business. They are really arguing that

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

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

If demand is unit elastic, revenue

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

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

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