Question 1

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 total revenue decreased even though the symphony raised its price, it can be inferred that demand for tickets is elastic. If demand were inelastic, raising the price would have led to an increase in total revenue.

Question 2

A demand curve to remain unit elastic along its entire length should
A)cross the X axis.
B)touch the X axis but not the Y axis.
C)never touch either the X or the Y axis.
D)touch the Y axis but not the X axis.

Accepted Answer

A demand curve that remains unit elastic along its entire length means that the elasticity of demand is always equal to 1, indicating that a change in price will lead to an equal percentage change in quantity demanded. For this to happen, the demand curve cannot touch either the X or the Y axis because any point on either axis results in either a vertical or horizontal demand curve, which would not maintain a constant elasticity of 1.

Question 3

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

If the supply is perfectly elastic and the demand is perfectly inelastic, then the entire burden of the excise tax will fall on the consumers. This means that the price that consumers pay for insulin will increase by the full amount of the tax, while the price received by suppliers will remain the same. Since the demand is perfectly inelastic, consumers will continue to purchase the same quantity of insulin even at the higher price. As a result, the government will collect a significant amount of revenue from the tax without affecting the quantity consumed. Therefore, the correct option is C.

Question 4

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 5

Julia knows 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 means that for every 1% increase in price, there will be a 3% decrease in rentals. So, a 25% increase in price (from $2 to $2.50) would result in a 75% decrease in rentals (25% multiplied by 3). Thus, the answer is C - 75 percent.

Question 6

When Scuba, Inc., lowered the price of a tank of compressed air by 20 percent, it sold 10 percent more tankfuls.The price elasticity for compressed air is
A)2.
B)1/2.
C)1.
D)20.

Accepted Answer

We can use the formula:

Price elasticity = percentage change in quantity demanded / percentage change in price

Let's assume the original price of the tank of compressed air was $100.

After the price cut of 20%, the new price is:

New price = $100 - 0.2($100) = $80

We know that the quantity demanded increased by 10%.

Using the formula:

Price elasticity = (10% / 100%) / (-20% / 100%) = 0.5

Therefore, the price elasticity of compressed air is 0.5, which corresponds to choice B.

Question 7

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

Since a 10% increase in price did not result in a change in total revenue, it suggests that the percentage change in quantity demanded is equal to the percentage change in price. This is characteristic of unit elasticity, where the price elasticity of demand is exactly equal to one.

Question 8

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.The approximate price elasticity is
A)0.20.
B)0.46.
C)2.16.
D)5.00.

Accepted Answer

The formula for price elasticity of demand is:

% Change in Quantity Demanded / % Change in Price

We know that the price has been reduced by 10% (from $1 to 90 cents), and the quantity demanded has increased by 5% (from 1,000 to 1,050 cones per week).

% Change in Quantity Demanded = [(1,050 – 1,000) / 1,000] x 100% = 5%
% Change in Price = [(0.90 – 1) / 1] x 100% = -10%

Using the formula, we get:

% Change in Quantity Demanded / % Change in Price = 5% / -10% = -0.5

Since the price elasticity of demand is always a positive number, we take the absolute value of -0.5 to get:

Price Elasticity of Demand = 0.5

Therefore, the best choice is B, as it is the closest answer to 0.5.

Question 9

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

The demand elasticity of 0.91 indicates that for every 1% increase in tuition, enrollment will decrease by 0.91%. This means that a tuition increase will bring in more revenue, but if the increase is too high, enrollment will decrease and offset the revenue gained. To maximize revenue, the administration should increase tuition, but not by too much. It is important to balance the increase with the decrease in enrollment to ensure that revenue is maximized. Therefore, increasing tuition is the best option.

Question 10

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 11

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 will result in an equal percentage change in quantity demanded. Therefore, total revenue (price x quantity) will remain constant as price rises or falls.

Question 12

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

When the marginal cost is virtually zero, states can maximize their profits on plate sales by selling at the point where demand is unit elastic. This means that a small change in price will lead to an equivalent change in demand, resulting in the maximum revenue for the state. This is because when demand is elastic, a slight increase in price can significantly reduce demand, while a slight decrease in price can significantly increase demand. When demand is inelastic, a change in price will have little impact on demand. If the demand curve crosses the horizontal axis, it means that the demand has reached zero and the state will not be able to make any profits.

Question 13

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

This can be solved using the formula for elasticity of demand:

% change in quantity demanded / % change in price

We know that revenue increased by $6 million which can be expressed as a percentage of the initial revenue by using the formula:

(% change in revenue = change in revenue / initial revenue) * 100%

The initial revenue is not given, but we can assume it to be some arbitrary value like $100 million. Therefore,

(% change in revenue = $6 million / $100 million) * 100% = 6%

We also know that the price increased by $5 per dozen, which can be expressed as a percentage of the initial price by using the formula:

(% change in price = change in price / initial price) * 100%)

Assuming the initial price to be $10 per dozen, we get:

(% change in price = $5 / $10) * 100% = 50%

Using the formula for elasticity of demand and substituting the values, we get:

|E| = (% change in quantity demanded / % change in price)

|E| = (6% / 50%) = 0.12

Since elasticity of demand is always positive, the answer is C) less than one.

Question 14

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

Accepted Answer

Exxon gasoline is a specific brand of gasoline, therefore it has close substitutes in terms of other brands of gasoline. Therefore, the demand for Exxon gasoline is more elastic than the demand for all gasoline, which includes different brands and has a more inelastic demand.

Question 15

Regarding demand elasticity, which of the following statements is correct?
A)If demand for seller's product is elastic, a price increase will decrease total revenue.
B)If demand for seller's product is elastic, a price increase will increase total revenue.
C)If demand is exactly unit-elastic, an increase in price will raise total revenue.
D)​If demand is exactly unit-elastic, an increase in price will raise total revenue.

Accepted Answer

When demand for a product is elastic, it means that changes in price have a significant impact on the quantity demanded. In this case, increasing the price will lead to a decrease in total revenue because the decrease in quantity demanded will outweigh the increase in price. On the other hand, if demand is inelastic, a price increase will lead to an increase in total revenue because the increase in price will outweigh the decrease in quantity demanded. Therefore, option A is correct. Option B is incorrect because it suggests that a price increase leads to an increase in total revenue regardless of demand elasticity, which is not true. Option C is incorrect because if demand is exactly unit-elastic, a price increase will not have any impact on total revenue because the percentage increase in price will be equal to the percentage decrease in quantity demanded. Option D is also incorrect as it is a repetition of option C.

Question 16

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

Graph 3 shows an increase in quantity sold (volume) but a decrease in revenue (price) which is consistent with the given set of facts. The other graphs do not show a decrease in revenue, indicating that they are not consistent with the given set of facts.

Question 17

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 unit elastic demand curve has a constant price elasticity of -1. Only curve 3 has a constant slope throughout, indicating that it has a constant price elasticity of -1. Therefore, curve 3 represents a demand curve that is unit elastic throughout.

Question 18

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

The answer of If, as price increases by 10 percent,...

Question 19

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 is arguing that tourist and convention demand is very elastic, meaning that even a small increase in price (i.e. a 2 percent hotel tax) could significantly reduce hotel bookings. They are suggesting that tourists may choose to stay in neighboring towns or states with lower taxes instead.

Question 20

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...

Quiz 6: Demand and Elasticity

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 demand curve to remain unit elastic along its entire length should

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

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

Julia knows 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

When Scuba, Inc., lowered the price of a tank of compressed air by 20 percent, it sold 10 percent more tankfuls.The price elasticity for compressed air is

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

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.The approximate price elasticity is

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

The demand for French Roast coffee is likely to be

If demand is unit elastic, revenue

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

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

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

Regarding demand elasticity, which of the following statements is correct?

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?

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

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