Question 1

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 that the tax would hurt hotel business suggests that they believe tourist and convention demand is very elastic, meaning that even a small increase in the price of hotel stays would significantly decrease the number of bookings. This is the most likely reason they are opposing the proposed tax.

Question 2

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 3

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 4

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,total revenue...

Question 5

The price elasticity of demand for widgets at any particular price is determined by
A)whether widgets are luxuries or necessities.
B)how much of their budgets consumers spend on widgets.
C)whether there are any good substitutes for widgets.
D)All of the above are correct.

Accepted Answer

The price elasticity of demand is affected by all three factors listed in the answer choices. If widgets are a luxury, then consumers are more likely to have a higher elasticity of demand, meaning they are more likely to reduce their purchases of widgets when the price increases. If widgets are a necessity, consumers are less likely to reduce their purchases, resulting in a lower elasticity of demand. The percentage of their budget that consumers spend on widgets is also a factor, as if the price of widgets increases, it will have a greater impact on their overall budget, making them more likely to reduce their purchases. Finally, the availability of substitutes will also affect the elasticity of demand, as if there are good substitutes available, consumers will be more likely to switch to those substitutes if the price of widgets increases, resulting in a higher elasticity of demand.

Question 6

If both matches and automobile prices increase by 10 percent,consumers will likely buy
A)fewer matches and approximately the same quantity of automobiles.
B)approximately the same quantity of matches and fewer automobiles.
C)fewer matches and fewer automobiles.
D)approximately the same quantity of both matches and automobiles.

Accepted Answer

Matches are generally considered a necessity with a low price elasticity of demand, meaning consumers will buy about the same quantity even if the price increases. Automobiles, being more expensive and not an immediate necessity, have a higher price elasticity of demand, so consumers are likely to buy fewer when prices increase.

Question 7

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 8

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

The total expenditure curve for a unit elastic demand curve is a straight line that passes through the origin. Only curve C fits this description.

Question 9

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

If demand is unit elastic, it means that the percentage change in price is equal to the percentage change in quantity demanded. Therefore, if the price rises by 10%, the quantity demanded will fall by 10%, resulting in a constant revenue. Similarly, if the price falls by 10%, the quantity demanded will increase by 10%, resulting in the same revenue. Therefore, the best choice is D, as revenue remains constant as price rises or falls.

Question 10

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

The decrease in revenue despite an increase in price indicates that demand for tickets is elastic, meaning that the price increase caused a greater decrease in demand than the increase in price, resulting in a net decrease in revenue.

Question 11

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 quantity demanded. Therefore, increasing the price from $2 to $2.50 is a 25% increase ([(2.50-2)/2]*100) which would result in a 75% decrease in rentals (25% * 3).

Question 12

The demand for potatoes at current prices is likely to be
A)elastic.
B)inelastic.
C)unit elastic.
D)perfectly elastic.

Accepted Answer

The demand for potatoes is likely to be inelastic as it is a staple food item for many households and there are few close substitutes that consumers can switch to if the price increases. Additionally, the short-term demand for staple food items like potatoes is less responsive to price changes, making it less likely to be elastic.

Question 13

A 10 percent increase in the cost of restaurant meals,which are a luxury,will most likely
A)increase the purchase of meals by 10 percent.
B)increase the purchase of meals by less than 10 percent.
C)decrease the purchase of meals by more than 10 percent.
D)decrease the purchase of meals by less than 10 percent.

Accepted Answer

The answer of A 10 percent increase in the cost...

Question 14

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

The company's revenue increasing when the price of penicillin tablets increases indicates that the demand is inelastic. Elasticity of demand (in absolute terms) must be less than one for an inelastic demand. Therefore, option C is the correct answer.

Question 15

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

With a perfectly elastic supply, any increase in cost (due to the excise tax) will be entirely borne by the consumers, causing no change in the quantity of the product consumed (with perfectly inelastic demand). The entire burden of the tax is borne by the consumers, allowing the government to collect a significant amount of revenue without affecting the quantity consumed. Therefore, the correct answer is C.

Question 16

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

If the increase in price did not affect total revenue, it means that the increase in revenue from the higher price per unit was offset by a decrease in the quantity demanded. This is characteristic of a situation where the elasticity of demand is exactly 1, which is unit elastic.

Question 17

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 18

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 19

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 of producing a good is zero, the profit-maximizing price is where demand is unit elastic. This is because at this point, the increase in revenue from selling one more unit is exactly offset by the increase in cost from producing one more unit, so profits are maximized. Therefore, the state would maximize its profits on vanity license plates at the point on the linear demand curve where demand is unit elastic.

Question 20

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

Since the demand elasticity is less than 1, a tuition increase would bring in more revenue for the college. Therefore, the revenue-maximizing decision is to increase tuition.

Quiz 6: Demand and Elasticity

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

The demand for French Roast coffee is likely to be

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

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

The price elasticity of demand for widgets at any particular price is determined by

If both matches and automobile prices increase by 10 percent,consumers will likely buy

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

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

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

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

The demand for potatoes at current prices is likely to be

A 10 percent increase in the cost of restaurant meals,which are a luxury,will most likely

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

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

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

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

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?

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 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