Question 1

The Mass Rapid Transit (MRT)System in Hong Kong has been running significant losses.Transport Ministry officials have argued over whether to raise fares to combat the losses.One argument against a fare increase is that it will aggravate traffic congestion on the streets during peak commuter hours.Suppose that the current fare is $4 and the government is considering raising it to $6.Officials estimate that this reduces the number of rides purchased from 10,000 to 8,000 per day.
a.What is the estimated elasticity of demand for MRT rides?
b.What does this elasticity of demand suggest to you about what will happen to total revenue earned by the transit system?
c.Last year,the MRT system incurred a loss of $50,000 per day.Do you think the fare increase will resolve the deficit problem as well as Ministry officials anticipate? Explain.

Accepted Answer

The answer of The Mass Rapid Transit (MRT)System in Hong...

Question 2

Figure 6-8 
-Refer to Figure 6-8.Identify the two goods which are substitutes.
A) Good X and Good Y
B) Good Y and Good Z
C) Good X and Good Z
D) It is not possible to distinguish any relationship among the goods.

Accepted Answer

The answer of Figure 6-8 
-Refer to Figure 6-8.Identify the...

Question 3

If you expect the economy is going to boom and average income in the economy will rise in the foreseeable future,the type of firm that would be able to increase its sales if your expectations are met is
A) one that sells an inferior good.
B) one that sells a necessity good.
C) one that sells a luxury good.
D) one that sells a price inelastic good.

Accepted Answer

A luxury good is one that consumers are willing to purchase even when their income rises, so if the economy booms and income rises, consumers are likely to have more disposable income to spend on luxury goods. Therefore, a firm that sells luxury goods is likely to see an increase in sales.

Question 4

Economists estimated that the price elasticity of beer is -0.30 and the income elasticity of beer is 0.09.This means that
A) an increase in the price of beer will increase the quantity demanded of beer and beer is a normal good.
B) an increase in the price of beer will lead to an increase in revenue for beer sellers and beer is a normal good.
C) a decrease in the price of beer will lead to an increase in revenue for beer sellers and beer is an inferior good.
D) an increase in the price of beer will lead to a decrease in the quantity demanded of beer and beer is a necessity.

Accepted Answer

The answer of Economists estimated that the price elasticity of...

Question 5

Consider the following pairs of items: 
a.shampoo and conditioner
b.iPhones and earbuds
c.a laptop computer and a desktop computer
d.beef and pork
e.air-travel and weed killer
Which of the pairs listed will have cross-price elasticity of zero?
A) a and b only
B) c only since most people cannot do without computers
C) e only
D) none of the pairs listed

Accepted Answer

The answer of Consider the following pairs of items: 
a.shampoo...

Question 6

Last year,Sefton purchased 60 pounds of potatoes to feed his family of five when his household income was $30,000.This year,his household income fell to $20,000 and Sefton purchased 80 pounds of potatoes.All else constant,Sefton's income elasticity of demand for potatoes is
A) negative, so Sefton considers potatoes to be an inferior good.
B) positive, so Sefton considers potatoes to be an inferior good.
C) positive, so Sefton considers potatoes to be a normal good and a necessity.
D) negative, so Sefton considers potatoes to be a normal good.

Accepted Answer

The answer of Last year,Sefton purchased 60 pounds of potatoes...

Question 7

Calculate the income elasticity if an 8 percent increase in income leads to a 4 percent increase in quantity demanded for organic produce.
A) -0.66
B) 0.5
C) 1.5
D) 2

Accepted Answer

Income elasticity of demand = % change in quantity demanded / % change in income
Plugging in the numbers, we get:
Income elasticity of demand = 4% / 8% = 0.5
Therefore, the answer is B.

Question 8

Which of the following items is likely to have the highest income elasticity of demand?
A) a bus ride
B) a meal at Taco Bell
C) a vacation home in the Swiss Alps
D) a tank of gasoline

Accepted Answer

Luxury goods such as vacation homes often have a high income elasticity of demand as they are not considered necessities and demand may increase more than proportionally with an increase in income.

Question 9

Cross-price elasticity of demand is calculated as the
A) percentage change in quantity demanded divided by percentage change in price of a good.
B) percentage change in quantity demanded of one good divided by percentage change in price of a different good.
C) percentage change in quantity sold divided by percentage change in buyers' incomes.
D) percentage change in quantity supplied divided by percentage change in price of a good.

Accepted Answer

Cross-price elasticity of demand measures how changes in the price of one good affect the quantity demanded of a different good. It is calculated as the percentage change in quantity demanded of one good divided by the percentage change in the price of another good. Option A is the formula for price elasticity of demand, option C is the formula for income elasticity of demand, and option D is the formula for price elasticity of supply.

Question 10

According to a study of the U.S.demand for alcoholic beverages,the price elasticity of demand for beer is -0.30.Which of the following could explain why the price elasticity of demand for beer is low?
A) Beer is an inferior alcoholic beverage.
B) More and more people are switching to wine and cocktails rather than beer.
C) The price of beer is relatively low and for many people it is a habit forming product.
D) There are only a few major suppliers of beer.

Accepted Answer

The relatively low price of beer and its habit-forming nature suggest that consumers are less likely to respond strongly to price changes, resulting in a low price elasticity of demand. A and B are not relevant to the explanation, and D does not necessarily affect the price elasticity of demand.

Question 11

Income elasticity measures
A) how a good's quantity demanded responds to change in the goods price.
B) how a good's quantity demanded responds to change in the price of another good.
C) how a good's quantity demanded responds to change in buyers' incomes.
D) how a good's quantity demanded responds to producers' incomes.

Accepted Answer

Income elasticity measures how a good's quantity demanded responds to change in buyers' incomes.

Question 12

Using cross-sectional data from the two Housing Assistance Supply Experiment (HASE)sites--Brown County,Wisconsin,and St.Joseph County,Indiana,John Mulford of Rand Research estimates that the long-run "permanent" income elasticity of housing expenditures to be 0.45 for owners.Using this information,what is likely to happen to housing expenditures if the government increases income transfers to recipients in HASE sites?
A) Housing expenditures will increase significantly.
B) Housing expenditures in HASE sites significantly will fall as recipients moved out of these areas to higher-income areas.
C) Housing expenditures will increase, but not significantly.
D) Housing expenditures will decrease by a small amount.

Accepted Answer

The long-run "permanent" income elasticity of housing expenditures for owners is only 0.45, which means that a 1% increase in income will lead to a 0.45% increase in housing expenditures. Therefore, an increase in income transfers to recipients in HASE sites will lead to an increase in housing expenditures, but not a significant one. The answer is not A, B or D because they suggest significant changes in housing expenditures, which are not supported by the information given.

Question 13

Studies show that the income elasticity of demand for wine is approximately five.What does this mean?
A) A 1 percent decrease in the price of wine leads to a 5 percent increase in wine consumption.
B) A 1 percent increase in income leads to a 5 percent increase in wine consumption.
C) A 5 percent increase in income leads to a 1 percent increase in wine consumption.
D) Wine is a relatively elastic good.

Accepted Answer

The income elasticity of demand for wine being five means that a 1 percent increase in income leads to a 5 percent increase in wine consumption.

Question 14

Linesha,a college student working part-time receives a wage increase.An avid movie buff,she increased her purchases of Blu-ray discs and reduced her purchases of DVDs.Based on this information
A) DVDs and Blu-ray discs are substitutes.
B) Blu-ray discs are normal goods and DVDs are inferior goods.
C) DVDs and Blu-ray discs are normal goods.
D) the cross-price elasticity between DVDs and Blu-ray discs is negative.

Accepted Answer

The answer of Linesha,a college student working part-time receives a...

Question 15

If the cross-price elasticity of demand for computers and software is negative,this means the two goods are
A) substitutes.
B) complements.
C) inferior.
D) normal.

Accepted Answer

A negative cross-price elasticity of demand between computers and software indicates that the two goods are complements, meaning that an increase in the price of one good leads to a decrease in the quantity demanded of the other good. If the two goods were substitutes, the cross-price elasticity of demand would be positive.

Question 16

Consider the following pairs of items: 
a.shampoo and conditioner
b.iPhones and earbuds
c.a laptop computer and a desktop computer
d.beef and pork
e.air-travel and weed killer
Which of the pairs listed will have a negative cross-price elasticity?
A) a and b only
B) c and d only
C) e only
D) a, b, and c only

Accepted Answer

The answer of Consider the following pairs of items: 
a.shampoo...

Question 17

Ali's Gyros operates near a college campus.Ali has been selling 120 gyros a day at $4.50 each and is considering a price cut.He estimates that he would be able to sell 200 gyros per day at $3.50 each.
a.Calculate the price elasticity of demand using the midpoint formula.
b.Calculate the change in revenue as a result of the price cut.

Accepted Answer

The answer of Ali's Gyros operates near a college campus.Ali...

Question 18

Suppose the governor of California has proposed increasing toll rates on California's toll roads,and has presented two possible scenarios to implement these increases.Following are projected data for the two scenarios for the California toll roads:
Scenario 1: Toll rate in 2012: $10.00.Toll rate in 2016: $22.50
For every 100 cars using the toll roads in 2012,only 81.6 cars will use the toll roads in 2016.
Scenario 2: Toll rate in 2012: $10.00.Toll rate in 2016: $17.50
For every 100 cars using the toll roads in 2012,only 96.2 cars will use the toll roads in 2016.
a.Using the midpoint formula,calculate the price elasticity of demand for Scenario 1 and Scenario 2.
b.Assume 10,000 cars use California toll roads every day in 2012.What would be the daily total revenue received for each scenario in 2012 and in 2016?
c.Is demand under Scenario 1 and under Scenario 2 price elastic,inelastic,or unit elastic.Briefly explain.
(For above questions,assume that nothing other than the toll change occurs during the time frame listed that would affect consumer demand.)

Accepted Answer

The answer of Suppose the governor of California has proposed...

Question 19

Suppose the cross-price elasticity of demand between grapefruit juice and orange juice is approximately 6.What does this mean?
A) A 1 percent decrease in the price of grapefruit juice leads to a 6 percent increase in orange juice consumption.
B) A 6 percent increase in the price of grapefruit juice leads to a 1 percent increase in orange juice consumption.
C) If the price of grapefruit juice rises by $1, 6 more cartons of orange juice will be purchased.
D) The demand for orange juice is 6 times more than the demand for grapefruit juice.

Accepted Answer

The answer of Suppose the cross-price elasticity of demand between...

Question 20

Suppose Tinsel Town Videos lowers the price of its movie club membership by 10 percent and as a result,CineArts Videos experienced a 16 percent decline in its movie club membership.What is the value of the cross-price elasticity between the two movie club memberships?
A) -1.6
B) -0.625
C) 0.625
D) 1.6

Accepted Answer

The answer of Suppose Tinsel Town Videos lowers the price...

Quiz 6: Elasticity: The Responsiveness of Demand and Supply

Figure 6-8 -Refer to Figure 6-8.Identify the two goods which are substitutes.

If you expect the economy is going to boom and average income in the economy will rise in the foreseeable future,the type of firm that would be able to increase its sales if your expectations are met is

Economists estimated that the price elasticity of beer is -0.30 and the income elasticity of beer is 0.09.This means that

Consider the following pairs of items: a.shampoo and conditioner b.iPhones and earbuds c.a laptop computer and a desktop computer d.beef and pork e.air-travel and weed killer Which of the pairs listed will have cross-price elasticity of zero?

Last year,Sefton purchased 60 pounds of potatoes to feed his family of five when his household income was $30,000.This year,his household income fell to $20,000 and Sefton purchased 80 pounds of potatoes.All else constant,Sefton's income elasticity of demand for potatoes is

Calculate the income elasticity if an 8 percent increase in income leads to a 4 percent increase in quantity demanded for organic produce.

Which of the following items is likely to have the highest income elasticity of demand?

Cross-price elasticity of demand is calculated as the

According to a study of the U.S.demand for alcoholic beverages,the price elasticity of demand for beer is -0.30.Which of the following could explain why the price elasticity of demand for beer is low?

Income elasticity measures

Studies show that the income elasticity of demand for wine is approximately five.What does this mean?

Linesha,a college student working part-time receives a wage increase.An avid movie buff,she increased her purchases of Blu-ray discs and reduced her purchases of DVDs.Based on this information

If the cross-price elasticity of demand for computers and software is negative,this means the two goods are

Consider the following pairs of items: a.shampoo and conditioner b.iPhones and earbuds c.a laptop computer and a desktop computer d.beef and pork e.air-travel and weed killer Which of the pairs listed will have a negative cross-price elasticity?

Suppose the cross-price elasticity of demand between grapefruit juice and orange juice is approximately 6.What does this mean?

Suppose Tinsel Town Videos lowers the price of its movie club membership by 10 percent and as a result,CineArts Videos experienced a 16 percent decline in its movie club membership.What is the value of the cross-price elasticity between the two movie club memberships?