Question 1

The local bakery makes such great cinnamon rolls that consumers do not respond much at all to a change in the price.If the owner is only interested in increasing revenue,she should

Accepted Answer

Since consumers do not respond much to price changes, the demand is inelastic. Raising the price will increase total revenue because the percentage drop in quantity demanded will be less than the percentage increase in price.

Question 2

A city wants to raise revenues to build a new municipal swimming pool next year.The mayor suggests that the city raise the price of admission to the current municipal pools this year to raise revenues.The city manager suggests that the city lower the price of admission to raise revenues.Who is correct?

Accepted Answer

If demand is price inelastic, raising prices will increase total revenue. If demand is price elastic, lowering prices will increase total revenue.

Question 3

If the demand for donuts is elastic,then a decrease in the price of donuts will

Accepted Answer

When demand is elastic, a decrease in price leads to a proportionally larger increase in quantity demanded, thus increasing total revenue.

Question 4

When the price of good A is $50,the quantity demanded of good A is 500 units.When the price of good A rises to $70,the quantity demanded of good A falls to 400 units.Using the midpoint method,the price elasticity of demand for good A is

Accepted Answer

Using the midpoint method formula for calculating price elasticity of demand:

Price elasticity of demand = ([(Q2-Q1)/((Q2+Q1)/2)]/[(P2-P1)/((P2+P1)/2)])

= ([(400-500)/((400+500)/2)]/[(70-50)/((70+50)/2)])

= -100/450 x 2/3

= -0.444

Taking the absolute value, we get:

= 0.444

Since the elasticity value is less than 1, demand for good A is inelastic. Therefore, an increase in price will result in an increase in total revenue for good A. The correct option is C.

Question 5

You have just been hired as a business consultant to determine what pricing policy would be appropriate to increase the total revenue of a bakery.The first step you would take would be to

Accepted Answer

Before making any changes to the bakery's pricing policy, it is important to understand how responsive customers will be to changes in price. This can be determined by calculating the price elasticity of demand, which measures the percentage change in quantity demanded in response to a change in price. This information will allow the consultant to make informed decisions about pricing that will benefit the bakery's bottom line without driving away customers. Option A may lead to a decrease in demand for the bakery's products, which could ultimately decrease total revenue. Option B may be helpful in increasing profitability, but it does not address the issue of pricing policy. Option D may provide some useful information, but price elasticity of supply is not as critical to determining pricing policy as price elasticity of demand.

Question 6

Suppose that 50 hot dogs are demanded at a particular price.If the price of hot dogs rises from that price by 5 percent,the number of hot dogs demanded falls to 48.Using the midpoint approach to calculate the price elasticity of demand,it follows that the

Accepted Answer

The midpoint formula for elasticity is [(Q2 - Q1) / ((Q2 + Q1) / 2)] / [(P2 - P1) / ((P2 + P1) / 2)]. Here, Q1 = 50, Q2 = 48, P1 = 100, P2 = 105. The elasticity is approximately 0.82.

Question 7

If the demand for textbooks is inelastic,then a decrease in the price of textbooks will

Accepted Answer

When demand is inelastic, a decrease in price leads to a proportionally smaller increase in quantity demanded, resulting in a decrease in total revenue.

Question 8

Suppose that when the price of ginger ale is $2 per bottle,firms can sell 4 million bottles.When the price of ginger ale is $3 per bottle,firms can sell 2 million bottles.Which of the following statements is true?

Accepted Answer

The fact that the quantity demanded of ginger ale decreases from 4 million bottles to 2 million bottles as the price increases from $2 to $3 per bottle indicates that the demand for ginger ale is price elastic. Therefore, an increase in the price of ginger ale will decrease the total revenue of ginger ale producers. This is because the increase in revenue from selling each bottle at a higher price is more than offset by the decrease in the number of bottles sold.

Question 9

If the price elasticity of demand for aluminum foil is 1.45,then a 2.4% decrease in the price of aluminum foil will increase the quantity demanded of aluminum foil by

Accepted Answer

Using the formula for calculating the percentage change in quantity demanded:

% change in quantity demanded = Price elasticity of demand × % change in price

We can plug in the given values:

1.45 = (% change in quantity demanded) / (-2.4%)

Solving for % change in quantity demanded:

% change in quantity demanded = 1.45 × (-2.4%) = -3.48%

This means that a 2.4% decrease in the price of aluminum foil will result in a 3.48% increase in the quantity demanded of aluminum foil.

Since the price cut will result in more sales, the total revenue of aluminum foil sellers will increase. Therefore, the correct answer is C.

Question 10

When a university bookstore prices chemistry textbooks at $200 each,it generally sells 120 books per month.If it lowers the price to $160,sales increase to 160 books per month.Given this information,we know that the price elasticity of demand for chemistry books is about

Accepted Answer

Price elasticity of demand = (% change in quantity demanded)/(% change in price)
Using the information given, we can calculate the price elasticity of demand:
% change in quantity demanded = (160-120)/120 = 0.33 (33% increase)
% change in price = (200-160)/200 = 0.2 (20% decrease)
Price elasticity of demand = (0.33/0.2) = 1.65
Since the price elasticity of demand is greater than 1, we know that demand is elastic. This means that a decrease in price will lead to an increase in total revenue. Therefore, choice A) is the best answer.

Question 11

Suppose that 300 bottles of soda are demanded at a particular price.If the price of a bottle of soda rises from that price by 6 percent,the number of bottles of soda demanded falls to 275.Using the midpoint approach to calculate the price elasticity of demand,it follows that the

Accepted Answer

Using the midpoint approach formula, the price elasticity of demand can be calculated as:
[(275-300)/((275+300)/2)] / [(0.06/((275+300)/2))] = -1.45
Since the elasticity is greater than 1, the demand for bottles of soda in this price range is considered elastic. Therefore, if the price increases, the total revenue of soda sellers will decrease.

Question 12

If the demand for bananas is elastic,then an increase in the price of bananas will

Accepted Answer

If the demand for bananas is elastic, then an increase in the price of bananas will lead to a more than proportionate decrease in the quantity demanded of bananas, which means the total revenue of banana sellers will decrease. This is because the decrease in quantity demanded will outweigh the increase in price per unit, resulting in a net decrease in total revenue.

Question 13

Hilda's Hair Hysteria earned $3,750 in total revenue last month when it sold 125 haircuts.This month it earned $3,600 in total revenue when it sold 90 haircuts.The price elasticity of demand for Hilda's Hair Hysteria is

Accepted Answer

Price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. The quantity demanded decreased by 28% (from 125 to 90 haircuts), and the price increased by 4% (from $30 to $40 per haircut). Thus, the elasticity is 28%/4% = 1.14.

Question 14

If the price elasticity of demand for apples is 0.8,then a 2.4% increase in the price of apples will decrease the quantity demanded of apples by

Accepted Answer

The price elasticity of demand is 0.8, so a 2.4% increase in price will lead to a 1.92% decrease in quantity demanded (0.8 * 2.4%). Since demand is inelastic (elasticity < 1), total revenue will increase as price increases.

Question 15

A city wants to raise revenues to build a new municipal swimming pool next year.The mayor suggests that the city raise the price of admission to the current municipal pools this year to raise revenues.The city manager suggests that the city lower the price of admission to raise revenues.Who is correct?

Accepted Answer

The correct answer depends on the price elasticity of demand for admission to the municipal pools. If demand for admission is elastic, the mayor's suggestion to raise prices would lead to a decrease in revenue as fewer people would be willing to pay the higher prices. On the other hand, if demand for admission is inelastic, the mayor's suggestion could lead to a revenue increase. Similarly, if demand is elastic, the city manager's suggestion to lower prices could lead to an increase in revenue, while if demand is inelastic, it could lead to a decrease in revenue. It is therefore necessary to have information on the price elasticity of demand before making a decision. The cost of construction of the new pool is not relevant to this decision.

Question 16

Skip's Sealcoating Service increased its total monthly revenue from $12,000 to $13,500 when it raised the price of driveway repairs from $600 to $750.The price elasticity of demand for Skip's Sealcoating Service is

Accepted Answer

The price elasticity of demand is calculated as:
% change in quantity demanded / % change in price

We can see that the price increased from $600 to $750, which is a 25% increase. The total monthly revenue increased from $12,000 to $13,500, which is a 12.5% increase.

Using the formula above, we get:
% change in quantity demanded = (% change in revenue) / (price elasticity of demand)
% change in quantity demanded = (12.5%) / (price elasticity of demand)
% change in quantity demanded = 0.125 / (price elasticity of demand)

We know that when the price increased by 25%, the quantity demanded decreased by some percentage. Therefore, the price elasticity of demand must be less than 1.

We can plug in the given answers to find the one that results in a % change in quantity demanded of 12.5% when the price increases by 25%. 
A) % change in quantity demanded = 0.125 / 0.11 = 1.14, which is greater than 1. This means the quantity demanded would have increased, which contradicts the problem. 
B) % change in quantity demanded = 0.125 / 0.47 = 0.27, which means the quantity demanded decreased by 27%. This answer is correct. 
C) % change in quantity demanded = 0.125 / 1.12 = 0.11, which means the quantity demanded decreased by 11%. This is not a big enough decrease to account for the increase in price. 
D) % change in quantity demanded = 0.125 / 2.11 = 0.06, which means the quantity demanded decreased by 6%. This is not a big enough decrease to account for the increase in price.

Therefore, the best choice is B.

Question 17

You are in charge of the local city-owned aquatic center.You need to increase the revenue generated by the aquatic center to meet expenses.The mayor advises you to increase the price of a day pass.The city manager recommends reducing the price of a day pass.You realize that

Accepted Answer

If the mayor suggests increasing the price of a day pass, they likely think that the demand for the aquatic center is inelastic, meaning that increasing the price will not significantly decrease demand. However, if the city manager suggests reducing the price of a day pass, they likely think that the demand for the aquatic center is elastic, meaning that reducing the price will increase demand and ultimately revenue. Therefore, it is best to follow the city manager's recommendation and reduce the price of a day pass to increase revenue.

Question 18

Consider luxury weekend hotel packages in Las Vegas.When the price is $250,the quantity demanded is 2,000 packages per week.When the price is $280,the quantity demanded is 1,700 packages per week.Using the midpoint method,the price elasticity of demand is about

Accepted Answer

Using the midpoint method, we get the price elasticity of demand as follows:

Price elasticity of demand = [(Q2-Q1)/((Q2+Q1)/2)] / [(P2-P1)/((P2+P1)/2)]
= [(1700-2000)/((1700+2000)/2)] / [(280-250)/((280+250)/2)]
= -0.374 / 0.117
= -3.196

Since the price elasticity of demand is greater than 1, demand is elastic. An increase in price will cause a more than proportionate decrease in quantity demanded, therefore hotels' total revenue will decrease.

Therefore, the best answer choice is A.

Question 19

Suppose that when the price of wheat is $2 per bushel,farmers can sell 10 million bushels.When the price of wheat is $3 per bushel,farmers can sell 8 million bushels.Which of the following statements is true? The demand for wheat is

Accepted Answer

The demand for wheat is price inelastic because the percentage decrease in quantity demanded (from 10 million to 8 million bushels) is less than the percentage increase in price (from $2 to $3). Therefore, an increase in price will increase total revenue.

Question 20

Get Smart University is contemplating an increase in tuition to enhance revenue.If GSU feels that raising tuition would enhance revenue,it is

Accepted Answer

If GSU assumes that raising tuition would enhance revenue, it is assuming that the demand for university education is inelastic, meaning that students will still enroll in GSU even if tuition prices increase. If the demand for university education were elastic, students may choose more affordable options, causing a decrease in enrollment and revenue despite the increase in tuition prices.

Quiz 5: Elasticity and Its Applications: The Elasticity of Demand