Deck 5: Elasticity: The Responsiveness of Demand and Supply

Question 1

Suppose favorable weather increased the supply of tomatoes so that the price of tomatoes fell from US$45 a ton to US$35 a ton and quantity sold increased from 300 tons to 420 tons. What is the absolute value of the price elasticity of demand?

A) 0.08
B) 1.33
C) 0.75
D) More information is needed to answer the question.

Answer 1

1.33

Question 2

Facing stiff competition, Hendrix College, a small liberal arts institution in the U.S., decided two years ago to bolster its academic offerings, promising students at least three hands-on experiences outside the classroom, including research, internships and service projects. Although it raised tuition and fees by 29 percent, enrollment in the freshman class rose by 37 percent. Based on the information above, the demand for Hendrix College education

A) cannot be defined without further information.
B) is perfectly price elastic.
C) is unit price elastic.
D) is relatively price inelastic.

Answer 2

is relatively price inelastic.

Question 3

-Refer to Figure 5 -4. Which of the following statements is true about the price elasticity of demand?

A) At the midpoint of the demand curve, the elasticity coefficient is zero.
B) The elastic portion of a straight -line downward sloping demand curve corresponds to the segment above the midpoint.
C) The inelastic portion of the demand curve corresponds to the segment above the midpoint.
D) The elasticity coefficient is constant along the demand curve.

Answer 3

The elastic portion of a straight -line downward sloping demand curve corresponds to the segment above the midpoint.

Question 4

When priced at US$15, Elham sells 20 boxes of her special organic soap and at US$20 she sells 10 boxes. This shows that the demand for her organic soaps is

A) price inelastic.
B) price elastic.
C) perfectly price elastic.
D) unit price elastic.

Question 5

When priced at US$10, Yasmin sells five packages of her home -made Mediterranean flat -bread per day. When she raised her price to US$15, she still sold five packages per day. Based on this information, the demand for her flat -bread is

A) price inelastic.
B) perfectly price elastic.
C) perfectly price inelastic.
D) unit price elastic.

Question 6

The elasticity coefficient is constant along a vertical demand curve.

Question 7

Which of the following does not affect the price elasticity of demand for a product?

A) how long buyers have to respond to any price change
B) the number of close substitutes available for the product
C) how much demand shifts when buyers' incomes change
D) expenditures on the product relative to buyers' incomes

Question 8

According to an article in the Wall Street Journal, unlike airlines, even elite hotels don't have sophisticated systems that can react quickly to changes in demand. Even if they could, many hoteliers say people don't respond that much to lower rates. "We've tested this, cutting our rates by US$50 [per night], and we didn't see an appreciable response in occupancy," says Jim Schultenover, a vice president for Ritz-Carlton. Based on the information above, the demand for hotel rooms

A) is income inelastic.
B) is income elastic.
C) is price inelastic.
D) is price elastic.

Question 9

The internet has made it easy for consumers to buy books online. As a result, many traditional booksellers like Barnes & Noble and Borders (starting in 2008) along with Amazon sell books on their websites. What effect will the internet have on the demand curve that any bookstore faces?

A) The price elasticity of demand will remain unchanged; only the cross -price elasticity will change.
B) The demand facing a bookstore will become more inelastic.
C) The demand facing a bookstore will become horizontal.
D) The demand facing a bookstore will become more elastic.

Question 10

Suppose that a Jarir bookstore manager, believes that there is no difference between charging US$22 and US$23 for the English version of Naguib Mahfouz's novel The Cairo Triology. He is convinced that the number of copies sold would be the same under both prices. The Jarir bookstore manager's argument suggests that

A) publishers can set any price they like for books.
B) the price elasticity of demand for books is highly inelastic.
C) the price elasticity of demand for books is highly elastic.
D) price is no object for English versions of Arabic books.

Question 11

For the discounted price of iPhones in Emirates to succeed in increasing the total revenue of Etisalat,

A) Etisalat should be operating at the unit elastic region of the demand curve.
B) Etisalat should be operating at the inelastic region of the demand curve.
C) demand for iPhones should be perfectly elastic.
D) Etisalat should be operating at the elastic region of the demand curve.

Question 12

Suppose that Jarir bookstores have a special membership program that gives customers a 20 percent discount on most hardcover books. But on Harry Potter and the Deathly Hallows, the bookstore offered a 40 percent discount with the hope of selling a very large quantity. The bookstore must believe that the demand for this book is

A) perfectly inelastic.
B) elastic.
C) perfectly elastic.
D) inelastic.

Question 13

Table 5 -2
The publisher of a magazine gives his staff the following information:
He tells the staff, "Our costs are currently US$150,000 more than our revenues each month. I propose to eliminate this problem by raising the price of the magazine to US$3 per issue. This will result in our revenue being exactly equal to our cost."
Which of the following statements is correct?

A) The publisher's analysis is correct only if the demand is unit elastic.
B) The publisher's analysis is correct only if the demand is perfectly inelastic.
C) The publisher's analysis is correct only if the demand is elastic.
D) The publisher's analysis is correct only if the demand is perfectly elastic.

Question 14

When demand is price inelastic, a fall in price causes total revenue to fall, because the increase in quantity sold is not large enough to offset the drop in price.

Question 15

Suppose that studies show that the income elasticity of demand for cigarettes is approximately five. What does this mean?

A) A five percent increase in income leads to a one percent increase in cigarette consumption.
B) A one percent increase in income leads to a five percent increase in cigarette consumption.
C) Cigarettes are a relatively elastic product.
D) A one percent decrease in the price of cigarettes leads to a five percent increase in cigarette consumption.

Question 16

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

A) positive, so Housam considers potatoes to be a normal good and a necessity.
B) negative, so Housam considers potatoes to be an inferior good.
C) positive, so Housam considers potatoes to be an inferior good.
D) negative, so Housam considers potatoes to be a normal good.

Question 17

-Refer to Figure 5 -5. The data in the diagram indicates that DVDs

A) are necessities.
B) are luxury goods.
C) are both luxury goods and price inelastic goods.
D) are both necessities and price inelastic goods.
E) are price inelastic goods.

Question 18

Using cross -sectional data from the two Housing Assistance Supply Experiment (HASE) sites in the U.S., John Mulford of Rand Research, estimates that the long -run "permanent" income elasticity of housing expenditures is 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 in HASE sites will fall significantly as recipients move out of these areas to higher -income areas.
B) Housing expenditures will increase significantly.
C) Housing expenditures will increase, but not significantly.
D) Housing expenditures will decrease by a small amount.

Question 19

Cross -price elasticity of demand measures

A) the percentage change in the price of a product due to a change in the quantity demanded of a related product.
B) the percentage change in the quantity demanded of a product due to a change in the price of a related product.
C) the rate at which firms can adjust the price of their goods when competitors adjust the price of their goods.
D) the responsiveness of quantity supplied to changes in quantity demanded.

Question 20

Some observers have been predicting for years that the printed book will be replaced with the electronic book. What does this imply about the cross -price elasticity between printed books and electronic books?

A) It is negative.
B) It is zero.
C) It is positive.
D) It is not possible to determine this without more information.

Question 21

-Refer to Figure 5 -6. Identify the two goods which are substitutes.

A) It is not possible to distinguish any relationship among the goods.
B) Good Y and Good Z
C) Good X and Good Y
D) Good X and Good Z

Question 22

In September 2006, the Food and Drug Administration recommended that Americans avoid eating bagged raw spinach in the wake of an outbreak of E. coli bacteria. Following this recommendation, the food industry looked at alternatives and many turned to arugula. One Chicago distributor claims, "The sale of the stuff has gone through the roof." Based on this information,

A) the cross price elasticity between arugula and spinach is negative.
B) arugula is a normal food item while raw spinach is an inferior food item.
C) the cross price elasticity between arugula and spinach is positive.
D) the price elasticity of arugula is positive while the price elasticity of spinach falls to zero.

Question 23

Suppose a Nurses Union successfully secured a 12 percent increase in the wages of registered nurses. If a hospital responds by reducing the quantity of registered nurses hired and increasing the quantity of physician's assistants hired, what conclusion can you draw?

A) The cross -price elasticity of demand between registered nurses and physician's assistants is positive.
B) Physician's assistants are more valuable in terms of their productivity.
C) The price elasticity of demand for registered nurses is negative while the price elasticity of demand for physician's assistants is positive.
D) The cross -price elasticity of demand between registered nurses and physician's assistants is negative.

Question 24

Hala, an expert in making desserts, made the following statement: "A cup of tea with mint is often the perfect end to a meal, sipped with a piece of my delicious chocolate cake." Evidently, Hala views

A) tea with mint and chocolate cake as necessities.
B) tea with mint and chocolate cake as substitutes to other desserts.
C) tea with mint and chocolate cake as complementary goods.
D) tea with mint and chocolate cake as luxury items.

Question 25

Suppose that the short run price elasticity of demand for oil is -0.26. Which of the following could explain why the price elasticity of demand for oil is low?

A) There are few alternatives to oil.
B) Firms consume less energy than before.
C) There are only a few suppliers of oil.
D) Oil is an inferior product.

Question 26

Which of the following is one reason why, in early 2008, Microsoft announced a price cut on boxed copies of its operating systems Windows Vista Home Basic, Windows Vista Home Premium, and Windows Vista Ultimate in the Gulf region?

A) The demand for stand-alone Windows software is price elastic for less technology-enthusiastic consumers.
B) The demand for stand-alone Windows software is income inelastic.
C) Consumption of Microsoft products is decreasing.
D) Technology lovers have elastic demand on new software.

Question 27

The demand for Microsoft Windows products is relatively inelastic. Damage that reduces the supply of Microsoft Windows products will also cause Microsoft revenues to fall.

Question 28

Suppose that the price of a money clip increases from US$0.75 to US$0.90 and quantity supplied rises from 8,000 units to 10,000 units. Use the midpoint formula to calculate the price elasticity of supply.

A) 0.07
B) 1.22
C) 1
D) 0.82

Question 29

-Refer to Figure 5 -7. A perfectly elastic supply curve is shown in

A) Panel A.
B) Panel B.
C) Panel C.
D) Panel D.

Question 30

-Refer to Figure 5 -7. A perfectly inelastic supply curve is shown in

A) Panel A.
B) Panel B.
C) Panel C.
D) Panel D.

Question 31

-Refer to Figure 5 -7. A unit elastic supply curve is shown in

A) Panel A.
B) Panel B.
C) Panel C.
D) Panel D.