Deck 3: Demand Elasticities

Question 1

Information on the price elasticity of demand is particularly important to managerial decision making because:

A)the higher the price elasticity of demand for a product is, the more profitable it will be to produce more of it.
B)depending on the elasticity coefficient, decision makers will immediately know if a price change will cause profits to increase or decrease.
C)it allows one to predict how total revenue will respond, i.e., increase or decrease, to a change in price.
D)as the price elasticity coefficient approaches one, profits will increase.

Answer 1

C

Question 2

An increase in price will result in an increase in total revenue if demand is:

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

Answer 2

C

Question 3

When calculating the price elasticity of demand,which of the following conditions must be satisfied?

A)All other factors that influence demand must be held constant.
B)Prices of related goods must be held constant but all other factors must be allowed to vary.
C)Prices of related goods must be allowed to vary but all other factors must be held constant.
D)All other factors than influence demand must be allowed to vary.

Answer 3

A

Question 4

If the percentage change in quantity demanded is less than the percentage change in price,we would say that over this range,demand is:

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

Question 5

An increase in price will result in no change in total revenue if:

A)the percentage change in price is large enough to cause quantity demanded to fall to zero.
B)the coefficient of elasticity is equal to zero.
C)the percentage change in quantity demanded is equal to the percentage change in price (in absolute values).
D)the demand function is perfectly elastic.

Question 6

If the percentage change in quantity demanded is greater than the percentage change in price,we would say that over this range,demand is:

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

Question 7

Assume that when the price of good Z is increased from $5 to $6,the total revenue earned increases from $600 to $690.Based on this information,we can conclude that over this range,demand for Z is:

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

Question 8

Assume the demand for a good is price inelastic,i.e.,ed < 1 (in absolute value).This means that if price decreases by 50 percent,quantity demanded will:

A)increase by more than 50 percent.
B)decrease by more than 50 percent.
C)increase by less than 50 percent.
D)decrease by less than 50 percent.

Question 9

A decrease in price will result in an increase in total revenue if:

A)the percentage change in quantity demanded is less than the percentage change in price.
B)the percentage change in quantity demanded is greater than the percentage change in price.
C)demand is inelastic.
D)the consumer is operating along a linear demand curve at a point at which the price is very low and the quantity demanded is very high.

Question 10

Assuming we are considering a normal good,the calculated price elasticity of demand is:

A)always positive.
B)always negative.
C)positive if demand is elastic and negative if demand is inelastic.
D)positive if demand is inelastic and negative if demand is elastic.

Question 11

Why is the price elasticity of demand a relative measure? That is,why is elasticity measured in percentage terms rather than in absolute terms?

A)So the coefficient of elasticity will not be dependent on the physical units of the good.
B)Because absolute measures do not account for the direction of the change in quantity.
C)So that the coefficient of elasticity will not be negative.
D)Because the absolute price or quantity demanded of a product is irrelevant to the elasticity measure.

Question 12

The price elasticity of demand is calculated as:

A)the change in price divided by the change in quantity demanded.
B)the change in quantity demanded divided by the change in price.
C)the percentage change in price divided by the percentage change in quantity demanded.
D)the percentage change in quantity demanded divided by the percentage change in price.

Question 13

According to the text,the price elasticity of demand for bath tissue has been estimated to be -2.42.This implies that a 10 percent decrease in the price of bath tissue would cause the quantity demanded of bath tissue to:

A)increase by 2.4 percent.
B)decrease by 2.4 percent.
C)increase by 24.2 percent.
D)decrease by 24.2 percent.

Question 14

Suppose the demand for meals at a medium-priced restaurant is elastic.If the management of the restaurant is considering raising prices,it can expect the total revenues the restaurant earns to:

A)increase.
B)stay the same.
C)decrease.
D)cannot be determined with the information given.

Question 15

If electricity demand is inelastic,and electric rates increase,which of the following is likely to occur?

A)Quantity demanded will fall by a relatively large amount.
B)Quantity demanded will fall by a relatively small amount.
C)Quantity demanded will rise in the short run, but fall in the long run.
D)Quantity demanded will fall in the short run, but rise in the long run.

Question 16

According to the text,the price elasticity of demand for oranges has been estimated to be -0.62.This implies that a doubling of the price of oranges would cause the quantity demanded of oranges to:

A)increase by 6.2 percent.
B)decrease by 6.2 percent.
C)increase by 62 percent.
D)decrease by 62 percent.

Question 17

Suppose the demand for meals at a medium-priced restaurant is elastic.If the management of the restaurant is considering raising prices,it can expect a relatively:

A)large decrease in quantity demanded.
B)large decrease in demand.
C)small decrease in quantity demanded.
D)small decrease in demand.

Question 18

For a particular product,a demand elasticity is a quantitative measure that shows:

A)the percentage change in quantity demanded relative to the absolute change in any of the other variables included in the demand function for that product.
B)the absolute change in quantity demanded relative to the percentage change in any of the other variables included in the demand function for that product.
C)the percentage change in quantity demanded relative to the percentage change in any of the other variables included in the demand function for that product.
D)the absolute change in quantity demanded relative to the absolute change in any of the other variables included in the demand function for that product.

Question 19

When demand is inelastic and price decreases:

A)the effect of the decrease in price on total revenue dominates the effect of the increase in quantity demanded on total revenue; overall total revenue declines.
B)the effect of the increase in quantity demanded on total revenue dominates the effect of the decrease in price on total revenue; overall total revenue increases.
C)the effects of the decrease in price on total revenue and the corresponding increase in quantity demanded on total revenue perfectly offset one another; overall total revenue remains unchanged.
D)quantity demanded and total revenue fall to zero.

Question 20

At a price of $5,consumers buy 200 units of good X.When the price falls to $4,quantity demanded increases to 250 units.We can conclude that over this range,demand is:

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

Question 21

In which of the following cases would the price elasticity of demand be expected to increase?

A)The number of close substitutes for the good increases.
B)The time period under consideration decreases.
C)The cost of the good relative to total income decreases.
D)The supply of the good increases.

Question 22

In the long run,the price elasticity of demand is ________ than in the short run because ________.

A)less; consumers have more time in which to make adjustments to price changes
B)less; the percentage change is measured over a larger amount of time
C)greater; consumers have more time in which to make adjustments to price changes
D)greater; firms have more time to shift the burden of the tax forward to consumers

Question 23

Assuming the inverse demand function for good Z can be written as P = 90 - 3Q,when P = 20,the point price elasticity of demand is equal to (approximately):

A)-0.22.
B)-0.29.
C)-0.67.
D)-4.5.

Question 24

As the percentage of the consumer's income accounted for by a particular good decreases,demand for the good will:

A)tend to become more price elastic.
B)tend to become more price inelastic.
C)tend to become closer to unit elastic.
D)tend toward being perfectly elastic.

Question 25

The last time the U.S.Post Office raised its prices for mail service critics of the rate increase argued that the Post Office's revenues would actually decline as a result of the price increase.It can be concluded that:

A)both groups believe demand is elastic, but for different reasons.
B)both groups believe demand is inelastic, but for different reasons.
C)the Post Office believes demand for mail service is elastic; opponents of the price increase believe demand is inelastic.
D)the Post Office believes demand for mail service is inelastic; opponents of the price increase believe demand is elastic.

Question 26

Demand for a good will tend to be more price elastic if it exhibits which of the following characteristics?

A)It accounts for a small part of the consumer's total income.
B)The good has many available substitutes.
C)It is a non-durable (as opposed to a durable good).
D)There is little time for the consumer to adjust to the price change.

Question 27

Assume an analyst has been hired to estimate the price elasticity of demand for Levi's brand blue jeans and for blue jeans in general.Ceteris paribus,we would expect the price elasticity of demand in absolute value to be:

A)larger for Levi's brand blue jeans than for blue jeans in general.
B)larger for blue jeans in general than for Levi's brand blue jeans.
C)approximately the same for both Levi's brand blue jeans and blue jeans in general.
D)none of the above because the market for blue jeans cannot be analyzed using the model of supply and demand.

Question 28

If the consumer has a great deal of time to adjust to an increase in the price of gasoline,which of the following is correct?

A)Quantity demanded will be relatively sensitive to the change in price.
B)The percentage change in quantity demanded will be quite small relative to the percentage change in price.
C)The percentage change in price will be quite large relative to the percentage change in quantity demanded.
D)Demand will tend to be unitary elastic as it is for most goods in the long run.

Question 29

Which of the following statements is correct?

A)In the case of a linear demand curve, the slope and the price elasticity of demand are equal at each point on the demand curve.
B)The slope of the demand curve is some constant value, but the value of the price elasticity coefficient decreases as we move down the demand curve.
C)The slope of the demand curve is some constant value, but the value of the price elasticity coefficient increases as we move down the demand curve.
D)There is no connection between the slope of the demand curve and the value of the price elasticity coefficient.

Question 30

Which of the following is a plausible reason that restaurants offer "Senior Citizen Discounts"?

A)Senior citizens tend to have relatively more elastic demands for restaurant meals than other consumer groups.
B)Senior citizens tend to have relatively more inelastic demands for restaurant meals. than other consumer groups.
C)Senior citizens are not very sensitive to changes in prices.
D)Senior citizens are easily fooled by "come-ons" and are therefore frequently victims of price discrimination.

Question 31

If the local pizzeria raises the price of a medium pizza from $6 to $10 and quantity demanded falls from 700 pizzas a night to 100 pizzas a night,the arc price elasticity of demand for pizzas is:

A)0)67.
B)1)5.
C)2)0.
D)3)0.

Question 32

Which of the following is not considered to be a determinant of the price elasticity of demand for a particular good?

A)The number of available substitutes.
B)The cost of the good relative to total income.
C)The quantity of the good that is supplied to the market.
D)The time period under consideration.

Question 33

Assuming the inverse demand function for good Z can be written as P = 90 - 3Q,when Q is equal to 5,average revenue and marginal revenue are equal to ________ and ________.

A)$75; $75.
B)$85; $85.
C)$75; $60.
D)$⁶⁰; $⁶⁰.

Question 34

According to one study,the price elasticity of demand for restaurant meals is -2.27.This implies that if restaurants want to increase their total revenues they should:

A)increase prices.
B)decrease prices.
C)leave prices unchanged.
D)cannot be determined with the information given.

Question 35

Suppose the price of movies seen at a theater rises from $12 per couple to $20 per couple.The theater manager observes that the rise in price causes attendance at a given movie to fall from 300 persons to 200 persons.What is the arc price elasticity of demand for movies?

A)0)5
B)0)8
C)1)0
D)1)2

Question 36

Assume an analyst has been hired to estimate the price elasticity of demand for hamburger (which sells for about $2.30 per pound)and filet mignon (which sells for about $20 per pound),respectively.Considering the different determinants of the price elasticity of demand and assuming the consumers in both markets have approximately the same incomes,we would expect the coefficient of price elasticity of demand in absolute value to be:

A)larger for hamburger than for filet mignon.
B)larger for filet mignon than for hamburger.
C)approximately the same for both hamburger and filet mignon.
D)none of the above because different determinants would have opposing effects on the two estimates.

Question 37

Assuming the inverse demand function for good Z can be written as P = 90 - 3Q,the corresponding total revenue function is:

A)6Q.
B)90 - 6Q.
C)90 - 3Q.
D)90Q - 3Q².

Question 38

Which of the following statements is correct?

A)Arc elasticity of demand is the same as the slope of the demand curve.
B)Arc elasticity of demand only applies to a nonlinear demand curve.
C)Point elasticity of demand is measured at each point along a demand curve.
D)Point elasticity of demand is measured between two adjacent points on a demand curve.

Question 39

A car dealer wants to get rid of the stock of last year's model.Assume that the dealer knows from past experience that the price elasticity of demand for cars is unitary (= 1).If the price of the cars is currently $20,000 and the dealer wants to increase the quantity demanded from 30 units to 50 units,what must the new price be if the dealer is to sell the 20 additional cars?

A)$10,000
B)$12,000
C)$16,000
D)$18,000

Question 40

Many unions attempt to raise the hourly wages received by their members by restricting the supply of workers firms can hire from.Assuming the demand for workers who belong to these unions is inelastic,this would cause:

A)wages of individual union members to decrease and the total (combined)income of union members to increase.
B)wages of individual union members and the total (combined)income of union members to decrease.
C)wages of individual union members to increase and the total (combined)income of union members to decrease.
D)wages of individual union members and the total (combined)income of union members to increase.

Question 41

When a demand curve is perfectly elastic:

A)marginal revenue = average revenue = price.
B)marginal revenue > average revenue = price.
C)marginal revenue < average revenue = price.
D)marginal revenue > average revenue > price.

Question 42

The "marginal rate of substitution" between two goods is measured by:

A)the ratio of the market prices of the two goods.
B)the number of units of a good consumed divided by the market price of the other good.
C)the number of units of one good a consumer would give up to consume one more unit of another good, while holding total utility constant.
D)the consumer's budget constraint divided by the price of each good.

Question 43

Assume the income elasticity of a good has been calculated to be +0.83.Based on this information,we can infer that the good is:

A)a normal good and a luxury.
B)an inferior good and a necessity.
C)a normal good and a necessity.
D)an inferior good and a luxury.

Question 44

At the point on the demand curve at which marginal revenue = 0,the absolute value of the coefficient of the price elasticity of demand is:

A)> 1.
B)= 1.
C)< 1.
D)= 0.

Question 45

Suppose a consumer's income increases from $30,000 to $36,000.As a result,the consumer increases her purchases of compact disks (CDs)from 25 CDs to 30 CDs.What is the consumer's income elasticity of demand for CDs?

A)0)5
B)1)0
C)1)5
D)2)0

Question 46

As we move down a particular indifference curve,if the "marginal rate of substitution" between the two goods does not change we can conclude that the two goods are:

A)perfect substitutes.
B)perfect complements.
C)totally unrelated.
D)both inferior goods.

Question 47

Hot dogs and hot dog buns would be expected to have:

A)positive income elasticities of demand with respect to each other.
B)negative income elasticities of demand with respect to each other.
C)a positive cross-price elasticity of demand.
D)a negative cross-price elasticity of demand.

Question 48

Assume the marginal revenue from each additional unit of a good sold is 0.In this case,we can conclude that demand for the good is:

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

Question 49

An indifference curve is negatively-sloped because:

A)utility is a subjective concept.
B)as the consumer obtains additional units of one good, the consumer is willing to sacrifice increasing amounts of the other good.
C)in order to remain at the same level of utility, if an individual gets more of one good, he must sacrifice some of the other good.
D)marginal utility is constant along an indifference curve, and increases in the consumption of one good cause the price of that good to fall.

Question 50

Which of the following is not a basic assumption underlying the theory of consumer behavior?

A)Consumers prefer more to less.
B)Consumer preferences depend on the amounts of goods they consume as well as the amounts being consumed by other consumers.
C)Goods are continuously divisible, that is, consumers can always purchase one more or one less unit of a good.
D)Consumers have well-behaved preferences, that is, preference orderings are complete.

Question 51

As we move down a linear demand curve,the absolute value of the price elasticity of demand:

A)increases.
B)stays the same.
C)decreases.
D)cannot be determined without more information.

Question 52

Which of the following pairs of goods would be expected to have a positive cross-price elasticity of demand?

A)coffee and tea.
B)gasoline and large SUVs.
C)tennis racquets and tennis balls.
D)hot dogs and hot dog buns.

Question 53

Which of the following statements is correct for the case of a downward-sloping demand curve (beyond the first unit of output)?

A)P = AR = MR
B)P = AR > MR
C)P > AR > MR
D)P = AR < MR

Question 54

Consider an indifference curve drawn for movies and pizzas.Which of the following statements about this indifference curve is false?

A)As an individual consumes more pizzas, the amount of movies the consumer is willing to give up for an additional pizza increases.
B)If the individual consumes more pizzas, the amount of movies consumed must fall if the consumer is to stay on the same indifference curve.
C)The indifference curve will be convex to the origin, that is, bowed in toward the origin.
D)If the consumer purchases more of movies and pizzas, total utility will increase, but the consumer will be on a new indifference curve that is farther from the origin than the original indifference curve.

Question 55

Consider two goods,X and Y,where X is measured on the horizontal axis and Y is measured on the vertical axis.All else constant,a decrease in the price of X will cause the consumer's budget constraint to:

A)rotate in along the X axis
B)rotate out along the X axis.
C)shift out parallel to the original budget constraint.
D)shift in parallel to the original budget constraint.

Question 56

Marginal revenue equals 0 when:

A)total revenue is increasing.
B)total revenue is at its maximum.
C)total revenue is decreasing.
D)none of the above; marginal revenue is always positive.

Question 57

If the cross-price elasticity of demand between two goods is positive,we can assume that the two goods in question are:

A)complements.
B)substitutes.
C)inferior goods.
D)totally unrelated to one another.

Question 58

The slope of the budget constraint:

A)changes as the marginal rate of substitution changes.
B)is the ratio of the prices of the two goods.
C)is the ratio of the budget to total utility.
D)equals one, since the consumer can purchase any combination along the budget constraint.

Question 59

For a normal good,the income elasticity of demand is:

A)positive or negative depending on the share of income accounted for by the good.
B)always equal to 1.
C)positive if income increases and negative when income declines.
D)always positive.

Question 60

Which of the following statements is true when the consumer is in utility-maximizing equilibrium?

A)The number of units of each good purchased is equal.
B)The prices of the goods in question must be equal.
C)The total benefits the consumer receives from every good consumed must be the same for all goods.
D)The rate at which the consumer is willing to trade one good for another is equal to the ratio of their market prices.

Question 61

Observations of consumer behavior suggest that when the price of gasoline rose above $3.50 per gallon,consumer demand for gas became considerably more price elastic.

Question 62

Assuming demand is inelastic,if a firm wants to increase its total revenue,it should raise price.

Question 63

The price elasticity of demand is measured as the percentage change in price divided by the percentage change in quantity demanded.

Question 64

If a 10 percent increase in the price of a luxury hotel room causes the quantity demanded to decrease by 41.5 percent.,we can conclude that the price elasticity of demand for luxury hotel rooms is approximately -0.24.

Question 65

Assuming the demand curve in question is downward sloping,the calculated price elasticity of demand will always be negative.

Question 66

Knowledge about the price elasticity of demand is especially useful to managers because it allows them to predict how a change in price would affect a firm's total revenues.

Question 67

Assume a consumer is currently purchasing a combination of goods,X and Y,that maximizes her utility given her budget constraint,i.e.,MRSX,Y = PX/PY.Now assume that there is a decrease in the price of Y.In this case,to once again maximize her utility,the consumer will want to adjust her purchases of X and Y such that:

A)the marginal rate of substitution of X for Y, i.e., MRSX,Y, decreases.
B)the marginal rate of substitution of X for Y, i.e., MRSX,Y, stays the same.
C)the marginal rate of substitution of X for Y, i.e., MRSX,Y, increases.
D)none of the above. The consumer will continue to maximize her utility after the price change by continuing to consume the same combination of X and Y.

Question 68

As the number of available substitutes for a good increases,the price elasticity of demand for the good will increase as well.

Question 69

Assume that when the price of good X is $12,quantity demanded is 32.When price is decreased to $9,quantity demanded increases to 45.Based on this information,over the range in question demand is elastic.

Question 70

If an increase in price causes total revenue to decrease,we can conclude that demand is price elastic.

Question 71

A demand elasticity coefficient is a measure of the sensitivity of quantity demanded to a change in one of the determinants of demand.

Question 72

When demand is unit elastic,an increase in price will cause total revenue to increase,stay the same,or decrease,depending on the corresponding change in quantity demanded.

Question 73

When the percentage change in price is greater than the corresponding change in quantity demanded,demand is inelastic.

Question 74

When calculating the price elasticity of demand,it is assumed that all of the other determinants of demand are to be held constant.

Question 75

The total revenue from the sale of a good or service is calculated by multiplying the price paid by the number of units sold.

Question 76

Referring to the previous question,as a result of the consumer's adjustment to the change in the price of Y,assuming Y is a normal good and X and Y are complements,it is reasonable to expect that the amount of Y consumed will ________,and the amount of X consumed will ________:

A)increase; decrease
B)decrease; decrease
C)increase; increase
D)cannot be determined; cannot be determined

Question 77

In order to ensure consistency across goods and services,elasticities should always be calculated based on absolute changes in quantity demanded.

Question 78

Knowledge about the price elasticity of demand is especially useful to managers because it allows them to predict how a change in price would affect a firm's total profit.

Question 79

Assume that when the price of good X is $7,quantity demanded is 25.When price is increased to $9,quantity demanded falls to 20.Based on this information,over the range in question demand is elastic.

Question 80

The price elasticity of demand is measured as the percentage change in quantity demanded divided by the percentage change in price.