Deck 5: Elasticity and Its Application

Question 1

A good will have a more inelastic demand,the

A)greater the availability of close substitutes.
B)broader the definition of the market.
C)longer the period of time.
D)more it is regarded as a luxury.

Answer 1

B

Question 2

Table 5-4 $$\begin{array} { | c | c | } \hline \text { Price } & \begin{array} { c } \text { Total } \\\text { Revenue }\end{array} \\\hline \$ 10 & \$ 100 \\\hline \$ 12 & \$ 108 \\\hline \$ 14 & \$ 112 \\\hline \$ 16 & \$ 112 \\\hline\end{array}$$

-Refer to Table 5-4.Demand is unit elastic when quantity demanded changes from

A)10 to 9.
B)9 to 8.
C)8 to 7.
D)There is not enough information given to determine the correct answer.

Answer 2

8 to 7.

Question 3

Figure 5-2
Refer to Figure 5-2.As price falls from Pa to Pb,which demand curve represents the most elastic demand?

A)D1
B)D2
C)D3
D)All of the above are equally elastic.

Answer 3

A

Question 4

For a particular good,a 2 percent increase in price causes a 12 percent decrease in quantity demanded.Which of the following statements is most likely applicable to this good?

A)There are no close substitutes for this good.
B)The good is a luxury.
C)The market for the good is broadly defined.
D)The relevant time horizon is short.

Question 5

If a 15% increase in price for a good results in a 20% decrease in quantity demanded,the price elasticity of demand is

A)0.75.
B)1.25.
C)1.33.
D)1.60.

Question 6

How does the concept of elasticity allow us to improve upon our understanding of supply and demand?

A)Elasticity allows us to analyze supply and demand with greater precision than would be the case in the absence of the elasticity concept.
B)Elasticity provides us with a better rationale for statements such as "an increase in x will lead to a decrease in y" than we would have in the absence of the elasticity concept.
C)Without elasticity,we would not be able to address the direction in which price is likely to move in response to a surplus or a shortage.
D)Without elasticity,it is very difficult to assess the degree of competition within a market.

Question 7

Which of the following is not a determinant of the price elasticity of demand for a good?

A)the time horizon
B)the steepness or flatness of the supply curve for the good
C)the definition of the market for the good
D)the availability of substitutes for the good

Question 8

If the price elasticity of demand for a good is 6,then a 3 percent decrease in price results in

A)a 20 percent increase in the quantity demanded.
B)an 18 percent increase in the quantity demanded.
C)a 2 percent increase in the quantity demanded.
D)a 1.8 percent increase in the quantity demanded.

Question 9

Which of the following is likely to have the most price inelastic demand?

A)laptop computers
B)MP3 players
C)designer jeans
D)college tuition for a junior or senior

Question 10

For a good that is a luxury,demand

A)tends to be inelastic.
B)tends to be elastic.
C)has unit elasticity.
D)cannot be represented by a demand curve in the usual way.

Question 11

The midpoint method is used to compute elasticity because it

A)automatically computes a positive number instead of a negative number.
B)results in an elasticity that is the same as the slope of the demand curve.
C)gives the same answer regardless of the direction of change.
D)automatically rounds quantities to the nearest whole unit.

Question 12

Figure 5-3
Refer to Figure 5-3.Mark says he would buy one Mt.Dew per day regardless of the price.If this is true,then Mark's demand for Mt.Dew is represented by demand curve

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

Question 13

Demand is inelastic if the price elasticity of demand is

A)less than 1.
B)equal to 1.
C)greater than 1.
D)equal to 0.

Question 14

Total revenue

A)always increases as price increases.
B)increases as price increases,as long as demand is elastic.
C)decreases as price increases,as long as demand is inelastic.
D)remains unchanged as price increases when demand is unit elastic.

Question 15

Table 5-4 $$\begin{array} { | c | c | } \hline \text { Price } & \begin{array} { c } \text { Total } \\\text { Revenue }\end{array} \\\hline \$ 10 & \$ 100 \\\hline \$ 12 & \$ 108 \\\hline \$ 14 & \$ 112 \\\hline \$ 16 & \$ 112 \\\hline\end{array}$$

-Refer to Table 5-4.As price rises from $10 to $12,the price elasticity of demand using the midpoint method is approximately

A)0.08.
B)0.18.
C)0.42.
D)0.58.

Question 16

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

A)increase total revenue of textbook sellers.
B)decrease total revenue of textbook sellers.
C)not change total revenue of textbook sellers.
D)There is not enough information to answer this question.

Question 17

Suppose that quantity demand falls by 30% as a result of a 5% increase in price.The price elasticity of demand for this good is

A)inelastic and equal to 6.
B)elastic and equal to 6.
C)inelastic and equal to 0.17.
D)elastic and equal to 0.17.

Question 18

Which of the following statements about the price elasticity of demand is correct?

A)The price elasticity of demand for a good measures the willingness of buyers of the good to buy less of the good as its price increases.
B)Price elasticity of demand reflects the many economic,psychological,and social forces that shape consumer tastes.
C)Other things equal,if good x has close substitutes and good y does not have close substitutes,then the demand for good x will be more elastic than the demand for good y.
D)All of the above are correct.

Question 19

Suppose that demand is inelastic within a certain price range.For that price range,

A)an increase in price would increase total revenue because the decrease in quantity demanded is proportionately less than the increase in price.
B)an increase in price would decrease total revenue because the decrease in quantity demanded is proportionately greater than the increase in price.
C)a decrease in price would increase total revenue because the increase in quantity demanded is proportionately smaller than the decrease in price.
D)a decrease in price would not affect total revenue.

Question 20

For a horizontal demand curve,

A)the slope is undefined,and the price elasticity of demand is equal to 0.
B)the slope is equal to 0,and the price elasticity of demand is undefined.
C)both the slope and price elasticity of demand are undefined.
D)both the slope and price elasticity of demand are equal to 0.

Question 21

Figure 5-12
Refer to Figure 5-12.If rectangle D is larger than rectangle A,then

A)demand is elastic between prices P₁ and P₂.
B)a decrease in price from P₂ to P₁ will cause an increase in total revenue.
C)the magnitude of the percent change in price between P₁ and P₂ is smaller than the magnitude of the corresponding percent change in quantity demanded.
D)All of the above are correct.

Question 22

If an increase in income results in a decrease in the quantity demanded of a good,then for that good,the

A)cross-price elasticity of demand is negative.
B)price elasticity of demand is elastic.
C)income elasticity of demand is negative.
D)income elasticity of demand is positive.

Question 23

Some firms eventually experience problems with their capacity to produce output as their output levels increase.For these firms,

A)market power is substantial.
B)supply is perfectly inelastic.
C)supply is more elastic at low levels of output and less elastic at high levels of output.
D)supply is less elastic at low levels of output and more elastic at high levels of output.

Question 24

Suppose that when the price of good X falls from $10 to $8,the quantity demanded of good Y rises from 20 units to 25 units.Using the midpoint method,the cross-price elasticity of demand is

A)-1.0,and X and Y are complements.
B)-1.0,and X and Y are substitutes.
C)1.0,and X and Y are complements.
D)1.0,and X and Y are substitutes.

Question 25

Table 5-5
Refer to Table 5-5.Along which of the supply curves does quantity supplied move proportionately more than the price?

A)along supply curve B only
B)along supply curves B and C
C)along all three supply curves
D)None.Quantity supplied moves proportionately less than the price along all of the three supply curves.

Question 26

Figure 5-5
Refer to Figure 5-5.Using the midpoint method,demand is unit elastic between prices of

A)$18 and $24.
B)$24 and $30.
C)$24 and $36.
D)$30 and $36.

Question 27

Table 5-5
Refer to Table 5-5.Which of the three supply curves represents the most elastic supply?

A)supply curve A
B)supply curve B
C)supply curve C
D)There is no difference in the elasticity of the three supply curves.

Question 28

Figure 5-13
Refer to Figure 5-13.Over which range is the supply curve in this figure the most elastic?

A)16 to 40
B)40 to 100
C)100 to 220
D)220 to 430

Question 29

If the price elasticity of supply is 1.2,and price increased by 5%,quantity supplied would

A)increase by 4.2%.
B)increase by 6%.
C)decrease by 4.2%.
D)decrease by 6%.

Question 30

Figure 5-6
Refer to Figure 5-6.Which of the following price changes would result in no change in sellers' total revenue?

A)The price increases from $6 to $9.
B)The price increases from $9 to $15.
C)The price decreases from $12 to $9.
D)The price decreases from $9 to $5.

Question 31

At price of 1.25 dollars,a paper manufacturer is willing to supply 150 spiral notebooks per day.At a price of 1.50 dollars,the paper manufacturer is willing to supply 175 spiral notebooks per day.Using the midpoint method,the price elasticity of supply is about

A)1.18.
B)1.00.
C)0.85.
D)0.25.

Question 32

Suppose good X has a negative income elasticity of demand.This implies that good X is

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

Question 33

Figure 5-10
Refer to Figure 5-10.An increase in price from $20 to $30 would

A)increase total revenue by $2,000.
B)decrease total revenue by $2,000.
C)increase total revenue by $1,000.
D)decrease total revenue by $1,000.

Question 34

Figure 5-12
Refer to Figure 5-12.Total revenue when the price is P₁ is represented by the area(s)

A)B + D.
B)A + B.
C)C + D.
D)D.

Question 35

A key determinant of the price elasticity of supply is the

A)number of close substitutes for the good in question.
B)extent to which buyers alter their quantities demanded in response to changes in prices.
C)length of the time period.
D)extent to which buyers alter their quantities demanded in response to changes in their incomes.

Question 36

Table 5-6 $$\begin{array} { | l | l | l | } \hline \text { Income } & \begin{array} { l } \text { Quantity of Good X } \\\text { Purchased }\end{array} & \begin{array} { l } \text { Quantity of Good Y } \\\text { Purchased }\end{array} \\\hline \$ 30,000 & 2 & 20 \\\hline \$ 40,000 & 6 & 10 \\\hline\end{array}$$

-Refer to Table 5-6.Using the midpoint method,the income elasticity of demand for good Y is

A)2.33,and good Y is a normal good.
B)-2.33,and good Y is an inferior good.
C)-0.43,and good Y is a normal good.
D)-0.43,and good Y is an inferior good.

Question 37

Assume that a 4 percent decrease in income results in a 6 percent increase in the quantity demanded of a good.The income elasticity of demand for the good is

A)negative,and the good is an inferior good.
B)negative,and the good is a normal good.
C)positive,and the good is an inferior good.
D)positive,and the good is a normal good.

Question 38

Table 5-6 $$\begin{array} { | l | l | l | } \hline \text { Income } & \begin{array} { l } \text { Quantity of Good X } \\\text { Purchased }\end{array} & \begin{array} { l } \text { Quantity of Good Y } \\\text { Purchased }\end{array} \\\hline \$ 30,000 & 2 & 20 \\\hline \$ 40,000 & 6 & 10 \\\hline\end{array}$$

-Refer to Table 5-6.Using the midpoint method,what is the income elasticity of demand for good X?

A)-3.5
B)-0.29
C)0.29
D)3.5

Question 39

If the price elasticity of supply is 1.5,and a price increase led to a 1.8% increase in quantity supplied,then the price increase is about

A)0.67%.
B)0.83%.
C)1.20%.
D)2.70%.

Question 40

Suppose a producer is able to separate customers into two groups,one having an inelastic demand and the other having an elastic demand.If the producer's objective is to increase total revenue,he should

A)increase the price charged to customers with the elastic demand and decrease the price charged to customers with the inelastic demand.
B)decrease the price charged to customers with the elastic demand and increase the price charged to customers with the inelastic demand.
C)decrease the price to both groups of customers.
D)increase the price for both groups of customers.

Question 41

Suppose that corn farmers want to increase their total revenue.Knowing that the demand for corn is inelastic,corn farmers should

A)plant more corn so that they would be able to sell more each year.
B)increase spending on fertilizer in an attempt to produce more corn on the acres they farm.
C)reduce the number of acres on which they plant corn.
D)contribute to a fund that promotes technological advances in corn production.

Question 42

If a firm is facing elastic demand,then the firm should decrease price to increase revenue.

Question 43

Goods with close substitutes tend to have more elastic demands than do goods without close substitutes.

Question 44

The demand for bread is likely to be more elastic than the demand for solid-gold bread plates.

Question 45

Supply and demand both tend to be more elastic in the long run and more inelastic in the short run.

Question 46

Suppose that when the price rises by 20% for a particular good,the quantity demanded of that good falls by 10%.The price elasticity of demand for this good is equal to 2.0.

Question 47

Good news for farming can be bad news for farmers because the

A)supply curve for an individual farmer is usually perfectly elastic.
B)supply curve for an individual farmer is usually perfectly inelastic.
C)demand for basic foodstuffs is usually inelastic,meaning that factors that shift supply to the right decrease total revenues to sellers.
D)demand for basic foodstuffs is usually elastic,meaning that factors that shift supply to the right increase total revenues to sellers.

Question 48

Which of the following statements is valid when supply is perfectly elastic at a price of $4?

A)The elasticity of supply approaches infinity.
B)The supply curve is vertical.
C)At a price below $4,quantity supplied is infinite.
D)At a price above $4,quantity supplied is zero.

Question 49

If the price elasticity of demand is equal to 0,then demand is unit elastic.

Question 50

In the market for oil in the short run,demand

A)and supply are both elastic.
B)and supply are both inelastic.
C)is elastic and supply is inelastic.
D)is inelastic and supply is elastic.

Question 51

If the price of calculators increases by 15 percent and the quantity demanded per week falls by 45 percent as a result,then the price elasticity of demand is 3.

Question 52

Cross-price elasticity of demand measures how the quantity demanded of one good changes as the price of another good changes.

Question 53

Farm programs that pay farmers not to plant crops on all their land

A)hurt farmers by lowering their total revenue and hurt consumers by causing shortages of some food items.
B)help farmers by cutting costs,which helps consumers by lowering food prices.
C)help farmers by increasing total revenue in the market but hurt consumers by raising food prices.
D)help farmers directly since they receive government payments but have no real effects on consumers.

Question 54

Necessities tend to have inelastic demands,whereas luxuries tend to have elastic demands.

Question 55

Along the elastic portion of a linear demand curve,total revenue rises as price rises.

Question 56

Measures of elasticity enhance our ability to study the magnitudes of changes in quantities in response to changes in prices or income.

Question 57

Scenario 5-2
The supply of cheese is inelastic,and the supply of bread is elastic.Both goods are considered to be normal goods by a majority of consumers.Suppose that a large income tax increase decreases the demand for both goods by 10%.
Refer to Scenario 5-2.The change in equilibrium price will be

A)greater in the cheese market than in the bread market.
B)greater in the bread market than in the cheese market.
C)the same in the cheese and bread markets.
D)Any of the above could be correct.

Question 58

The demand for gasoline will respond more to a change in price over a period of five weeks than over a period of five years.

Question 59

An advantage of using the midpoint method to calculate the price elasticity of demand is that it uses the metric system.

Question 60

Figure 5-16
Refer to Figure 5-16.If,holding the supply curve fixed,there were an increase in demand that caused the equilibrium price to increase from $6 to $8,then sellers' total revenue would

A)increase.
B)decrease.
C)remain unchanged.
D)The effect on total revenue cannot be determined from the given information.

Question 61

Consider the following pairs of goods.For which of the two goods would you expect the demand to be more price elastic?
Why?
a.water or diamonds
b.insulin or nasal decongestant spray
c.food in general or breakfast cereal
d.gasoline over the course of a week or gasoline over the course of a year
e.personal computers or Sony personal computers

Question 62

If a supply curve is horizontal,then supply is said to be perfectly elastic,and the price elasticity of supply approaches infinity.

Question 63

When a family had a monthly income of 2,000 dollars,they usually ate out 8 times a month.Now that the family makes 5,500 dollars a month,they eat out 10 times a month.Compute the family's income elasticity of demand using the midpoint method.Explain your answer.Is a restaurant meal a normal or inferior good to the couple?

Question 64

Using the midpoint method,compute the elasticity of demand between points A and B.Is demand along this portion of the curve elastic or inelastic?
Interpret your answer with regard to price and quantity demanded.Now compute the elasticity of demand between points B and C.Is demand along this portion of the curve elastic or inelastic?

Question 65

A discovery that increases wheat yields per acre helps farmers by increasing both supply and total revenues.