Question 1

For automobile demand in the U.S., the income response tends to be larger in the:

Accepted Answer

The income response is larger in the short run because consumers are more likely to purchase new cars when their incomes increase in the short term. In the long run, consumers have more time to adjust their spending habits and may choose to save or invest their additional income rather than spending it on new cars.

Question 2

Suppose the U.S. demand curve for gasoline shifts rightward, and the U.S. supply curve for gasoline remains unchanged. As a result, the price of gasoline increases by 9 percent, and the equilibrium quantity increases by 3 percent. Which of the following statements is true based on this information?

Accepted Answer

The price elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price. Given that the quantity supplied increased by 3 percent in response to a 9 percent increase in price, the price elasticity of supply is 0.33 (3% / 9%).

Question 3

Which of the following terms refers to price elasticity of demand calculated over a range of prices?

Accepted Answer

Arc elasticity of demand is calculated over a range of prices, whereas point elasticity of demand refers to the price elasticity of demand at a specific point, and cross-price elasticity of demand refers to the responsiveness of demand to changes in the price of a related good. Unit elasticity refers to a situation where the percentage change in quantity demanded is equal to the percentage change in price.

Question 4

A freeze in Florida's orange growing regions will:

Accepted Answer

A freeze in Florida's orange growing regions will reduce the supply of oranges, meaning there will be less oranges available to meet the demand. With demand for oranges being highly inelastic (people are willing to pay higher prices for oranges despite changes in price), a reduction in supply will lead to a sharp increase in price in the short run. Therefore, choice A is the best answer.

Question 5

Harding Enterprises has developed a new product called the Gillooly Shillelagh. The market demand for this product is given as follows:
Q = 240 - 4P
a. At what price is the price elasticity of demand equal to zero?
b. At what price is demand infinitely elastic?
c. At what price is the price elasticity of demand equal to one?
d. If the shillelagh is priced at $40, what is the point price elasticity of demand?

Accepted Answer

The answer of Harding Enterprises has developed a new product...

Question 6

For U.S. consumers, the income elasticity of demand for fruit juice is 1.1. If the economy enters a recession next year and consumer income declines by 2.5%, what is the expected change in the quantity of fruit juice demanded next year?

Accepted Answer

The income elasticity of demand formula is % change in quantity demanded / % change in income. Given an elasticity of 1.1 and a -2.5% change in income, the expected change in quantity demanded is 1.1 * (-2.5%) = -2.75%.

Question 7

In the long run, new firms can enter an industry and so the supply elasticity tends to be:

Accepted Answer

In the long run, new firms can enter the industry, which increases competition and supply. This makes it easier for firms to increase or decrease their production level in response to changes in demand, making supply more elastic than in the short run.

Question 8

Figure 2.5.1
-Refer to Figure 2.5.1 above. If close substitutes are difficult to find in the short run, which of the demand curves in the figure best represents market demand in the short run?

Accepted Answer

The demand curve that best represents market demand in the short run is D₁ because it is less elastic and more steeply sloped than D₂. This indicates that consumers are less responsive to price changes in the short run and are willing to pay a higher price for the product. The flatter demand curve D₂ suggests that consumers have more alternatives to this product and can easily switch to substitutes if the price increases.

Question 9

The price elasticity of gasoline supply in the U.S. is 0.4. If the price of gasoline rises by 8%, what is the expected change in the quantity of gasoline supplied in the U.S.?

Accepted Answer

The price elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price. Given an elasticity of 0.4 and a price increase of 8%, the expected change in quantity supplied is 0.4 * 8% = 3.2%.

Question 10

The monthly supply of desktop personal computers is given by the equation  At a price of $800, what is the price elasticity of supply?

Accepted Answer

The answer of The monthly supply of desktop personal computers...

Question 11

Due to capacity constraints, the price elasticity of supply for most products is:

Accepted Answer

In the long run, producers have more time to adjust their production capacity and resources in response to price changes, making the price elasticity of supply greater compared to the short run where adjustments are more limited and immediate.

Question 12

The demand for tickets to the Daytona 500 NASCAR event is given by the equation  The supply of tickets to the event is given by the capacity of the Daytona track, which is 150,000. What is the equilibrium price of tickets to the event? What is the price elasticity of demand at the equilibrium price? What is the price elasticity of supply at the equilibrium price?

Accepted Answer

The answer of The demand for tickets to the Daytona...

Question 13

The price elasticity of supply refers to:

Accepted Answer

The price elasticity of supply is measured as the percentage change in the quantity supplied of a good resulting from a 1-percent increase in the price of that good. This shows the level of responsiveness of suppliers to a change in the price of a good.

Question 14

The demand for packs of Pokemon cards is given by the equation  At a price of $2.50 per pack, what is the quantity demanded? At $5.00 per pack, what is the price elasticity of demand?

Accepted Answer

The answer of The demand for packs of Pokemon cards...

Question 15

If two goods are substitutes, the cross-price elasticity of demand must be:

Accepted Answer

If two goods are substitutes, an increase in the price of one good will lead to an increase in demand for the other good. This means that the cross-price elasticity of demand is positive, indicating a direct relationship between the price of one good and the demand for the other good.

Question 16

The cross-price elasticity of demand for peanut butter with respect to the price of jelly is -0.3. If we expect the price of jelly to decline by 15%, what is the expected change in the quantity demanded for peanut butter?

Accepted Answer

The cross-price elasticity of demand formula is % change in quantity demanded of good X / % change in price of good Y. Given a -0.3 elasticity and a -15% change in price of jelly, the expected change in quantity demanded for peanut butter is -0.3 * (-15%) = +4.5%.

Question 17

According to the textbook, for most goods and services-foods, beverages, entertainment, etc.-the income elasticity of demand is:

Accepted Answer

For most goods and services, the income elasticity of demand tends to be larger in the long run than in the short run. This is because consumers have more time to adjust their consumption habits in response to changes in their income over the long run.

Question 18

Figure 2.5.2
-Refer to Figure 2.5.2 above. Which of the following best represents the demand for cars in the short run (SR) and in the long run (LR)?

Accepted Answer

In the short run, demand for cars is typically more inelastic due to limited substitutes and immediate needs. In the long run, demand becomes more elastic as consumers have more time to adjust their preferences and find alternatives. Panel A likely depicts this scenario.

Question 19

Suppose the market price for wheat changes, and we move from point A to point B on the wheat demand curve. If the price elasticity of wheat demand was -0.3 at point A and -0.4 at point B, what is a plausible value for the arc elasticity of demand for wheat between points A and B?

Accepted Answer

The arc elasticity of demand is calculated as the average of the price elasticities at two points, so (-0.3 + -0.4) / 2 = -0.35.

Question 20

The demand for a bushel of wheat in 1981 was given by the equation  At a price of $3.46 per bushel, what is the price elasticity of demand? If the price of wheat falls to $3.27 per bushel, what happens to the revenue generated from the sale of wheat?

Accepted Answer

The answer of The demand for a bushel of wheat...

Quiz 2: The Basics of Supply and Demand