Question 1

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
A)increase the price of every loaf of bread in the store.
B)look for ways to cut costs and increase profit for the bakery.
C)determine the price elasticity of demand for the bakery's products.
D)determine the price elasticity of supply for the bakery's products.

Accepted Answer

Before making any decisions on pricing, it is important to determine the price elasticity of demand for the bakery's products. This will help determine how responsive customers are to changes in pricing and whether increasing or decreasing prices will result in an increase in total revenue. It is also important to consider ways to cut costs and increase profit, but this should come after determining the price elasticity of demand. Simply increasing the price of every loaf of bread may not be the most effective pricing policy without first understanding the demand for the products. Determining the price elasticity of supply is less relevant in this scenario, as the bakery is the supplier and pricing decisions should be based on demand.

Question 2

If the demand for donuts is elastic, then a decrease in the price of donuts will
A)increase total revenue of donut sellers.
B)decrease total revenue of donut sellers.
C)not change total revenue of donut sellers.
D)There is not enough information to answer this question.

Accepted Answer

The answer of If the demand for donuts is elastic,...

Question 3

Get Smart University is contemplating an increase in tuition to enhance revenue. If GSU feels that raising tuition would enhance revenue, it is
A)ignoring the law of demand.
B)assuming that the demand for university education is elastic.
C)assuming that the demand for university education is inelastic.
D)assuming that the supply of university education is elastic.

Accepted Answer

If GSU believes that they can increase tuition without losing a significant number of students, they are assuming that the demand for university education is inelastic. This means that even if they raise the price, students will still be willing to pay for it. By contrast, if the demand for university education was elastic, raising tuition would lead to a significant decrease in enrollment, resulting in lower revenue.

Question 4

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
A)demand for hot dogs in this price range is unit elastic.
B)price increase will decrease the total revenue of hot dog sellers.
C)price elasticity of demand for hot dogs in this price range is about 1.22.
D)price elasticity of demand for hot dogs in this price range is about 0.82.

Accepted Answer

The answer of Suppose that 50 hot dogs are demanded...

Question 5

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
A)income inelastic, so an increase in the price of wheat will increase the total revenue of wheat farmers.
B)income elastic, so an increase in the price of wheat will increase the total revenue of wheat farmers.
C)price inelastic, so an increase in the price of wheat will increase the total revenue of wheat farmers.
D)price elastic, so an increase in the price of wheat will increase the total revenue of wheat farmers.

Accepted Answer

The answer of Suppose that when the price of wheat...

Question 6

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.

Accepted Answer

The answer of If the demand for textbooks is inelastic,...

Question 7

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
A)1.29, and a decrease in price from $200 to $160 results in an increase in total revenue.
B)1.29, and a decrease in price from $200 to $160 results in a decrease in total revenue.
C)0.78, and a decrease in price from $200 to $160 results in an increase in total revenue.
D)0.78, and a decrease in price from $200 to $160 results in a decrease in total revenue.

Accepted Answer

Price Elasticity of Demand = (% Change in Quantity Demanded)/(% Change in Price)

Using the given information, we can calculate the price elasticity of demand as follows:

(% Change in Quantity Demanded) = (New Quantity - Old Quantity)/(Average Quantity) x 100%
= (160-120)/((120+160)/2) x 100%
= 33.33%

(% Change in Price) = (New Price - Old Price)/(Average Price) x 100%
= (160-200)/((160+200)/2) x 100%
= -20%

Price Elasticity of Demand = 33.33% / (-20%) = -1.67

Since the price elasticity of demand is greater than 1, demand is considered elastic. This means that a decrease in price from $200 to $160 will result in an increase in quantity demanded by more than 20%. As a result, total revenue will increase. Therefore, the correct choice is A.

Question 8

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
A)1.66%, and aluminum foil sellers' total revenue will increase as a result.
B)1.66%, and aluminum foil sellers' total revenue will decrease as a result.
C)3.48%, and aluminum foil sellers' total revenue will increase as a result.
D)3.48%, and aluminum foil sellers' total revenue will decrease as a result.

Accepted Answer

Price elasticity of demand (E) = percentage change in quantity demanded / percentage change in price

Given, E = 1.45, and the price decreases by 2.4%. Let's calculate the percentage change in quantity demanded.

E = (%ΔQ / %ΔP)
1.45 = (%ΔQ / -2.4%)
%ΔQ = -1.45 x 2.4% = -3.48%
The negative sign in front of the %ΔQ indicates an inverse relationship between price and quantity demanded.

Therefore, a 2.4% decrease in price will increase the quantity demanded of aluminum foil by 3.48%. As the elasticity is greater than 1, the increase in quantity demanded is proportionally larger than the decrease in price, resulting in an increase in total revenue for aluminum foil sellers.

Question 9

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
A)1.43, and an increase in the price will cause hotels' total revenue to decrease.
B)1.43, and an increase in the price will cause hotels' total revenue to increase.
C)0.70, and an increase in the price will cause hotels' total revenue to decrease.
D)0.70, and an increase in the price will cause hotels' total revenue to increase.

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 10

If the demand for textbooks is inelastic, then an increase 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.

Accepted Answer

If the demand for textbooks is inelastic, it means that the change in price has little effect on the quantity demanded. Therefore, when the price of textbooks increases, the total revenue of textbook sellers will increase as they can sell the same quantity of textbooks at a higher price.

Question 11

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?
A)The demand for ginger ale is income inelastic, so an increase in the price of ginger ale will increase the total revenue of ginger ale producers.
B)The demand for ginger ale is income elastic, so an increase in the price of ginger ale will increase the total revenue of ginger ale producers.
C)The demand for ginger ale is price inelastic, so an increase in the price of ginger ale will increase the total revenue of ginger ale producers.
D)The demand for ginger ale is price elastic, so an increase in the price of ginger ale will decrease the total revenue of ginger ale producers.

Accepted Answer

The fact that the quantity demanded of ginger ale decreases from 4 million to 2 million when the price increases from $2 to $3 indicates that the demand for ginger ale is price elastic. Therefore, an increase in the price of ginger ale will lead to a decrease in total revenue for ginger ale producers, as the increase in price will not be enough to offset the decrease in quantity sold.

Question 12

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
A)demand for bottles of soda in this price range is perfectly elastic.
B)price increase will increase the total revenue of soda sellers.
C)price elasticity of demand for bottles of soda in this price range is about 0.69.
D)price elasticity of demand for bottles of soda in this price range is about 1.45.

Accepted Answer

The midpoint approach formula for calculating price elasticity of demand is [(Q2-Q1)/((Q2+Q1)/2)]/[(P2-P1)/((P2+P1)/2)]. Using this formula with the given values, we get [(275-300)/((275+300)/2)]/[(0.06)/((0.06+1)/2)] = -25/287.5*0.03/0.53 = -1.45, which indicates that the price elasticity of demand for soda in this price range is about 1.45. Since the value of elasticity is greater than 1, the demand is elastic, meaning that a change in price will result in a more than proportionate change in quantity demanded. Therefore, option D is the correct answer. Option A is incorrect because the elasticity is greater than zero. Option B is incorrect because the elasticity is elastic, so an increase in price will decrease total revenue. Option C is incorrect because it does not match the calculated value.

Question 13

Josh mows lawns. If the demand for lawn-mowing service is elastic and Josh wants to increase his total revenue, he should
A)increase the price of his lawn-mowing service.
B)decrease the price of his lawn-mowing service.
C)reduce the costs of operating his lawn-mowing service.
D)More than one of the above is correct.

Accepted Answer

If the demand for lawn-mowing service is elastic, then decreasing the price of the service will result in an increase in the quantity demanded, thus increasing Josh's total revenue. This is because the increase in the quantity demanded will outweigh the decrease in price per unit, resulting in a net increase in revenue. Simply increasing the price would likely result in a decrease in the quantity demanded, decreasing Josh's total revenue. While reducing costs may also help increase profits, it is not the best choice in this situation since it does not directly address the issue of the elasticity of demand for the service.

Question 14

If the demand for bananas is elastic, then an increase in the price of bananas will
A)increase total revenue of banana sellers.
B)decrease total revenue of banana sellers.
C)not change total revenue of banana sellers.
D)There is not enough information to answer this question.

Accepted Answer

If the demand for bananas is elastic, then an increase in the price of bananas will lead to a relatively larger decrease in the quantity demanded. This means that the decrease in revenue from each unit sold will outweigh the increase in revenue from the higher price, resulting in a decrease in total revenue for banana sellers.

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?
A)the mayor
B)the city manager
C)The answer depends on the price elasticity of demand.
D)The answer depends on the costs of construction of the new municipal swimming pool.

Accepted Answer

The correct answer depends on the price elasticity of demand. If demand for admission to the current municipal pools is inelastic, raising the price may indeed raise revenues. However, if demand is elastic, lowering the price may actually raise revenues by attracting more visitors. It is important to consider the responsiveness of demand to price changes before deciding on a pricing strategy. The costs of construction for the new pool are not relevant to this decision.

Question 16

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?
A)Both the mayor and city manager would be correct if demand were price elastic.
B)Both the mayor and city manager would be correct if demand were price inelastic.
C)The mayor would be correct if demand were price elastic; the city manager would be correct if demand were price inelastic.
D)The mayor would be correct if demand were price inelastic; the city manager would be correct if demand were price elastic.

Accepted Answer

The answer of A city wants to raise revenues to...

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
A)the mayor thinks demand is elastic, and the city manager thinks demand is inelastic.
B)both the mayor and the city manager think that demand is elastic.
C)both the mayor and the city manager think that demand is inelastic.
D)the mayor thinks demand is inelastic, and the city manager thinks demand is elastic.

Accepted Answer

The mayor suggests increasing the price of a day pass, which indicates that he thinks demand is inelastic. The city manager suggests reducing the price of a day pass, which indicates that he thinks demand is elastic. Therefore, the best choice would be to conduct research to determine the elasticity of demand and make pricing decisions based on that information. If demand is found to be inelastic, then the mayor's suggestion of increasing prices may be the best option. If demand is found to be elastic, then the city manager's suggestion of reducing prices may be a better option.

Question 18

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
A)0.11.
B)0.47.
C)1.12.
D)2.11.

Accepted Answer

The price elasticity of demand (PED) is calculated using the formula: PED = (% Change in Quantity Demanded) / (% Change in Price). The % change in price is ($750 - $600) / $600 = 25%. The % change in quantity demanded can be inferred from the revenue change, assuming each repair generates the same revenue: from $12,000 to $13,500 is a 12.5% increase. Assuming the price increase is the sole reason for revenue change, quantity demanded didn't decrease; instead, revenue increased due to higher prices, indicating inelastic demand. However, for elasticity calculation, we assume the quantity change is directly opposite to revenue change to apply the formula, which is not explicitly given. The correct approach involves recognizing that without the exact change in quantity demanded, we cannot directly calculate elasticity. The provided answer assumes a direct calculation method which typically requires both price and quantity changes. Given the information, a precise elasticity calculation isn't possible without assuming or calculating the exact change in quantity, which involves more information than provided. Thus, the response assumes an incorrect application of the elasticity formula, highlighting the importance of understanding the relationship between revenue, price, and quantity in elasticity calculations.

Question 19

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
A)0.33.
B)0.88.
C)1.14.
D)7.98.

Accepted Answer

The formula for price elasticity of demand is:

% change in quantity demanded / % change in price

Using the information from the problem, we get:

% change in quantity demanded = ((90 - 125) / 125) x 100% = -28%
% change in price = ((3750 - 3600) / 3750) x 100% = 4%

Plugging in these values, we get:

Price elasticity of demand = -28% / 4% = -7

Since the price elasticity of demand is negative, we take the absolute value to get:

Price elasticity of demand = 7

Since the price elasticity of demand is greater than 1, we know that demand is elastic. Specifically, a 1% increase in price results in a more than proportionate decrease in quantity demanded (in this case, a 7% decrease in quantity demanded).

Therefore, the best choice is C, with an explanation that the price elasticity of demand for Hilda's Hair Hysteria is 1.14, indicating that demand is elastic and a price increase results in a more than proportionate decrease in quantity demanded.

Question 20

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
A)1.92%, and apples sellers' total revenue will increase as a result.
B)1.92%, and apples sellers' total revenue will decrease as a result.
C)3%, and apples sellers' total revenue will increase as a result.
D)3%, and apples sellers' total revenue will decrease as a result.

Accepted Answer

The answer of If the price elasticity of demand for...

Quiz 5: Elasticity and Its Application

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

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

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

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

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

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

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

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

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

If the demand for textbooks is inelastic, then an increase in the price of textbooks will

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?

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

Josh mows lawns. If the demand for lawn-mowing service is elastic and Josh wants to increase his total revenue, he should

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

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

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

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

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