Question 1

Generally speaking, the smaller the percentage of one's total budget devoted to a particular product, the more price elastic will be the demand for that product.

Accepted Answer

Price elasticity of demand is determined by several factors including the availability of substitutes, necessity of the product, and the proportion of income spent on the product. However, the statement is reversed; typically, the larger the percentage of one's budget devoted to a product, the more price elastic the demand, as consumers are more sensitive to price changes when a product takes up a larger portion of their budget.

Question 2

A linear demand curve has a constant elasticity over the full range of the curve.

Accepted Answer

A linear demand curve does not have constant elasticity; the price elasticity of demand changes at different points along the curve.

Question 3

If price changes and total revenue changes in the opposite direction, demand is relatively elastic.

Accepted Answer

This statement is consistent with the definition of elastic demand, where a change in price results in a proportional change in quantity demanded and total revenue moves in the opposite direction of price changes.

Question 4

(Last Word) Which of the following is not an example of pricing based on group differences in elasticity of demand?

Accepted Answer

Cash rebates for purchases of automobiles are not based on group differences in elasticity of demand but are instead a general incentive to encourage purchases.

Question 5

If the demand for wheat is highly price inelastic, an extraordinarily large crop may reduce farm incomes.

Accepted Answer

If the demand for wheat is highly price inelastic, it means that a change in price will not significantly affect the quantity demanded. Therefore, if there is an extraordinarily large crop, the price of wheat will decrease due to the excess supply, but this decrease in price will not cause a significant increase in quantity demanded. As a result, farmers will not be able to recoup their losses by selling more wheat, leading to a reduction in farm incomes.

Question 6

If the elasticity coefficient of supply is 0.7, supply is elastic.

Accepted Answer

If the elasticity coefficient of supply is less than 1, supply is considered inelastic, not elastic.

Question 7

The smaller the number of good substitutes for a product, the greater will be the price elasticity of demand for it.

Accepted Answer

The smaller the number of good substitutes for a product, the less elastic (or more inelastic) the demand for it will be, because consumers have fewer alternatives and thus changes in price have a smaller effect on the quantity demanded.

Question 8

A cross elasticity of demand coefficient of +2.5 indicates that the two products are substitutes.Difficulty: 03 Hard
Learning Objective: 06-05 Apply cross elasticity of demand and income elasticity of demand.Topic: Cross Elasticity and Income Elasticity of Demand

Accepted Answer

A positive cross elasticity of demand indicates that an increase in the price of one product leads to an increase in the demand for another product, suggesting they are substitutes.

Question 9

(Last Word) Suppose that a firm has "pricing power" and can segregate its market into two distinct groups based on differences in elasticities of demand.The firm might charge

Accepted Answer

A firm with pricing power can charge a higher price to the group with less elastic demand because they are less responsive to price changes and are willing to pay more for the product.

Question 10

If price and total revenue are directly related, demand is inelastic.

Accepted Answer

Inelastic demand means that the change in price does not significantly affect the quantity demanded. Therefore, if the price increases, total revenue will also increase, and if the price decreases, total revenue will decrease. This indicates a direct relationship between price and total revenue.

Question 11

If the coefficient of income elasticity of demand is positive, the product is an inferior good.Difficulty: 03 Hard
Learning Objective: 06-05 Apply cross elasticity of demand and income elasticity of demand.Topic: Cross Elasticity and Income Elasticity of Demand
Difficulty: 03 Hard
Learning Objective: 06-05 Apply cross elasticity of demand and income elasticity of demand.Topic: Cross Elasticity and Income Elasticity of Demand

Accepted Answer

A positive income elasticity of demand indicates that the product is a normal good, not an inferior good.

Question 12

An income elasticity coefficient of −1.8 means the product is a normal good.Difficulty: 03 Hard
Learning Objective: 06-05 Apply cross elasticity of demand and income elasticity of demand.Topic: Cross Elasticity and Income Elasticity of Demand

Accepted Answer

An income elasticity coefficient of -1.8 indicates that the product is an inferior good, as the demand decreases when income increases.

Question 13

If the coefficient of cross elasticity of demand is positive, the two products are complementary goods.Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 03 Hard
Learning Objective: 06-05 Apply cross elasticity of demand and income elasticity of demand.Topic: Cross Elasticity and Income Elasticity of Demand

Accepted Answer

A positive coefficient of cross elasticity of demand indicates that the two products are substitutes, not complements. Complementary goods have a negative cross elasticity of demand.

Question 14

Generally speaking, the demand for luxury goods is more price elastic than is the demand for necessities.

Accepted Answer

Luxury goods are considered non-essential and consumers are more likely to reduce their consumption or switch to substitute goods if the price increases. On the other hand, necessities like food and housing have a more inelastic demand as consumers have no choice but to continue purchasing them even if the price increases.

Question 15

(Last Word) Based on the concept of price elasticity of demand, which of the following cases is most likely to occur?

Accepted Answer

Price elasticity of demand refers to how sensitive the quantity demanded is to a change in price. Colleges charging lower tuition for low-income students is an example of price discrimination based on elasticity, as low-income students are likely more price-sensitive.

Question 16

(Last Word) Microsoft charges a substantially lower price for a software upgrade than for the initial purchase of the software.This implies that Microsoft views the demand curve for the software upgrade to be

Accepted Answer

Microsoft charges a lower price for the upgrade because they believe the demand is more elastic; consumers are more sensitive to price changes for upgrades than for the initial purchase.

Question 17

Income elasticity measures the effect of a change in income on the purchases of some good or service.

Accepted Answer

Income elasticity is a measure used in economics to measure the responsiveness of the quantity demanded for a good or service to a change in consumer income. It is calculated by dividing the percentage change in quantity demanded by the percentage change in income. A positive income elasticity means that as income increases, demand increases, while a negative income elasticity means that as income increases, demand decreases.

Question 18

(Consider This) Which of the following best explains the significant increases in the equilibrium prices for higher education in the United States since the 1980s?

Accepted Answer

The supply of higher education is relatively inelastic due to the high costs and time required to expand facilities and hire faculty, while demand has increased substantially due to factors like the perceived value of a degree and population growth.

Question 19

The greater the ease of shifting resources from product X to product Y in the production process, the greater is the elasticity of supply of product Y.

Accepted Answer

When resources can easily shift from one product to another, it means that the production process is flexible and adaptable to changes in demand for different products. This leads to a greater ability to increase the supply of a particular product in response to changes in price or demand, resulting in greater elasticity of supply.

Question 20

Cross elasticity of demand measures the effect of a change in the price of one product on the quantity demanded of another product.Difficulty: 03 Hard
Learning Objective: 06-05 Apply cross elasticity of demand and income elasticity of demand.Topic: Cross Elasticity and Income Elasticity of Demand

Accepted Answer

Cross elasticity of demand quantifies how the quantity demanded of one good responds to a price change in another good, indicating whether they are substitutes or complements.

Quiz 6: Elasticity