Question 1

Suppose a coffee plantation in Colombia increases the quantity of coffee beans it supplies by 5% when it learns that the price of a coffee at cafes in Melbourne has risen by 25%. The Colombian producer's price elasticity of supply of coffee beans is 0.2.

Accepted Answer

The price elasticity of supply (PES) formula is (% change in quantity supplied / % change in price). Given that the PES of the Colombian producer is 0.2, we can rearrange the formula to get (% change in quantity supplied = PES x % change in price). Plugging in the values, we get (% change in quantity supplied = 0.2 x 25% = 5%), which matches the increase in quantity supplied mentioned in the question. Therefore, the statement is true.

Question 2

In general, elasticity is:
A) the friction that develops between buyer and seller in a market
B) a measure of how much government intervention is prevalent in a market
C) a measure of how much buyers and sellers respond to changes in markets
D) a measure of the competitive nature of a market

Accepted Answer

Elasticity measures how much buyers and sellers respond to changes in markets, such as changes in price or demand. It is not related to friction between buyers and sellers, government intervention, or the competitive nature of a market.

Question 3

Price elasticity of supply measures how much the quantity supplied responds to changes in demand.

Accepted Answer

Price elasticity of supply measures how much the quantity supplied responds to changes in price, not demand.

Question 4

While an increase in total agricultural production may benefit farmers as a group, it will not benefit an individual farmer to increase his production.

Accepted Answer

Increasing individual production can lead to economies of scale and lower costs, which can benefit the individual farmer. Additionally, increased production can allow for higher revenues if prices remain stable.

Question 5

The cross-price elasticity of demand will be positive for complement goods and negative for substitute goods.

Accepted Answer

The cross-price elasticity of demand will be negative for complement goods (because as the price of one good goes up, the demand for its complement goes down) and positive for substitute goods (as the price of one good goes up, the demand for its substitute goes up).

Question 6

Price elasticity of supply is defined as the percentage change in quantity supplied divided by the percentage change in price.

Accepted Answer

Price elasticity of supply is indeed measured by the percentage change in quantity supplied divided by the percentage change in price.

Question 7

Economists use the concept of price elasticity of demand to measure how much:
A) sellers respond to changes in the price of the good
B) worse off consumers are when the price of the good rises
C) demand responds to changes in buyers' incomes
D) buyers respond to changes in the price of the good

Accepted Answer

Price elasticity of demand measures the responsiveness of buyers to changes in the price of a good. A high price elasticity means that buyers will significantly change their quantity demanded in response to a change in price, while a low price elasticity means that buyers will not change their quantity demanded much in response to a change in price. Therefore, option D is correct - economists use the concept of price elasticity of demand to measure how much buyers respond to changes in the price of the good.

Question 8

In the 1970s OPEC generated high prices for oil but could not sustain this in the mid-80s and 90s. The reason was that both the supply and demand elasticity for oil is less elastic in the short run than in the long run.

Accepted Answer

The statement is true. In the short run, both the supply and demand for oil are less elastic, meaning that changes in price have a relatively smaller effect on the quantity supplied and demanded. However, in the long run, producers can increase their output and consumers can find substitutes, making both the supply and demand more elastic. This is why OPEC's attempts to artificially increase prices in the 1970s could not be sustained in the long run.

Question 9

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

Accepted Answer

Cross-price elasticity of demand measures the responsiveness of demand for one good to a change in the price of another good.

Question 10

Slope is the ratio of the changes in two variables, while elasticity is the ratio of the percentage changes in two variables.

Accepted Answer

Slope measures the rate of change between two variables, typically in a linear relationship, while elasticity quantifies how responsive one variable is to changes in another, expressed as a percentage change, indicating a different type of relationship that accounts for relative changes rather than absolute changes.

Question 11

The demand for basic foodstuffs such as rice or flour is usually elastic.

Accepted Answer

The demand for basic foodstuffs like rice or flour is usually inelastic because they are essential goods, and consumers will continue to buy them even if prices change.

Question 12

Demand is said to be inelastic if:
A) the price of the good responds only slightly to changes in demand
B) demand shifts only slightly when the price of the good changes
C) buyers respond substantially to changes in the price of the good
D) the quantity demanded changes only slightly when the price of the good changes

Accepted Answer

Inelastic demand means that the quantity demanded changes only slightly when the price of the good changes. This is because the good is considered a necessity, has few substitutes, or is perceived as having a high level of quality or brand loyalty, making consumers willing to pay the higher price. In contrast, elastic demand means that the quantity demanded changes substantially in response to price changes, indicating that the good has many substitutes and consumers are price-sensitive.

Question 13

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

Accepted Answer

When a supply curve is horizontal, it means that any given increase in price will result in an infinite increase in quantity supplied. This reflects a situation where producers can potentially supply an unlimited amount of a good if the price is high enough, and therefore the price elasticity of supply approaches infinity.

Question 14

Demand is said to be elastic if:
A) the price of the good responds substantially to changes in demand
B) the supply of the good responds weakly to changes in demand
C) the quantity demanded responds substantially to changes in the quantity supplied of the good
D) the quantity demanded responds substantially to changes in the price of the good

Accepted Answer

Elastic demand means that the quantity demanded of a good or service changes significantly in response to a change in the price of that good or service. In other words, if the price of a product goes up, consumers will decrease their demand for it, and if the price goes down, consumers will increase their demand for it.

Question 15

If the price of forest-products rises, the price elasticity of supply will be more responsive in the long run than in the short run.

Accepted Answer

In the long run, forest-product suppliers have more time to adjust their production levels and make changes to their operations, such as planting new trees or switching to different types of products. This makes the supply more elastic, meaning that it can respond more readily to changes in price. In the short run, suppliers may not be able to adjust their production levels as quickly or easily, which makes the supply less elastic.

Question 16

Supply is said to be inelastic if the quantity supplied responds substantially to changes in the price and elastic if the quantity supplied responds only slightly to price.

Accepted Answer

The definition given in the statement is incorrect. Supply is said to be inelastic if the quantity supplied responds only slightly to changes in the price, whereas it is said to be elastic if the quantity supplied responds significantly to changes in the price.

Question 17

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

Accepted Answer

If price changes and total revenue changes in the opposite direction, it means that consumers are sensitive to changes in price and are buying less when the price increases. This indicates that demand is relatively elastic.

Question 18

If the price of one good goes up, and this causes the quantity demanded of another good to go down, the cross-price elasticity of demand will be negative.

Accepted Answer

The cross-price elasticity of demand is positive when two goods are substitutes, meaning if the price of one good goes up and the demand for another good goes down, they are not substitutes but rather complements, indicating a negative cross-price elasticity of demand.

Question 19

The price elasticity of demand measures how responsive:
A) buyers are to a change in price
B) buyers are to a change in advertising by sellers
C) sellers are to a change in price
D) buyers are to a change in their tastes

Accepted Answer

The price elasticity of demand measures how sensitive or responsive buyers are to a change in price. It indicates the percentage change in quantity demanded in response to a percentage change in price. Option B relates to the concept of advertising elasticity, option C relates to the concept of price elasticity of supply, and option D relates to the concept of income elasticity of demand or cross-price elasticity of demand.

Question 20

A government program that reduces land under cultivation hurts farmers but helps consumers.

Accepted Answer

Reducing land under cultivation typically decreases the supply of agricultural products, which can lead to higher prices for consumers. Farmers might benefit from higher prices for their products, but consumers face increased costs.

Quiz 5: Elasticity and Its Application