Question 1

Sony is considering a 10 percent price reduction on its HD TV sets. If the price-elasticity coefficient for the sets in this price range is 0.75, then the price cut will cause

Accepted Answer

A price elasticity coefficient of 0.75 indicates that the demand for the product is elastic, meaning that a 10 percent price cut will result in more than a 10 percent increase in quantity demanded. However, because the price cut will also lead to a reduction in revenue per unit sold, the overall effect will be an increase in quantity demanded but a decrease in total revenues.

Question 2

An auto rental company lowers the price of its rentals to increase its market share. The price cut increases quantity demanded, but total revenue decreases. This result suggests that over this price range, the demand for the auto rentals is

Accepted Answer

When total revenue decreases as a result of a price cut, it indicates that the demand is inelastic over that price range. This means that the percentage change in quantity demanded is less than the percentage change in price.

Question 3

A study of mass-transit systems in American cities revealed that in the long run, revenues generally decline after substantial fare increases. This would suggest that

Accepted Answer

The fact that revenues decline after substantial fare increases suggests that the demand for mass transit is price-elastic in the long run. This means that as prices rise, consumers will eventually seek out alternative modes of transportation, resulting in a decline in revenue for mass transit systems.

Question 4

The law of supply suggests that the price-elasticity of supply is

Accepted Answer

The law of supply suggests that as price increases, quantity supplied also increases, implying a positive relationship between price and quantity supplied. This positive relationship indicates that as the price of a good increases, suppliers will produce and supply more of it. Therefore, the price-elasticity of supply is positive.

Question 5

If demand for farm crops is inelastic, a good harvest will cause farm revenues to

Accepted Answer

When demand is inelastic, a good harvest increases supply, leading to a larger percentage drop in price than the percentage increase in quantity sold, thus decreasing total revenue.

Question 6

When universities announce a large tuition increase and follow it with an announcement that more financial aid will be available, they are assuming that students who pay full tuition

Accepted Answer

When universities announce a large tuition increase and follow it with an announcement that more financial aid will be available, they assume that students who pay full tuition have inelastic demand because they are willing to pay the increased price even though it is higher than before. On the other hand, students who use financial aid have elastic demand because they are more price-sensitive and may not be able to afford the increased cost without aid. Therefore, universities are trying to offset the potential loss of students with elastic demand by offering more financial aid to attract them to still attend.

Question 7

An increase in the price of tickets to a popular sporting event will increase total revenue if

Accepted Answer

If the buyers of the tickets are fanatic about the event, they are likely to be less sensitive to price changes, meaning the demand is inelastic. In such cases, an increase in price will lead to an increase in total revenue.

Question 8

If the government imposes an excise tax on a good, it will collect the most tax revenues from it if the demand for the good is

Accepted Answer

If the demand for a good is inelastic, it means that consumers are not very responsive to changes in price and will continue to buy the good even if the price increases due to the tax. Therefore, the government will be able to collect the most tax revenues from it because consumers will still be buying the same amount of the good even with the tax, resulting in a higher total revenue for the government. If the demand is elastic or unit elastic, the increase in price due to the tax will cause consumers to decrease their demand for the good, resulting in lower total revenue for the government. If the demand is perfectly elastic, even a small increase in price will cause consumers to stop buying the good altogether, resulting in zero tax revenue for the government.

Question 9

Movie theaters charge lower prices to see a movie in the afternoon than in the evening because there is an

Accepted Answer

Movie theaters charge lower prices to see a movie in the afternoon because demand for movies is typically more elastic in the afternoon than in the evening. In the evening, people are more willing to pay higher prices to see a movie because it is a popular time to go out and socialize, while in the afternoon, people are more likely to have other options for how to spend their time, so they are more sensitive to price changes.

Question 10

The price elasticity of demand for a textbook is estimated to be 1 no matter what the price or quantity demanded. In this case,

Accepted Answer

When the price elasticity of demand is 1, it is unitary elastic, meaning a percentage change in price results in an equal percentage change in quantity demanded in the opposite direction.

Question 11

A union argues that a price cut will boost the revenues of the firm, while management argues that the opposite is true. This suggests that the price elasticity of demand is

Accepted Answer

The union believes a price cut will increase revenue, indicating demand is elastic (quantity demanded increases more than the price decrease). Management believes revenue will decrease, indicating demand is inelastic (quantity demanded increases less than the price decrease).

Question 12

If sellers could price-discriminate and charge two different prices to two different groups of buyers in order to increase revenues, then the sellers would charge

Accepted Answer

Sellers would charge a higher price to the group of buyers whose demand is inelastic because they are less price-sensitive and therefore more willing to pay a higher price. This would result in increased revenues for the seller. In contrast, charging a higher price to the group of buyers with elastic demand would potentially lead to a significant decline in revenue as the buyers may look for substitutes or stop buying altogether. Unit-elastic demand means a change in price results in a proportional change in quantity demanded, so sellers would likely charge the same price to both groups of buyers.

Question 13

A state government wants to increase the taxes on cigarettes to increase tax revenue. Because cigarettes are addictive, we would expect its demand to be

Accepted Answer

Cigarettes are addictive, making their demand inelastic. When demand is inelastic, an increase in taxes typically leads to an increase in tax revenue because the decrease in quantity demanded is proportionally smaller than the increase in price.

Question 14

If in the short run the demand for mass transit is inelastic and in the long run the demand is elastic, then a price

Accepted Answer

In the short run, when demand is inelastic, a price increase will lead to an increase in total revenue as the demand for mass transit is relatively unaffected by price changes. However, in the long run, when the demand becomes more elastic, a price increase will lead to a decrease in total revenue as consumers will have more time to adjust their behavior, either by finding alternative modes of transportation or by deciding to forgo using mass transit altogether. Therefore, choice B is the best answer.

Question 15

You are the newly appointed sales manager of the Rock Computer Tablets Company and have been charged with the task of increasing revenues. Your economics consultants have informed you that at present price and output levels, price elasticity of demand for your product is less than one. You should

Accepted Answer

When the price elasticity of demand is less than one, demand is inelastic, meaning consumers are not very responsive to price changes. Increasing prices will lead to higher total revenue because the percentage drop in quantity demanded will be smaller than the percentage increase in price.

Question 16

The Bear Corporation finds that its total spending on machine parts increases after the price of machine parts falls, other things being equal. Which of the following is true about the Bear Corporation's demand for machine parts with the price change?

Accepted Answer

The fact that the Bear Corporation's total spending on machine parts increases after the price of machine parts falls suggests that the corporation's demand for machine parts is price elastic. In other words, the percentage change in quantity demanded is greater than the percentage change in price.

Question 17

If the government tightens up on drug dealers and raises the costs of dealing illegal drugs, then the drug addicts' dollar expenditures to feed their addiction will tend to

Accepted Answer

If the demand for drugs is price-inelastic, addicts will continue to purchase drugs despite higher prices, leading to increased total expenditures.

Question 18

Considering the price-elasticity of demand for wheat, we would expect that if the supply of wheat increases, other factors constant, then wheat farmers' total revenues would

Accepted Answer

If the demand for wheat is price-inelastic, an increase in supply will lead to a decrease in price, and since the quantity demanded does not increase proportionally, total revenue will decrease.

Question 19

The coefficient of price-elasticity of supply for a product is 2 if

Accepted Answer

The price-elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price. A 1 percent decrease in price causing a 2 percent decrease in quantity supplied results in a coefficient of 2 (2% / 1% = 2).

Question 20

If the demand for a product is elastic, then

Accepted Answer

If demand for a product is elastic, then an increase in price (caused by a tax) will cause a relatively larger decrease in quantity demanded. As a result, total revenue (price times quantity demanded) will decrease. So, a higher tax on the product will generate less tax revenue.

Quiz 6: Elasticity