Question 1

Suppose Tinsel Town Videos lowers the price of its movie club membership by 10 percent and as a result, CineArts Videos experienced a 16 percent decline in its movie club membership. What is the value of the cross-price elasticity between the two movie club memberships?
A) -1.6
B) -0.625
C) 0.625
D) 1.6

Accepted Answer

The answer of Suppose Tinsel Town Videos lowers the price...

Question 2

Consider the following pairs of items: a. shampoo and conditioner
B. iPhones and earbuds
C. a laptop computer and a desktop computer
D. beef and pork
E. air-travel and weed killer
Which of the pairs listed will have a negative cross-price elasticity?
A) a and b only
B) c and d only
C) e only
D) a, b, and c only

Accepted Answer

The answer of Consider the following pairs of items: a....

Question 3

Suppose the governor of California has proposed increasing toll rates on California's toll roads, and has presented two possible scenarios to implement these increases. Following are projected data for the two scenarios for the California toll roads:
Scenario 1: Toll rate in 2012: $10.00. Toll rate in 2016: $22.50
For every 100 cars using the toll roads in 2012, only 81.6 cars will use the toll roads in 2016.
Scenario 2: Toll rate in 2012: $10.00. Toll rate in 2016: $17.50
For every 100 cars using the toll roads in 2012, only 96.2 cars will use the toll roads in 2016.
a. Using the midpoint formula, calculate the price elasticity of demand for Scenario 1 and Scenario 2.
b. Assume 10,000 cars use California toll roads every day in 2012. What would be the daily total revenue received for each scenario in 2012 and in 2016?
c. Is demand under Scenario 1 and under Scenario 2 price elastic, inelastic, or unit elastic. Briefly explain.
(For above questions, assume that nothing other than the toll change occurs during the time frame listed that would affect consumer demand.)

Accepted Answer

The answer of Suppose the governor of California has proposed...

Question 4

Consider the following pairs of items: a. shampoo and conditioner
B. iPhones and earbuds
C. a laptop computer and a desktop computer
D. beef and pork
E. air-travel and weed killer
Which of the pairs listed will have cross-price elasticity of zero?
A) a and b only
B) c only since most people cannot do without computers
C) e only
D) none of the pairs listed

Accepted Answer

The answer of Consider the following pairs of items: a....

Question 5

Economists estimated that the price elasticity of beer is -0.30 and the income elasticity of beer is 0.09. This means that
A) an increase in the price of beer will increase the quantity demanded of beer and beer is a normal good.
B) an increase in the price of beer will lead to an increase in revenue for beer sellers and beer is a normal good.
C) a decrease in the price of beer will lead to an increase in revenue for beer sellers and beer is an inferior good.
D) an increase in the price of beer will lead to a decrease in the quantity demanded of beer and beer is a necessity.

Accepted Answer

The price elasticity of -0.30 indicates that beer is inelastic, so an increase in price will increase revenue. The income elasticity of 0.09 suggests beer is a normal good.

Question 6

If you expect the economy is going to boom and average income in the economy will rise in the foreseeable future, the type of firm that would be able to increase its sales if your expectations are met is
A) one that sells an inferior good.
B) one that sells a necessity good.
C) one that sells a luxury good.
D) one that sells a price inelastic good.

Accepted Answer

Luxury goods are typically associated with higher incomes and consumers are more likely to purchase them when their incomes are rising. Therefore, if you expect the economy to boom and average income to rise, a firm that sells luxury goods is more likely to see an increase in sales.

Question 7

Cross-price elasticity of demand is calculated as the
A) percentage change in quantity demanded divided by percentage change in price of a good.
B) percentage change in quantity demanded of one good divided by percentage change in price of a different good.
C) percentage change in quantity sold divided by percentage change in buyers' incomes.
D) percentage change in quantity supplied divided by percentage change in price of a good.

Accepted Answer

Cross-price elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price of another good. It is calculated as the percentage change in quantity demanded of one good divided by the percentage change in the price of a different good.

Question 8

Calculate the income elasticity if an 8 percent increase in income leads to a 4 percent increase in quantity demanded for organic produce.
A) -0.66
B) 0.5
C) 1.5
D) 2

Accepted Answer

Income elasticity of demand = % change in quantity demanded / % change in income

Given, % change in income = 8%
% change in quantity demanded = 4%

Hence, Income elasticity of demand = 4%/8% = 0.5.

Question 9

Suppose the cross-price elasticity of demand between grapefruit juice and orange juice is approximately 6. What does this mean?
A) A 1 percent decrease in the price of grapefruit juice leads to a 6 percent increase in orange juice consumption.
B) A 6 percent increase in the price of grapefruit juice leads to a 1 percent increase in orange juice consumption.
C) If the price of grapefruit juice rises by $1, 6 more cartons of orange juice will be purchased.
D) The demand for orange juice is 6 times more than the demand for grapefruit juice.

Accepted Answer

A cross-price elasticity of 6 means that a 1 percent decrease in the price of grapefruit juice leads to a 6 percent increase in the quantity demanded of orange juice, indicating they are substitutes.

Question 10

Studies show that the income elasticity of demand for wine is approximately five. What does this mean?
A) A 1 percent decrease in the price of wine leads to a 5 percent increase in wine consumption.
B) A 1 percent increase in income leads to a 5 percent increase in wine consumption.
C) A 5 percent increase in income leads to a 1 percent increase in wine consumption.
D) Wine is a relatively elastic good.

Accepted Answer

The income elasticity of demand for wine being approximately 5 means that a 1 percent increase in income leads to a 5 percent increase in wine consumption. This indicates that wine is a relatively income elastic good.

Question 11

Figure 6-8 
-Refer to Figure 6-8. Identify the two goods which are substitutes.
A) Good X and Good Y
B) Good Y and Good Z
C) Good X and Good Z
D) It is not possible to distinguish any relationship among the goods.

Accepted Answer

The answer of Figure 6-8 
-Refer to Figure 6-8. Identify...

Question 12

Ali's Gyros operates near a college campus. Ali has been selling 120 gyros a day at $4.50 each and is considering a price cut. He estimates that he would be able to sell 200 gyros per day at $3.50 each.
a. Calculate the price elasticity of demand using the midpoint formula.
b. Calculate the change in revenue as a result of the price cut.

Accepted Answer

The answer of Ali's Gyros operates near a college campus....

Question 13

According to a study of the U.S. demand for alcoholic beverages, the price elasticity of demand for beer is -0.30. Which of the following could explain why the price elasticity of demand for beer is low?
A) Beer is an inferior alcoholic beverage.
B) More and more people are switching to wine and cocktails rather than beer.
C) The price of beer is relatively low and for many people it is a habit forming product.
D) There are only a few major suppliers of beer.

Accepted Answer

The price elasticity of demand for beer is low (-0.30) because the price of beer is relatively low and for many people it is a habit forming product. This means that even if the price of beer increases, consumers will still continue to purchase it.

Question 14

The Mass Rapid Transit (MRT) System in Hong Kong has been running significant losses. Transport Ministry officials have argued over whether to raise fares to combat the losses. One argument against a fare increase is that it will aggravate traffic congestion on the streets during peak commuter hours. Suppose that the current fare is $4 and the government is considering raising it to $6. Officials estimate that this reduces the number of rides purchased from 10,000 to 8,000 per day.
a. What is the estimated elasticity of demand for MRT rides?
b. What does this elasticity of demand suggest to you about what will happen to total revenue earned by the transit system?
c. Last year, the MRT system incurred a loss of $50,000 per day. Do you think the fare increase will resolve the deficit problem as well as Ministry officials anticipate? Explain.

Accepted Answer

The answer of The Mass Rapid Transit (MRT) System in...

Question 15

Using cross-sectional data from the two Housing Assistance Supply Experiment (HASE) sites-Brown County, Wisconsin, and St. Joseph County, Indiana, John Mulford of Rand Research estimates that the long-run "permanent" income elasticity of housing expenditures to be 0.45 for owners. Using this information, what is likely to happen to housing expenditures if the government increases income transfers to recipients in HASE sites?
A) Housing expenditures will increase significantly.
B) Housing expenditures in HASE sites significantly will fall as recipients moved out of these areas to higher-income areas.
C) Housing expenditures will increase, but not significantly.
D) Housing expenditures will decrease by a small amount.

Accepted Answer

According to the given information, the long-run "permanent" income elasticity of housing expenditures is 0.45. This means that for every 1% increase in income, housing expenditures will increase by 0.45%. Therefore, if the government increases income transfers to HASE recipients, it is likely that their housing expenditures will increase, but not significantly.

Question 16

Which of the following items is likely to have the highest income elasticity of demand?
A) a bus ride
B) a meal at Taco Bell
C) a vacation home in the Swiss Alps
D) a tank of gasoline

Accepted Answer

Luxury goods, such as vacation homes, tend to have higher income elasticity of demand, meaning that as income increases, the demand for these goods increases at a proportionately higher rate.

Question 17

If the cross-price elasticity of demand for computers and software is negative, this means the two goods are
A) substitutes.
B) complements.
C) inferior.
D) normal.

Accepted Answer

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

Question 18

Income elasticity measures
A) how a good's quantity demanded responds to change in the goods price.
B) how a good's quantity demanded responds to change in the price of another good.
C) how a good's quantity demanded responds to change in buyers' incomes.
D) how a good's quantity demanded responds to producers' incomes.

Accepted Answer

Income elasticity measures how a good's quantity demanded responds to a change in buyers' incomes.

Question 19

Linesha, a college student working part-time, receives a wage increase. An avid movie buff, she increased her purchases of Blu-ray discs and reduced her purchases of DVDs. Based on this information,
A) DVDs and Blu-ray discs are substitutes.
B) Blu-ray discs are normal goods and DVDs are inferior goods.
C) DVDs and Blu-ray discs are normal goods.
D) the cross-price elasticity between DVDs and Blu-ray discs is negative.

Accepted Answer

Linesha's behavior suggests that Blu-ray discs are normal goods because she buys more of them as her income increases. DVDs are likely inferior goods because she buys fewer of them as her income increases.

Question 20

Last year, Sefton purchased 60 pounds of potatoes to feed his family of five when his household income was $30,000. This year, his household income fell to $20,000 and Sefton purchased 80 pounds of potatoes. All else constant, Sefton's income elasticity of demand for potatoes is
A) negative, so Sefton considers potatoes to be an inferior good.
B) positive, so Sefton considers potatoes to be an inferior good.
C) positive, so Sefton considers potatoes to be a normal good and a necessity.
D) negative, so Sefton considers potatoes to be a normal good.

Accepted Answer

The answer of Last year, Sefton purchased 60 pounds of...

Quiz 6: Elasticity: the Responsiveness of Demand and Supply

Suppose Tinsel Town Videos lowers the price of its movie club membership by 10 percent and as a result, CineArts Videos experienced a 16 percent decline in its movie club membership. What is the value of the cross-price elasticity between the two movie club memberships?

Consider the following pairs of items: a. shampoo and conditioner B. iPhones and earbuds C. a laptop computer and a desktop computer D. beef and pork E. air-travel and weed killer Which of the pairs listed will have a negative cross-price elasticity?

Consider the following pairs of items: a. shampoo and conditioner B. iPhones and earbuds C. a laptop computer and a desktop computer D. beef and pork E. air-travel and weed killer Which of the pairs listed will have cross-price elasticity of zero?

Economists estimated that the price elasticity of beer is -0.30 and the income elasticity of beer is 0.09. This means that

If you expect the economy is going to boom and average income in the economy will rise in the foreseeable future, the type of firm that would be able to increase its sales if your expectations are met is

Cross-price elasticity of demand is calculated as the

Calculate the income elasticity if an 8 percent increase in income leads to a 4 percent increase in quantity demanded for organic produce.

Suppose the cross-price elasticity of demand between grapefruit juice and orange juice is approximately 6. What does this mean?

Studies show that the income elasticity of demand for wine is approximately five. What does this mean?

Figure 6-8 -Refer to Figure 6-8. Identify the two goods which are substitutes.

According to a study of the U.S. demand for alcoholic beverages, the price elasticity of demand for beer is -0.30. Which of the following could explain why the price elasticity of demand for beer is low?

Which of the following items is likely to have the highest income elasticity of demand?

If the cross-price elasticity of demand for computers and software is negative, this means the two goods are

Income elasticity measures

Linesha, a college student working part-time, receives a wage increase. An avid movie buff, she increased her purchases of Blu-ray discs and reduced her purchases of DVDs. Based on this information,

Last year, Sefton purchased 60 pounds of potatoes to feed his family of five when his household income was $30,000. This year, his household income fell to $20,000 and Sefton purchased 80 pounds of potatoes. All else constant, Sefton's income elasticity of demand for potatoes is