Question 1

You own a small town movie theatre. You currently charge $5 per ticket for everyone who comes to your movies.
Your friend who took an economics course in college tells you that there may be a way to increase your total revenue. Given the demand curves shown, answer the following questions.   
a. What is your current total revenue for both groups?
b. The elasticity of demand is more elastic in which market?
c. Which market has the more inelastic demand?
d. What is the elasticity of demand between the prices of $5 and $2 in the adult market? Is this elastic or inelastic?
e. What is the elasticity of demand between $5 and $2 in the children's market? Is this elastic or inelastic?
f. Given the graphs and what your friend knows about economics, he recommends you increase the price of adult tickets to $8 each and lower the price of a child's ticket to $3.
How much could you increase total revenue if you take his advice?

Accepted Answer

The answer of You own a small town movie theatre....

Question 2

A government program that pays farmers not to plant corn on part of their land can help farmers not only through the subsidy payments to farmers who participate in the program but also by raising the market price of corn.

Accepted Answer

By reducing the supply of corn in the market, the program can increase the market price of corn, benefiting all farmers who produce corn, even those who do not participate in the program.

Question 3

When the price of knee braces increased by 25 percent, the Brace Yourself Company increased its quantity supplied of knee braces per week by 75 percent. BYC's price elasticity of supply of knee braces is 0.33.

Accepted Answer

The price elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price. In this case, it would be 75% / 25% = 3.

Question 4

OPEC failed to maintain a high price of oil in the long run, partly because both the supply of oil and the demand for oil are more elastic in the long run than in the short run.

Accepted Answer

OPEC's attempts to maintain high oil prices by limiting supply were not sustainable in the long run because both the supply of oil (e.g. new oil discoveries, technological advances in extraction methods) and the demand for oil (e.g. development of alternative energy sources, increased fuel efficiency) became more elastic over time, meaning they were more responsive to changes in price. Thus, attempts to constrain supply would eventually lead to increased competition and decreased market share for OPEC countries.

Question 5

If a t-shirt manufacturer supplies 1,000 t-shirts per week when the price of t-shirts is $10 and supplies 1,200 t-shirts per week when the price of t-shirts is $12, the price elasticity of supply is 2.

Accepted Answer

The price elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price. In this case, the quantity supplied increases from 1,000 to 1,200 (a 20% increase) when the price increases from $10 to $12 (a 20% increase), resulting in a price elasticity of supply of 1 (20%/20%).

Question 6

A "Just Say No" drug education policy that successfully educates consumers to reduce their demand for drugs will lower drug prices and reduce the quantity of drugs demanded.

Accepted Answer

The answer of A "Just Say No" drug education policy...

Question 7

If the price elasticity of supply is 2 and the quantity supplied decreases by 6%, then the price must have decreased by 3%.

Accepted Answer

The answer of If the price elasticity of supply is...

Question 8

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

Accepted Answer

A horizontal supply curve means that suppliers can increase their output infinitely without any increase in price, indicating that supply is perfectly elastic. This means that the percentage change in quantity supplied will be infinitely greater than the percentage change in price, resulting in an infinite price elasticity of supply.

Question 9

Drug interdiction, which reduces the supply of drugs, will likely be a less effective policy than educating consumers to reduce their demand for drugs because the drug interdiction policy will lower drug prices and reduce the quantity of drugs demanded.

Accepted Answer

Drug interdiction, aimed at reducing the supply of drugs, typically increases drug prices due to the reduced availability, making them less accessible to consumers, which can reduce the quantity demanded. However, the effectiveness of education in reducing demand can vary and is not directly related to the effects of interdiction on prices.

Question 10

A discovery that increases wheat yields per acre hurts farmers by increasing supply and lowering their total revenues.

Accepted Answer

The answer of A discovery that increases wheat yields per...

Question 11

Drug interdiction, which reduces the supply of drugs, may decrease drug-related crime because the demand for drugs is inelastic.

Accepted Answer

The statement is incorrect. While reducing the supply of drugs may increase the cost and difficulty of obtaining them, the demand for drugs is not necessarily inelastic. If drug prices increase significantly, some individuals may be deterred from using drugs or seek out alternative substances, therefore decreasing the demand. However, there is no guarantee that drug interdiction will result in a decrease in drug-related crime, as other factors such as social and economic conditions also play a role.

Question 12

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.

Question 13

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

Accepted Answer

Price elasticity of supply is a measure of the responsiveness of the quantity supplied to changes in the price. If the quantity supplied responds strongly to changes in the price, the supply is said to be elastic. If the quantity supplied is not very sensitive to changes in the price, the supply is said to be inelastic. The formula for price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price.

Question 14

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

Question 15

Consider the following pairs of goods. For which of the two goods would you expect the demand to be more price elastic? Why?
a. water or diamonds
b. insulin or nasal decongestant spray
c. food in general or breakfast cereal
d. gasoline over the course of a week or gasoline over the course of a year
e. personal computers or IBM personal computers

Accepted Answer

The answer of Consider the following pairs of goods. For...

Question 16

Supply tends to be more elastic in the short run and more inelastic in the long run.

Accepted Answer

Supply tends to be more inelastic in the short run because producers need time to adjust their production levels, whereas in the long run, they can adjust their production capacity, making supply more elastic.

Question 17

If we observe that when the price of ice cream rises by 10%, ice cream manufacturers increase the quantity supplied of ice cream by 20%, then the price elasticity of supply is 2.

Accepted Answer

The price elasticity of supply (PES) is calculated as the percentage change in quantity supplied divided by the percentage change in price. In this scenario, the percentage change in quantity supplied (20%) is double the percentage change in price (10%), which gives a PES of 2. Therefore, the statement is true.

Question 18

The OPEC oil cartel has difficulty maintaining high prices in the long run because the supply of oil is more inelastic in the long run than in the short run.

Accepted Answer

In the long run, the supply of oil becomes more elastic as producers have more time to adjust to price changes, making it harder for OPEC to maintain high prices.

Question 19

A discovery that increases wheat yields per acre helps farmers by increasing both supply and total revenues.

Accepted Answer