Survey of Economics International Edition 7th Edition by Irvin B. Tucker – Test Bank

Complete Test Bank With Answers

 

 

Sample Questions Posted Below

 

Chapter 5

Price Elasticity of Demand

MULTIPLE CHOICE

1. 2. 3. 4. Topic: Price elasticity of demand, Difficulty: D, Type: SA, Answer: a

Suppose the Pleasant Corporation cuts the price of its American Girl dolls by 10 percent, and as a

result, the quantity of the dolls sold increases by 25 percent. This indicates that the price elasticity

of demand for the dolls over this range is:

a. 2.5.

b. 0.4.

c. 0.5.

d. 5.0.

Topic: Price elasticity of demand, Difficulty: M, Type: CA, Answer: c

Suppose that Starbucks reduces the price of its premium coffee from $2.20 to $1.80 per cup, and

as a result, the quantity sold per day increased from 350 to 450. Over this price range, the price

elasticity of demand for Starbucks coffee is:

a. 0.40.

b. 0.80.

c. 1.25.

d. 2.50.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: c

Suppose you are the manager of a local water company, and you are instructed to get consumers

to reduce their water consumption by 10 percent. If the price elasticity of demand for water is

0.25, by how much would you have to raise the price of water?

a. 10 percent

b. 25 percent

c. 40 percent

d. 100 percent

Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: c

If the quantity demanded increases by 20 percent in response to a 10 percent decrease in price,

demand is classified as:

a. unstable.

b. relatively inelastic.

c. relatively elastic.

d. of unitary elasticity.

5. Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: a

A local Krispy Kreme doughnut shop reduced the price of its doughnuts from $4 per dozen to

$3.50 per dozen, and as a result, the daily sales increased from 300 to 400 dozen. This indicates

that the price elasticity of demand for the doughnuts was:

a. elastic.

b inelastic.

c. of unitary elasticity.

d. indeterminate; more information is needed to determine the price elasticity of demand.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.194 Chapter 5

6. 7. 8. 9. 10. 11. Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: b

If a demand curve for a good were completely vertical, it would be considered:

a. perfectly elastic.

b. perfectly inelastic.

c. of unitary elasticity.

d. relatively inelastic.

Topic: Price elasticity of demand, Difficulty: E, Type: RE, Answer: d

If the demand for cigarettes is highly inelastic, this indicates that:

a. b. c. d. higher cigarette prices will increase the demand for cigarettes.

the price elasticity coefficient of cigarettes exceeds 1.

the price elasticity coefficient of cigarettes equals 1.

the quantity of cigarettes purchased by consumers is not very responsive to a change in the

price of cigarettes.

Topic: Price elasticity of demand, Difficulty: E, Type: RE, Answer: b

The price elasticity of demand for gasoline measures the:

a. b. c. d. responsiveness of gasoline producers to changes in the quality of gasoline.

responsiveness of customers to changes in the price of gasoline.

responsiveness of consumer preferences to changes in the quality of gasoline.

both a and c above.

Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: a

When demand is price inelastic:

a. b. c. d. price and total revenue move in the same direction.

price and total revenue move in the opposite direction.

total revenue increases whether price goes up or down.

total revenue decreases whether price goes up or down.

Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: c

If demand is inelastic, an increase in the price of a good will cause total revenue to:

a. fall.

b. remain constant since the decrease in quantity sold is exactly offset by the price increase.

c. rise.

d. rise if it is a normal good and fall if it is an inferior good.

Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: c

Price elasticity of demand refers to the ratio of the:

a. percentage change in price of a good in response to a percentage change in quantity

demanded.

b. c. percentage change in price of a good to a percentage increase in income.

percentage change in the quantity demanded of a good to a percentage change in its price.

d. none of the above.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Price Elasticity of Demand 195

12. 13. 14. 15. 16. 17. Topic: Price elasticity of demand, Difficulty: E, Type: RE, Answer: d

Price elasticity of demand is defined as the ratio of the:

a. b. c. d. percentage increase in price to an increase in quantity demanded.

unit change in quantity demanded to the dollar change in price.

maximum amount that consumers will pay to increase quantity.

percentage change in quantity demanded to the percentage change in price, other things

being equal.

Topic: Price elasticity of demand, Difficulty: E, Type: RE, Answer: d

Price elasticity of demand refers to the:

a. b. c. percentage increase in price in response to a percentage increase in quantity demanded.

percentage decrease in price in response to a percentage increase in income.

minimum amount that consumers will pay for a percentage change in quantity demanded or

supplied.

d. responsiveness of quantity demanded to a change in the price of a good.

Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: a

If demand is price elastic, a decrease in price causes:

a. b. c. d. an increase in total revenue.

a decrease in total revenue.

no change in total revenue.

an increase in quantity, but anything can happen to revenue.

Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: a

If a decrease in the price of movie tickets increases the total revenue of movie theaters, this is

evidence that demand is:

a. price elastic.

b. price inelastic.

c. unit elastic with respect to price.

d. perfectly inelastic.

Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: d

A perfectly elastic demand curve has an elasticity coefficient of:

a. 0.

b. 1.

c. less than 1.

d. infinity.

Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: a

Over the elastic portion of a demand curve, a decrease in price causes:

a. b. c. d. an increase in total revenue.

a decrease in total revenue.

no change in total revenue.

an increase in quantity demanded, but anything can happen to revenue.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.196 Chapter 5

18. 19. 20. 21. 22. 23. Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: c

Using the midpoints formula, what would be price elasticity of demand for a gallbladder

operation if the number of operations fell from 6,000 to 4,000 per week after its price increased

from $6,000 to $10,000?

a. 0.25.

b. 0.50.

c. 0.80.

d. 1.25

Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: b

If the percentage change in the quantity demanded of a good is less than the percentage change in

price, price elasticity of demand is:

a. elastic.

b. inelastic.

c. perfectly inelastic.

d. unitary elastic.

Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: a

If the percentage change in the quantity demanded of a good is greater than the percentage change

in price, price elasticity of demand is:

a. elastic.

b. inelastic.

c. perfectly inelastic.

d. perfectly elastic.

Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: d

If the percentage change in the quantity demanded of a good equals the percentage change in

price, price elasticity of demand is:

a. elastic.

b. inelastic.

c. perfectly elastic.

d. unitary elastic.

Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: c

Along the elastic range of a demand curve, a decrease in price causes:

a. b. c. d. no change in total revenue.

a decrease in total revenue.

an increase in total revenue.

an unpredictable change in total revenue.

Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: a

If a decrease in the price of theater tickets increases the total revenue earned by the theater, this is

evidence that demand is:

a. price elastic.

b. price inelastic.

c. unitary elastic.

d. perfectly inelastic.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Price Elasticity of Demand 197

24. 25. 26. 27. 28. Topic: Price elasticity of demand, Difficulty: M Type: SA, Answer: a

Along the elastic range of a demand curve, a price change causes:

a. b. c. d. a change in total revenue in the opposite direction.

a change in total revenue in the same direction.

no change in total revenue.

an unpredictable change in the total revenue.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: b

Suppose the president of a college argues that a 25 percent tuition increase will raise revenues for

the college. It can be concluded that the president thinks that demand to attend this college is:

a. elastic.

b. inelastic, but not perfectly inelastic.

c. unitary elastic.

d. perfectly elastic.

Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: c

Suppose Good Food’s supermarket raises the price of its steak and finds its total revenue from

steak sales does not change. This is evidence that price elasticity of demand for steak is:

a. perfectly elastic.

b. perfectly inelastic.

c. unitary elastic.

d. inelastic.

e. elastic.

Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: b

The price elasticity of demand for a vertical demand curve is:

a. perfectly elastic.

b. perfectly inelastic.

c. unitary elastic.

d. elastic.

e. inelastic.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: b

The president of Tucker Motors says, “Lowering the price won’t sell a single additional Tucker

car.” The president believes that the price elasticity of demand is:

a. perfectly elastic.

b. perfectly inelastic.

c. unitary elastic.

d. elastic.

e. inelastic.

29. Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: b

If the price elasticity of demand is computed for two products, and product A measures .79, and

product B measures 1.6, then:

a. product A is more price elastic than product B.

b. product B is more price elastic than product A.

c. consumers are more sensitive to price changes in product A than in product B.

d. product B is more price inelastic than product A.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.198 Chapter 5

30. e. products A and B must be substitutes.

Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: d

Demand price elasticity measures:

a. how much supply will change as price changes.

b. how consumers change their purchases in response to a change in income.

c. how consumers change their purchases in response to a change in the price of a

substitute good.

d. e. how consumers change their purchases in response to a change in the price of a product.

the change in price brought about by a change in consumer demand.

Exhibit 1 Demand curves

a

Price

per unit

(dollars)

10

8

6

b

c

Demand

20 25 30

Quantity

31. 32. Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: c

In Exhibit 1, the demand curve between points a and b is:

a. price elastic.

b. price inelastic.

c. unit elastic.

d. perfectly elastic.

e. perfectly inelastic.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: b

In Exhibit 1, the demand curve between points b and c is:

a. price elastic.

b. price inelastic.

c. unit elastic.

d. perfectly elastic.

e. perfectly inelastic.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Price Elasticity of Demand 199

33. 34. 35. 36. 37. 38. Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: e

In Exhibit 1, between points a and b, the price elasticity of demand measures:

a. 0.67.

b. 1.5.

c. 2.0.

d. 1.56.

e. 1.0.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: d

In Exhibit 1, between points b and c, the price elasticity of demand measures

a. 4.27.

b. 1.5.

c. 1.56.

d. 0.636.

e. 0.425.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: c

If demand price elasticity measures 2, this implies that consumers would:

a. b. c. d. e. buy twice as much of the product if the price drops 10 percent.

require a 2 percent drop in price to increase their purchases by 1 percent.

buy 2 percent more of the product in response to a 1 percent drop in price.

require at least a $2 increase in price before showing any response to the price increase.

buy twice as much of the product if the price drops 1 percent.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: b

If the demand curve over a certain range is “price elastic,” this implies that the:

a. b. c. e. percentage change in the quantity demanded exceeds one.

percentage change in the quantity demanded exceeds the percentage change in product price.

percentage change in price exceeds the percentage change in quantity demanded.

d. product is non-reactive.

product has no good substitute.

Topic: Price elasticity of demand, Difficulty: E, Type: RE, Answer: e

If the demand curve is unit elastic, this implies that:

a. b. c. d. e. consumers do not react to a change in product price.

the good can only be purchased in units of 1.

this good has no good substitutes.

the good is a basic food staple.

the percentage change in the quantity demanded = the percentage change in product price.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: d

Which of the statements below does not describe a demand curve that is unit elastic?

a. b. c. d. e. The percentage change in the quantity demanded = percentage change in product price.

An increase in product price will not change total revenue.

The price elasticity of demand equals one.

A change in price does not change quantity demanded.

A decrease in product price will not change total revenue.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.200 Chapter 5

39. 40. 41. 42. 43. Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: d

Demand price elasticity is measured by the:

a. b. c. d. e. percentage change in income / percentage change in price.

percentage change in quantity demanded / percentage change in income.

percentage change in price / percentage change in quantity demanded.

percentage change in quantity demanded / percent change in price.

percentage change in total revenue / percentage change in price.

Topic: Price elasticity of demand, Difficulty: M, Type: CA, Answer: b

If Sam, the Pizza Man, lowers the price of his pizzas from $6 to $5 and finds that sales increase

from 400 to 600 pizzas per week, then the demand for Sam’s pizzas in this range is:

a. price inelastic.

b. price elastic.

c. unit elastic.

d. cross elastic.

e. income inelastic.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: c

If Herbert, the hair stylist, raises the price of his cuts from $13 to $15 and finds the number

of cuts falls from 300 to 260, then the demand for Herbert’s cuts in this range is:

a. price inelastic.

b. price elastic.

c. unit elastic.

d. cross elastic.

e. income inelastic.

Topic: Price elasticity of demand, Difficulty: M, Type: CA, Answer: c

If a 10 percent cut in price causes a 15 percent increase in sales, then:

a. total revenue will decrease.

b. c. d. e. demand is price inelastic in this range.

demand is price elastic in this range.

demand is unit elastic in this range.

total revenue will remain the same.

Topic: Price elasticity of demand, Difficulty: M, Type: CA, Answer: b

If Pete raises his price of muffins from $2 to $3 and his sales revenue increases from $35,000 to

$38,000, then:

a. b. c. d. the demand for Pete’s muffins in this range is price elastic.

the demand for Pete’s muffins in this range is price inelastic.

the demand for Pete’s muffins in this range is unit elastic.

the percentage change in quantity demanded must exceed the percentage change in product

price.

e. this is impossible since this would violate the law of demand.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Price Elasticity of Demand 201

44. 45. 46. 47. 48. Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: a

You are part of a local community theater group. It is the goal of the group to increase the amount

of revenue earned through ticket sales. Mary says the obvious solution is to increase ticket prices.

Is Mary correct?

a. Mary is correct if the demand for tickets is price inelastic.

b. Mary is incorrect if the demand for tickets is price inelastic.

c. Mary is correct. The increase in ticket prices will always increase revenue.

d. Mary is incorrect. The increase in ticket prices will never increase revenue.

e. Mary is incorrect. The way to increase revenue is to decrease ticket prices.

Topic: Price elasticity of demand, Difficulty: E, Type: RE, Answer: c

Elasticity measures how “sensitive” consumers are by measuring their change in __________ as

the price of the product changes.

a. attitude

b. income

c. quantity demanded

d. supply

e. taxes

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: e

If the price elasticity of demand for a product measures .45,

a. b. c. d. e. this good has many available substitutes.

this good must be a nonessential good.

this good is a high-priced good.

a decrease in price will increase total revenue.

this good is demand price inelastic.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: b

If a straight-line demand curve slopes down, price elasticity will:

a. b. c. e. remain the same at all points on the demand curve.

change between any two points along the demand curve.

always be greater than one.

d. always equal one.

always be less than one.

Topic: Price elasticity of demand, Difficulty: D, Type: RE, Answer: a

As one moves down a straight-line, down-sloping demand curve, price elasticity will:

a. b. c. d. e. change from elastic, to unit elastic, then to inelastic.

remain the same between any two points.

change from inelastic, to elastic, then to unit elastic.

change from unit elastic, to elastic, then to inelastic.

change from elastic, to inelastic, then to unit elastic.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.202 Chapter 5

49. 50. 51. 52. 53. Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: d

Since it is always a negative number, economists use the convention of taking the absolute value

of:

a. income elasticity of demand.

b. cross price elasticity of demand.

c. price elasticity of supply.

d. price elasticity of demand.

e. any elasticity calculation.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: b

Leo’s Bakery reduces the price of wheat bread from $3 to $1 and finds that quantity demanded

increases from 100 to 122 loaves. Leo calculates that his price elasticity of demand for wheat

bread is:

a. 0.

b. 0.2.

c. 1.0.

d. 1.5.

e. 2.0

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: c

Tara buys four music cassettes when the price is $10 and two cassettes when the price is $14. Her

price elasticity of demand is:

a. 0.

b. 1.

c. 2.

d. 3.

e. 4.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: a

As price decreases and we move down further along a linear demand curve, the price elasticity of

demand will:

a. decrease.

b. increase.

c. stay the same.

d. approach infinity.

e. increase or decrease.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: c

If the price elasticity of demand for football tickets is estimated to be 4.5, then a 10 percent

increase in football ticket prices would be expected to cause a:

a. 4.5 percent decrease in quantity demanded.

b. 4.5 percent increase in quantity demanded.

c. 45 percent decrease in quantity demanded.

d. 45 percent increase in quantity demanded.

e. 450 percent increase in quantity demanded

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Price Elasticity of Demand 203

54. 55. 56. 57. 58. Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: e

A health club sells 50 memberships when the monthly price is $60 and 70 memberships when the

monthly price is $40. The price elasticity of demand for memberships at this health club is (using

the average values method):

a. 0.25.

b. 0.6.

c. 1.0.

d. 1.1.

e. 0.83

Topic: Price elasticity of demand, Difficulty: D, Type: RE, Answer: b

Within different price ranges along a linear demand curve, elasticities are:

a. constant.

b. different.

c. equal.

d. the same as slope.

e. negative 1.

Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: c

If demand for a good is price elastic, then the price elasticity will be:

a. equal to one.

b. equal to zero.

c. greater than one.

d. less than one.

e. less than zero.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: d

An economist estimates that .67 is the price elasticity of demand for disposable diapers. This

suggests that disposable diaper producers could:

a. advertise more to raise the price elasticity of demand.

b. encourage more parents to use cloth diapers.

c. lower the price of disposable diapers to raise more revenue.

d. raise the price of disposable diapers to raise more revenue.

e. maximize revenues by staying at the current price.

Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: b

If demand is price elastic, then when price decreases, total revenue:

a. decreases.

b. increases.

c. does not change.

d. is less than one.

e. is negative.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.204 Chapter 5

59. 60. 61. 62. 63. Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: e

When a 2 percent increase in price generates a greater than 2 percent decrease in quantity

demanded, then:

a. demand is price inelastic.

b. total revenue increases.

c. demand is positively sloped.

d. demand is unit elastic.

e. total revenue

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: d

The short-run price elasticity of demand for airline travel is .05, while the long-run elasticity is

2.36. This means that a significant increase in airline ticket prices will cause airline companies to:

a. collect less revenue from short-notice travelers.

b. collect more revenue from travelers who book well in advance.

c. lose money on short-notice travelers.

d. collect less revenue from travelers who book well in advance.

e. lose many of its short-notice travelers.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: c

On a part of the demand curve where the price elasticity of demand is less than 1, a decrease in

price:

a. is impossible.

b. will increase total revenue.

c. will decrease total revenue.

d. raises the price elasticity of demand.

e. decreases quantity demanded.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: d

A public transit company finds that when it reduces the price of a bus ticket, total revenues

remain the same. One can conclude from this that:

a. b. c. d. e. the demand curve is horizontal, reflecting infinite price elasticity.

the company sells the same number of bus tickets both before and after the price change.

the demand curve for bus tickets must have shifted to the right.

the firm is operating in a range of the demand curve that is unit elastic.

the price should be lowered further so that a larger quantity can be sold.

Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: e

It is Valentine’s Day and Jason is desperately looking all over town for a dozen roses to give to

Judy. Most likely, Jason’s price elasticity of demand is:

a. infinitely large.

b. negative.

c. equal to one.

d. greater than one.

e. less than one.

64. Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: c

Sally is an average shopper, with average income. When she is in the store she buys a few items

which cost more than $20, several items which cost between $5 and $20, and many items which

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Price Elasticity of Demand 205

65. 66. 67. 68. cost less than $1. The price elasticity of Sally’s demand for these goods most likely

____________.

a. b. c. d. e. increases as the price decreases

decreases as the price decreases

increases as the price increases

decreases as the price increases

remains constant over all price ranges

Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: b

Elasticity has which special meaning for economists?

a. b and c.

b. c. d. e. A ratio of percentage changes.

How easily prices adjust to market changes.

How price changes as quantities demanded change.

When consumers will no longer react to price changes.

Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: d

Which statement about price elasticity of demand along a linear demand curve is true?

a. b. As the quantity demanded increases, so does the buyer’s sensitivity to price.

When price elasticity of demand is equal to 1, consumers are indifferent to subtle

price changes.

c. The ratio of current price to quantity demanded is a good estimate of the elasticity

of demand.

d. e. As the prices of goods increase, the elasticity of demand increases.

When an individual buys 4 units of a good his/her elasticity of demand for each

unit increases.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: a

Looking at the relationship between elasticity and total revenue, we can see that __________.

a. b and c

b. c. d. e. when demand is unit elastic, small price changes don’t change total revenue

when a good is price inelastic, revenue increases when prices increase

when a good is price elastic, revenue increases when prices increase

total revenue is maximized when the elasticity has stopped changing

Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: b

Which of the following statements is true?

a. b and d.

b. c. d. e. Total revenue is maximized when elasticity is one.

Goods are said to be price inelastic when the elasticity is greater than two.

Demand for milk is more elastic than demand for football tickets.

Demand for 5-cent candy is more elastic than demand for sweaters.

69. Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: d

Larissa is a famous attorney with a great reputation in court. She charges her clients $300 for

each hour she spends working on their cases. If she earned $450,000 in hourly wages last year,

and by raising her rates to $350 per hour her income increased to $490,000 what can we say

about the elasticity of demand for Larissa’s legal services?

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.206 Chapter 5

70. a. b. c. d. e. It is approximately equal to 2.3.

It is approximately equal to 1.6.

It is approximately equal to 1.0.

It is approximately equal to 0.45.

It is approximately equal to 0.1.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: c

Dana is an art historian who needs to travel to Italy to do research. Art historians usually don’t

have a lot of money, and therefore are very sensitive to price changes. Dana’s funding agency

pays her a fixed amount to travel. At current exchange rates, Dana can stay in Italy for 35 days. If

the exchange rate improves by 10 percent, she can stay for 40 days. What is Dana’s price

elasticity of demand for days spent in Italy?

a. It is approximately equal to 2.3.

b. It is approximately equal to 1.6.

c. It is approximately equal to 1.4.

d. It is approximately equal to 0.4.

e. It is approximately equal to 0.1.

Exhibit 2 Price and quantity demanded data

Price 71. Quantity Demanded

5 20

4 25

3 30

2 35

1 40

Topic: Price elasticity of demand, Difficulty: M, Type: CA, Answer: e

The data in Exhibit 2 shows that price elasticity of demand is:

a. b. c. d. e. increasing as the price decreases.

decreasing as the price increases.

increasing as the quantity increases.

decreasing as the quantity decreases.

decreasing as the quantity increases.

72. Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: a

Using Exhibit 2, what is the price elasticity of demand when the price falls from five dollars to

four?

a. 1.

b. 1.25.

c. 0.8.

d. 2.0.

e. 0.4.

73. Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: e

One of the reasons that price elasticities of demand are always stated as positive numbers

is because:

a. the numerators and denominators of the formula are both negative.

b. the numerators and denominators of the formula are both positive.

c. price increases always lead to increases in quantity demanded.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Price Elasticity of Demand 207

74. d. e. price decreases always lead to decreases in quantity demanded.

price elasticities are always negative, so we ignore the sign.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: c

Avital and Joshua each have their own business selling lemonade in front of their houses. When

they each charge 25 cents per glass, their total revenues are equal. However, when they each

charge 40 cents per glass, Avital’s revenues are bigger than Joshua’s revenues. This

is because:

a. Joshua faces a more inelastic demand curve.

b. Avital faces a more elastic demand curve.

c. Joshua faces a more elastic demand curve.

d. Avital faces a less inelastic demand curve.

e. there is a market failure.

75. 76. Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: b

The price elastic portion of the linear demand curve lies:

a. b and c.

b. c. d. e. above the point of unit elasticity.

anywhere to the left of current market prices.

below the point where total revenue is maximized.

at the intersection with the supply curve.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: c

If a supplier faces a perfectly horizontal demand curve and sets his price slightly higher than the

demand curve itself, he can expect:

a. no change in his total revenues.

b. everyone to begin buying his product.

c. a complete loss of revenues.

d. a new demand curve.

e. a relative increase in income.

Exhibit 3 Demand curves for gallons of orange juice

Price Albert Betty Carl Dana Edward

10 9 0 8 0 0 1 1.5 2 2 2 0 0

2 0.5 0

2 4

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.208 Chapter 5

7 0 6 1 5 3 4 5 3 7 2 9 1 11 2.5 3.5 4.5 5.5 3 3 4 3 5 3 2 3.5 8

5 12

3 6.5 16

8 20

3 9.5 24

11 28

3 12.5 32

77. Topic: Price elasticity of demand, Difficulty: M, Type: CA, Answer: a

Using Exhibit 3, whose elasticity of demand is greatest when the price falls from $7 to $6?

a. Albert

b. Betty

c. Carl

d. Dana

e. Edward

78. Topic: Price elasticity of demand, Difficulty: M, Type: CA, Answer: c

Using Exhibit 3, in general, whose demand for orange juice is the most inelastic?

a. Albert

b. Betty

c. Carl

d. Dana

e. Edward

79. Topic: Price elasticity of demand, Difficulty: M, Type: CA, Answer: e

Using Exhibit 3, in general, whose demand for orange juice is the most elastic?

a. Albert

b. Betty

c. Carl

d. Dana

e. Edward

80. Topic: Price elasticity of demand, Difficulty: E, Type: CA, Answer: a

Using Exhibit 3, whose “quantity demanded” experiences the largest percentage increase when

the price falls from $2 to $1?

a. Albert

b. Betty

c. Carl

d. Dana

e. Edward

81. Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: d

If a revenue-maximizing firm is told that the price elasticity of demand is equal to one, it should:

a. raise prices 1 percent.

b. lower prices 1 percent.

c. raise prices until the elasticity becomes very high.

d. keep the price where it is.

e. lower prices until the elasticity becomes very high.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Price Elasticity of Demand 209

82. 83. 84. 85. Topic: Price elasticity of demand, Difficulty: E, Type: RE, Answer: a

Another word for elasticity is:

a. responsiveness.

b. happiness.

c. bonus

d. profit.

e. surplus.

Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: d

Firms would like to know the price elasticity of demand for their products because it helps

determine the effect of price changes on the firms’:

a. property taxes.

b. competitors’ profits.

c. quantity supplied.

d. revenues.

e. total costs.

Topic: Price elasticity of demand, Difficulty: D, Type: SA, Answer: d

If the price of Pepsi-Cola increases from 40 cents to 50 cents per bottle and the quantity

demanded decreases from 100 bottles to 50 bottles, then according to the averaging equation, the

value of price elasticity of demand for Pepsi-Cola is:

a. 0.5.

b. 0.25.

c. 1.

d. 3.

e. 2.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: c

If the value of the price elasticity of demand is 0.2, this means that:

a. b. c. d. e. a 20 percent decrease in price causes a 1 percent increase in quantity demanded.

a 0.2 percent decrease in price causes a 1 percent increase in quantity demanded.

a 5 percent decrease in price causes a 1 percent increase in quantity demanded.

a 0.2 percent decrease in price causes a 0.2 percent increase in quantity demanded.

a 100 percent decrease in price causes a 200 percent increase in quantity demanded.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.210 Chapter 5

86. 87. 88. 89. 90. Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: b

If an increase in the price of a product from $1 to $2 per unit leads to a decrease in the quantity

demanded from 100 to 80 units, then demand is:

a. elastic.

b. inelastic.

c. of unitary elasticity.

d. 0.

e. inferior.

Topic: Price elasticity of demand, Difficulty: D, Type: SA, Answer: a

If an increase in the price of a product from $1 to $2 per unit leads to a decrease in the quantity

demanded from 100 to 80 units, then according to the averaging equation, the value of price

elasticity of demand in absolute terms is:

a. 0.33.

b. 2.33.

c. 0.25.

d. 3.

e. 0.66.

Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: c

If Stimpson University increases tuition in order to increase its revenue, it will:

a. b. c. d. e. not be successful if the demand curve slopes downward.

be successful if demand is elastic.

be successful if demand is inelastic.

be successful if supply is elastic.

be successful if supply is inelastic.

Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: c

If New York City expects that an increase in bus fares will raise mass transit revenues, it must

think that the demand for bus travel is:

a. elastic.

b. unit elastic.

c. inelastic.

d. perfectly inelastic.

e. 10.

Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: c

Which of the following describes a situation in which demand must be inelastic?

a. b. c. Total revenue decreases by 10 percent when the price of spats rises by 10 percent.

Total revenue decreases by less than 10 percent when the price of spats rises by 10 percent.

Total revenue increases by more than 10 percent when the price of spats rises by

10 percent.

d. e. Total revenue decreases by $10 when the price of spats rises by $10.

Total revenue decreases by more than $10 when the price of spats rises by $10.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Price Elasticity of Demand 211

91. 92. 93. 94. 95. Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: c

Which of the following describes a situation in which demand must be elastic?

a. b. Total revenue increases by 15 percent when the price of corn dogs rises by 15 percent.

Total revenue increases by less than 15 percent when the price of corn dogs rises by

15 percent.

c. Total revenue decreases by more than 15 percent when the price of corn dogs rises by

15 percent.

d. e. Total revenue increases by $15 when the price of corn dogs rises by $15.

Total revenue increases by more than $15 when the price of corn dogs rises by $15.

Topic: Price elasticity of demand, Difficulty: E, Type: RE, Answer: a

A measure of sensitivity or responsiveness to changes in price or income is called:

a. elasticity.

b. technology.

c. supply and demand.

d. social pressure.

e. kickback.

Topic: Price elasticity of demand, Difficulty: E, Type: RE, Answer: c

Elasticity is a measure of:

a. the slope of a linear demand curve.

b. the slope of a supply curve.

c. relative responsiveness.

d. economic welfare.

e. consumer tastes.

Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: b

Consider the market for bicycles. If a dealer cuts prices by 10 percent and sells 20 percent more

bikes, then demand for bicycles is:

a. inelastic, and total revenue will increase.

b. elastic, and total revenue will increase.

c. inelastic, and total revenue will decrease.

d. elastic, and total revenue will decrease.

e. unit elastic, and total revenue will remain the same.

Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: a

The percentage change in the quantity demanded of film divided by the percentage change

in the price of cameras indicates:

a. the price elasticity of demand for film.

b. the price elasticity of demand for cameras.

c. the price elasticity of supply for film.

d. the price elasticity of supply for cameras.

e. nothing, because the two goods fall into the broadly defined category of

photographic equipment.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.212 Chapter 5

96. Topic: Price elasticity of demand, Difficulty: M, Type: CA, Answer: c

Governments can use price elasticity of demand to estimate how changes in excise tax rates will

affect:

a. income.

b. prices.

c. tax revenues.

d. government spending.

e. profits.

Exhibit 4 Demand curves for silver

Graph A

Perfectly Elastic Demand

Graph B

Perfectly Inelastic Demand

D

Price

per

ounce

(dollars)

200

150

100

50

0 10

D

Price

per

ounce

(dollars)

20 30 40

Quantity of silver

(millions of ounces)

Graph C

Elastic Demand

Price

per

ounce

(dollars)

200

150

100

50

D

0 10

Price

per

ounce

(dollars)

D

200

150

100

50

0 10

20 30 40

Quantity of silver

(millions of ounces)

Graph D

Inelastic Demand

D

200

150

100

50

0 10

20 30 40

Quantity of silver

(millions of ounces)

D

20 30 40

Quantity of silver

(millions of ounces)

97. Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: a

Assume that a wealthy buyer, Mr. Hunt, declares that he will purchase any amount of silver at a

price of $125 an ounce. In Exhibit 4, which graph illustrates the shape of the demand curve for

silver?

a. Graph A.

b. Graph B.

c. Graph C.

d. Graph D.

98. Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: a

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Price Elasticity of Demand 213

99. 100. 101. 102. If the quantity of concert tickets sold decreases by 10 percent when the price increases by 5

percent, the price elasticity of demand over this range of the demand curve is:

a. price elastic.

b. price inelastic.

c. perfectly inelastic.

d. unitary elastic.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: b

Suppose the quantity demanded of steak is 200 million pounds per year when the price is $6 per

pound and 400 million pounds per year when the price is $2 per pound. The price elasticity of

demand for steak over this range is:

a. elastic.

b. inelastic.

c. unitary elastic.

d. perfectly elastic.

e. perfectly inelastic.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: a

Suppose the Good Food supermarket increases the price of a pound of bananas from $.75 to

$1.25 and finds that the quantity of bananas it sells per month drops from 1,500 to 1,000. The

price elasticity of demand coefficient for bananas in this price range is:

a. 0.80.

b. 3.00.

c. 2.00.

d. 0.50.

Topic: Price elasticity of demand, Difficulty: M, Type: CA, Answer: b

Suppose the quantity demanded is 1,000 million bushels of peaches per year when the price is $3

per bushel and 1,500 million bushels when the price is $1 per bushel. The price elasticity of

demand in this range of the demand curve is:

a. elastic.

b. inelastic.

c. unitary elastic.

d. infinitely elastic.

Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: e

If a 5 percent decrease in the price of a good produces a 5 percent increase in the quantity

demanded, the price elasticity of demand is:

a. perfectly elastic.

b. perfectly inelastic.

c. elastic.

d. inelastic.

e. unitary elastic.

103. Topic: Price elasticity of demand, Difficulty: E, Type: RE, Answer: e

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.214 Chapter 5

104. 105. 106. Suppose there is no change in total revenue when the price changes. The demand curve for this

good is:

a. perfectly elastic.

b. perfectly inelastic.

c. elastic.

d. inelastic.

e. unitary elastic.

Topic: Price elasticity of demand, Difficulty: E, Type: RE, Answer: c

Any change in price along a perfectly inelastic demand curve produces:

a. b. c. d. greater change in the quantity demanded.

less change in the quantity demanded.

no change in the quantity demanded.

infinite change in the quantity demanded.

Topic: Price elasticity of demand, Difficulty: D, Type: RE, Answer: e

A perfectly elastic demand curve has a price elasticity of demand coefficient of:

a. zero.

b. 1.

c. greater than 1, but less than infinity.

d. less than 1, but greater than zero.

e. infinity.

Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: a

A demand curve that has constant price elasticity of demand coefficient equals to one at all points

is a (an):

a. rectangular hyperbola.

b. downward-sloping straight line.

c. upward-sloping straight line.

d. none of the above.

Exhibit 5 Demand curve for computers

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Price Elasticity of Demand 215

A B

Price

per computer

(dollars)

E

D

DEMAND

0

C

F

Quantity of computers

(millions per year)

107. Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: c

In Exhibit 5, if the area OABC equals the area ODEF, the demand curve is:

a. elastic.

b. inelastic.

c. unitary elastic.

d. nonelastic.

108. Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: a

In Exhibit 5, the change in total revenue resulting from a change in price from A to D indicates

that the demand curve is:

a. elastic.

b. inelastic.

c. unitary elastic.

d. nonelastic.

109. Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: d

In Exhibit 5, the total revenue at point B on the demand curve equals:

a. OA.

b. CB.

c. AB.

d. OABC.

e. None of the above.

110. 111. Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: d

In Exhibit 5, the total revenue at point E on the demand curve equals:

a. OD.

b. FE.

c. DE.

d. ODEF.

e. None of the above.

Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: c

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.216 Chapter 5

112. 113. 114. 115. You are on a campus committee which sets the ticket prices for basketball games. The committee

wants to increase the total money generated from ticket sales. When should the committee choose

to lower its ticket prices?

a. Always.

b. Never.

c. When demand for basketball tickets is elastic.

d. When demand for basketball tickets is inelastic.

Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: a

A 10 percent rise in the price of housing reduces the quantity demanded of housing by 3 percent.

We can conclude that the demand for housing is:

a. inelastic.

b. elastic.

c. unitary elastic.

d. perfectly elastic.

Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: b

Suppose an oil company wants to make its total revenue as large as possible. It should charge a

price at which the demand for oil is:

a. elastic.

b. unitary elastic.

c. inelastic.

d. perfectly inelastic.

Topic: Price elasticity of demand, Difficulty: E, Type: SA, Answer: a

If a decrease in the price of football tickets increases the total revenue of the athletic department,

this is evidence that demand is:

a. price elastic.

b. price inelastic.

c. unit elastic with respect to price.

d. perfectly inelastic.

Topic: Price elasticity of demand, Difficulty: E, Type: RE, Answer: a

If the percentage change in the quantity demanded of a good is greater than the percentage change

in price, price elasticity of demand is:

a. elastic.

b. inelastic.

c. perfectly inelastic.

d. perfectly elastic.

116. Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: b

Suppose the president of a textbook publisher argues that a 10 percent increase in the price of

textbooks will raise total revenue for the publisher. It can be concluded that the company

president thinks that demand for textbooks is:

a. unitary elastic.

b. inelastic.

c. elastic.

d. perfectly inelastic.

117. Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: a

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Price Elasticity of Demand 217

118. 119. 120. 121. If the quantity of tickets to the fair sold decreases by 10 percent when the price increases by 5

percent, the price elasticity of demand over this range of the demand curve is:

a. price elastic.

b. price inelastic.

c. perfectly inelastic.

d. unitary elastic.

Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: a

There is no change in total revenue when the demand curve for a good is:

a. unitary elastic.

b. perfectly inelastic.

c. elastic.

d. inelastic.

e. perfectly elastic.

Topic: Price elasticity of demand, Difficulty: E, Type: RE, Answer: b

If a good has a price elasticity of demand coefficient less than one, then:

a. b. c. this good has an elastic demand.

this good has an inelastic demand.

a 10 percent increase in the price will result in a greater than 10 percent decrease in the

quantity demanded.

d. the demand curve will be vertical.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: b

If the price elasticity of demand coefficient equals 2 then:

a. a 7 percent decrease in the price will result in a 14 percent decrease in the quantity

demanded.

b. c. d. a price decrease will increase total revenue.

the good has an inelastic demand.

there is likely few substitutes, a short time period under consideration, or this good accounts

for a relatively small percentage of consumers’ budgets.

Topic: Price elasticity of demand, Difficulty: D, Type: CA, Answer: e

Which of the following statements is true?

a. b. c. d. If the income elasticity of demand is less than zero, the good is an inferior good.

Only if the demand curve is vertical will sellers raise the price by the full amount of a tax.

Two goods are substitutes if the cross-elasticity of demand coefficient is positive.

A price elasticity of supply coefficient equal to 1.5 means the product exhibits an elastic

supply and a 10 percent increase in the price will increase the quantity supplied by 15

percent.

e. All of the above.

Exhibit 6 Demand curve for concert tickets

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.218 Chapter 5

40

Price per

ticket

(dollars)

30

20

Demand

curve

10

10

0 20 30 40

Quantity of tickets per concert

(thousands)

122. 123. 124. Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: a

In Exhibit 6, suppose promoters charge a price of $30 per ticket. How much total revenue will

their sales generate?

a. $300,000.

b. $400,000.

c. $500,000.

d. $600,000.

Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: d

In Exhibit 6, if promoters lower their ticket price form $30 to $20, then:

a. b. c. d. they will receive less money from their ticket sales.

people will continue to buy the same number of tickets.

customers will spend less total money on concert tickets.

both ticket sales and total revenue will rise.

Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: b

In Exhibit 6, the demand curve for concert tickets shown above is classified as:

a. inelastic.

b. elastic.

c. unitary elastic.

d. cross elastic.

Exhibit 7 Demand curve for concert tickets

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Price Elasticity of Demand 219

Price per

ticket

(dollars)

40

30

20

10

Demand

125. 126. 127. 128. curve

10

0 20 30 40

Quantity of tickets per concert

(thousands)

Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: a

According to Exhibit 7, the demand for concert tickets is:

a. inelastic.

b. elastic.

c. unitary elastic

d. perfectly elastic.

Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: b

In Exhibit 7, If promoters charge a price of $10 per ticket, then their total revenue is:

a. $240,000.

b. $300,000.

c. $333,333.

d. $800,000.

Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: a

In Exhibit 7, if promoters raise their prices from $10 to $40 per ticket, then their total revenue

will:

a. increase.

b. decrease.

c. remain unchanged.

d. react unpredictably.

Topic: Determinants of price elasticity of demand, Difficulty: M, Type: RE, Answer: d

The demand for a product is likely to be more elastic:

a. b. c. d. the smaller the share of the total budget spent on the product.

when more complementary products are available.

in the short run than in the long run.

when more good substitutes for the product are available.

129. Topic: Determinants of price elasticity of demand, Difficulty: M, Type: RE, Answer: b

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.220 Chapter 5

130. 131. 132. 133. Other things constant, the price elasticity of demand for a product will be smaller (more inelastic)

if:

a. b. c. d. people spend a large share of their income on the product.

people spend an insignificant share of their income on the product.

the population in the market area is large.

there are many good substitutes for the product.

Topic: Determinants of price elasticity of demand, Difficulty: M, Type: SA, Answer: d

A product would be more demand price elastic:

a. b. c. d. e. the shorter the time the consumer has to adjust to price changes.

the lower the price of the good.

the fewer the number of good substitutes.

the less the essential nature of the good.

if the supply is more price elastic.

Topic: Determinants of price elasticity of demand, Difficulty: M, Type: SA, Answer: a

A product would be more demand price inelastic:

a. b. c. d. e. the shorter the time the consumer has to adjust to price changes.

the higher the price of the good.

the more the number of good substitutes.

the less the essential nature of the good.

if the supply is more price elastic.

Topic: Determinants of price elasticity of demand, Difficulty: E, Type: RE, Answer: a

The longer the time period under study,

a. b. c. d. e. the more elastic is the price elasticity of demand.

the less sensitive consumers will be to price changes.

the less adjustment consumers will make to price changes.

the more inelastic is the price elasticity of demand.

the more likely any given price cut will result in a smaller reaction by the consumer.

Topic: Determinants of price elasticity of demand, Difficulty: D, Type: CA, Answer: b

Demand sensitivity depends on all of the following except:

a. b. d. e. how low is the price of the good.

the sensitivity of firms’ output to changes in its price.

c. the consumer’s income.

the availability and closeness of substitutes.

the amount of time a consumer has to adjust to price changes.

134. Topic: Determinants of price elasticity of demand, Difficulty: M, Type: SA, Answer: c

In the short run, consumers typically ___________ to price changes (when compared to the long

run).

a. are very responsive

b. are more demand sensitive

c. are less demand sensitive

d. do not respond at all

e. overreact

135. Topic: Determinants of price elasticity of demand, Difficulty: M, Type: SA, Answer: d

A product would be more demand price elastic:

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Price Elasticity of Demand 221

136. 137. 138. 139. 140. a. b. c. d. e. the shorter the time the consumer has to adjust to price changes.

the lower the price of the good.

the fewer the number of good substitutes.

the less the essential nature of the good.

if the supply is more price elastic.

Topic: Determinants of price elasticity of demand, Difficulty: M, Type: SA, Answer: a

A product would be more demand price inelastic:

a. b. c. d. the shorter the time the consumer has to adjust to price changes.

the higher the price of the good.

the more the number of good substitutes.

the less the essential nature of the good.

Topic: Determinants of price elasticity of demand, Difficulty: E, Type: RE, Answer: a

The longer the time period under study,

a. b. c. d. e. the more elastic is the price elasticity of demand.

the less sensitive consumers will be to price changes.

the less adjustment consumers will make to price changes.

the more inelastic is the price elasticity of demand.

the more likely any given price cut will result in a smaller reaction by the consumer.

Topic: Determinants of price elasticity of demand, Difficulty: M, Type: SA, Answer: a

If the short-run price elasticity of demand for hospital care is .27, then the long-run price

elasticity is expected to be:

a. greater than .27.

b. greater than 1.

c. less than .27.

d. equal to .27.

e. less than 0.

Topic: Determinants of price elasticity of demand, Difficulty: M, Type: CA, Answer: d

Which of the following events would increase the price elasticity of demand for Chicago Bears

tickets that sell at a price of $20?

a. b and c.

b. c. d. e. The Bears are having a successful season.

The visiting team is having a successful season.

The Bears have been defeated in their previous seven games.

The weather on game day will be warm.

Topic: Determinants of price elasticity of demand, Difficulty: M, Type: SA, Answer: a

The price elasticity of demand for a particular good is influenced by which of the following

factors?

a. b and c.

b. The income of the buyers.

c. The availability of substitutes.

d. The level of competition among sellers.

e. How many uses the good has.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.222 Chapter 5

141. 142. 143. 144. 145. Topic: Determinants of price elasticity of demand, Difficulty: D, Type: CA. Answer: c

The long-run price elasticity of demand is usually larger than the short-run price elasticity of

demand because:

a. b. demand curves tend to become steeper over time.

economists take the absolute value of long-run price elasticities but not of short-run

elasticities.

c. d. e. people have more time to find substitute goods.

incomes tend to rise over time.

supply curves change over time.

Topic: Determinants of price elasticity of demand, Difficulty: D, Type: CA, Answer: b

Demand sensitivity depends on all of the following except:

a. b. d. e. how low is the price of the good.

the sensitivity of firms’ output to changes in its price.

c. the consumer’s income.

the availability and closeness of substitutes.

the amount of time a consumer has to adjust to price changes.

Topic: Determinants of price elasticity of demand, Difficulty: M, Type: SA, Answer: a

If the short-run price elasticity of demand for hospital care is .27, then the long-run price

elasticity is expected to be:

a. greater than .27.

b. greater than 1.

c. less than .27.

d. equal to .27.

e. less than 0.

Topic: Determinants of price elasticity of demand, Difficulty: D, Type: CA. Answer: c

The long-run price elasticity of demand is usually larger than the short-run price elasticity of

demand because:

a. b. demand curves tend to become steeper over time.

economists take the absolute value of long-run price elasticities but not of short-run

elasticities.

c. d. e. people have more time to find substitute goods.

incomes tend to rise over time.

supply curves change over time.

Topic: Determinants of price elasticity of demand, Difficulty: M, Type: SA, Answer: e

In the long run, price elasticities of demand are usually __________.

a. b. c. d. e. less than they are in the short run because people can adjust

the same as they are in the short run because tastes don’t change

greater than they are in the short run because prices rise over time

less than they are in the short run because real prices fall over time

greater than they are in the short run because consumers have time to adjust

146. Topic: Determinants of price elasticity of demand, Difficulty: D, Type: CA, Answer: c

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Price Elasticity of Demand 223

147. 148. 149. 150. 151. A lower price elasticity of demand coefficient occurs when:

a. many substitutes exist.

b. d. the quantity demanded is more responsive.

c. few substitutes exist.

the market is broadly defined.

Topic: Determinants of price elasticity of demand, Difficulty: M, Type: SA, Answer: e

In the long run, price elasticities of demand are usually __________.

a. b. c. d. e. less than they are in the short run because people can adjust

the same as they are in the short run because tastes don’t change

greater than they are in the short run because prices rise over time

less than they are in the short run because real prices fall over time

greater than they are in the short run because consumers have time to adjust

Topic: Determinants of price elasticity of demand, Difficulty: E, Type: RE, Answer: a

The price elasticity of demand coefficient for a good will be greater:

a. if close substitutes exist.

b. if minor complements exist.

c. in the short-run.

d. if a small portion of the budget will be spent on it.

Topic: Determinants of price elasticity of demand, Difficulty: M, Type: SA, Answer: d

Which of the following goods is likely to have the most elastic demand curve?

a. Tobacco products.

b. Gasoline.

c. Medical care.

d. Honda automobiles.

Topic: Determinants of price elasticity of demand, Difficulty: M, Type: SA, Answer: d

If the price elasticity of demand is elastic, then:

a. Ed < 1.

b. c. d. consumers are relatively not very responsive to a price increase.

an increase in the price will increase total revenue.

there are likely a large number of substitute products available.

Topic: Determinants of price elasticity of demand, Difficulty: D, Type: CA, Answer: b

Which of the following statements is not true?

a. b. c. Price elasticity of demand for basic foods is low.

When price elasticity of demand is very high, we say there is brand loyalty.

The availability and price of substitutes affect the elasticity of demand for a good

or service.

d. e. When goods have very low prices, the elasticity of demand is usually quite low.

Elasticities increase as the price of the good increases.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.224 Chapter 5

152. 153. 154. 155. 156. Topic: Determinants of price elasticity of demand, Difficulty: D, Type: Ca, Answer: e

In differentiating between the short- and long-run elasticities, when economists talk about short-

run elasticities,

a. b and c.

b. there is no need to mention short versus long run.

c. the only issues are price and quantity.

d. short-run elasticities are usually higher.

e. short-run elasticities are usually lower.

Topic: Determinants of price elasticity of demand, Difficulty: M, Type: SA, A lower price elasticity of demand coefficient occurs when:

a. many substitutes exist.

b. the quantity demanded is more responsive.

c. few substitutes exist.

d. the market is broadly defined.

Answer: c

Topic: Determinants of price elasticity of demand, Difficulty: M, Type: RE, Answer: a

The price elasticity of demand coefficient for a good will be greater:

a. if close substitutes exist.

b. if minor complements exist.

c. in the short-run.

d. if a small portion of the budget will be spent on it.

Topic: Determinants of price elasticity of demand, Difficulty: M, Type: SA, Answer: c

The price elasticity of demand coefficient for a good will be lower:

a. b. c. d. if there are few substitutes for the good.

if expenditure on it is a small part of one’s budget.

both a and b are true.

neither a nor b are true.

Topic: Determinants of price elasticity of demand, Difficulty: E, Type: RE, Answer: c

Which of the following is true for a lower price elasticity of demand coefficient?

a. The market is broadly defined.

b. The quantity demanded is more responsive.

c. Few substitutes exist.

d. Many substitutes exist.

e. All of the above.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Price Elasticity of Demand 225

Exhibit 8 Supply and demand curves for good X

S

Price

per unit

(dollars)

800

600

400

200

0

W

X

E

Y

Z

D

100

200 300 400 500

Quantity of output

(units per time period)

157. Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: a

As shown in Exhibit 8, the price elasticity of demand for good X between points E and Z is:

a. 3/13 = 0.23.

b. 13/3 = 4.33.

c. 1/3 = 0.33.

d. 1.

Exhibit 9 Supply and demand curves for good X

SUPPLY

Price

per unit

(dollars)

400

300

200

100

0

D C

E

A

B

DEMAND

50

100 150 200 250

Quantity of output

(units per time period)

158. Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: a

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.226 Chapter 5

As shown in Exhibit 9, the price elasticity of demand for good X between points E and B is:

a. 3/7 = 0.43.

b. 7/3 = 2.33.

c. 1/2 = 0.50.

d. 1.

159. Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: d

As shown in Exhibit 9, the price elasticity of demand for good X between points E and D is:

a. 1/5 = 0.20.

b. 3/7 = 0.43.

c. 1/2 = 0.50.

d. 1.

TRUE OR FALSE

1. Topic: Price elasticity of demand, Difficulty: E, Type: RE, Answer: True

The price elasticity of demand measures consumer responsiveness to a price change.

2. Topic: Price elasticity of demand, Difficulty: E, Type: SA, Answer: False

If the price elasticity of demand for a good is elastic, then consumers are relatively unresponsive

with respect to the quantity purchased when the price changes.

3. Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: True

If the price elasticity of demand coefficient equals 2, this means a 10 percent increase in price

will result in a 20 percent decrease in the quantity demanded.

4. Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: True

If the managers of the bus system found that revenues increase when fares are raised, they would

conclude that price elasticity demand for subway service is inelastic.

5. Topic: Price elasticity of demand, Difficulty: E, Type: RE, Answer: True

A horizontal demand curve indicates perfectly elastic demand.

6. Topic: Price elasticity of demand, Difficulty: E, Type: RE, Answer: False

Price elasticity remains constant along a straight-line demand curve.

7. Topic: Price elasticity of demand, Difficulty: E, Type: RE, Answer: True

If demand is perfectly inelastic, then the demand curve will be vertical.

8. Topic: Price elasticity of demand, Difficulty: E, Type: SA, Answer: True

If a 10 percent price increase causes the quantity demanded for a good to decrease by 20 percent,

demand is elastic.

9. Topic: Price elasticity of demand, Difficulty: E, Type: SA, Answer: False

If a 10 percent price increase causes the quantity demanded for a good to decrease by 5 percent,

demand is elastic.

10. Topic: Price elasticity of demand, Difficulty: E, Type: SA, Answer: True

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Price Elasticity of Demand 227

11. 12. 13. 14. 15. 16. 17. 18. If a 10 percent price increase causes the quantity demanded for a good to decrease by 10 percent,

demand is unitary elastic.

Topic: Price elasticity of demand, Difficulty: E, Type: SA, Answer: False

If the demand curve for a good is elastic, consumers will spend more on that good when its price

increases.

Topic: Price elasticity of demand, Difficulty: E, Type: SA, Answer: True

Suppose an economist found that total revenues increase for the bus system when fares were

raised, the conclusion is that the price elasticity demand for subway services over the range of

fare increase is inelastic.

Topic: Price elasticity of demand, Difficulty: E, Type: RE, Answer: True

A horizontal demand curve is perfectly elastic.

Topic: Price elasticity of demand, Difficulty: M, Type: SA, Answer: False

If a good has a price elasticity of demand coefficient greater than 1, total revenue can be

increased by raising the price.

Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: False

Other factors held constant, if there are few close substitutes for a good, demand is more elastic

for it.

Topic: Price elasticity of demand, Difficulty: M, Type: RE, Answer: False

If the demand for a product is inelastic, then a price increase will result in a decrease in total

revenue.

Topic: Determinants of price elasticity of demand, Difficulty: E, Type: RE,

Answer: False

coefficient.

The fewer the substitutes for a good the greater will be the value of the price elasticity of demand

Topic: Determinants of price elasticity of demand, Difficulty: M, Type: RE, Answer: True

Goods with few available substitutes tend to have inelastic demand curves.

ESSAY QUESTIONS

1. What does the “price elasticity of demand” measure? What does a price elasticity of demand

coefficient of 1.2 mean? Does the product have an elastic, unitary elastic or inelastic demand?

ANS:

The price elasticity of demand measures buyer responsiveness to a price change. If the price

elasticity of demand coefficient equals 1.2, this means that for every 1 percent change in price

there will be a 1.2 percent change in the quantity demanded in the opposite direction. This

implies that consumers are relatively responsive to a change in the price and therefore the demand

for this product is elastic.

2. What happens to total revenue given a price increase and demand is inelastic? Why?

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.228 Chapter 5

3. ANS:

Total revenue will rise if the price rises and demand is inelastic. This is because the percentage

increase in the price exceeds the percentage decrease in the quantity demanded. Indeed,

whenever, the demand is inelastic this means buyers are relatively unresponsive to a change in

the price. Therefore, total revenue rises when price rises.

What are the characteristics of the product that has an inelastic demand?

ANS:

A product that has an inelastic demand has few substitutes, accounts for a relatively small share

of buyers’ budget, and there is a relatively short time frame under consideration.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.