Question 1

A product has elastic demand if, when price rises, total revenue falls.

Accepted Answer

A) True 
 B)False

Question 2

Suppose that the price of product G increases from $10 to $20 and, in response, quantity demanded declines from 100 to 80. Using the midpoint formula, what is the elasticity of demand?

Accepted Answer

A)  .5 
B)  3 
C)  .67 
D)  .33 
E)  2 
A)  .5 
B)  3 
C)  .67 
D)  .33 
E)  2

Question 3

If price falls by 10 percent, total revenue

Accepted Answer

A)  rises if quantity demanded changes by 10 percent. 
B)  rises if quantity demanded does not change. 
C)  rises if quantity demanded changes by less than 10 percent. 
D)  falls if quantity demanded changes by 10 percent. 
E)  falls if quantity demanded changes by less than 10 percent. 
A)  rises if quantity demanded changes by 10 percent. 
B)  rises if quantity demanded does not change. 
C)  rises if quantity demanded changes by less than 10 percent. 
D)  falls if quantity demanded changes by 10 percent. 
E)  falls if quantity demanded changes by less than 10 percent.

Question 4

Why isn't the slope of a demand curve used to measure the sensitivity of demand to a price change?

Accepted Answer

Slope is dependent on absolute measures

Question 5

In the case of a price floor, price is not allowed to increase above a certain level.

Accepted Answer

A) True 
 B)False

Question 6

A product with an inelastic demand means that

Accepted Answer

A)  consumers are relatively insensitive to a change in the price of the product. 
B)  producers are relatively sensitive to a change in the quantity demanded. 
C)  consumers are relatively sensitive to a change in the price of the product. 
D)  producers are relatively insensitive to a change in the quantity demanded. 
E)  consumers are relatively insensitive to a change in the quantity demanded. 
A)  consumers are relatively insensitive to a change in the price of the product. 
B)  producers are relatively sensitive to a change in the quantity demanded. 
C)  consumers are relatively sensitive to a change in the price of the product. 
D)  producers are relatively insensitive to a change in the quantity demanded. 
E)  consumers are relatively insensitive to a change in the quantity demanded.

Question 7

If a household's demand for bread decreases as its income increases, then its income elasticity of demand for bread is

Accepted Answer

A)  elastic. 
B)  unit elastic. 
C)  inelastic. 
D)  equal to 0. 
E)  negative. 
A)  elastic. 
B)  unit elastic. 
C)  inelastic. 
D)  equal to 0. 
E)  negative.

Question 8

A perfectly elastic demand curve has a price elasticity

Accepted Answer

A)  equal to zero. 
B)  that varies. 
C)  equal to 1. 
D)  less than 1. 
E)  of infinity. 
A)  equal to zero. 
B)  that varies. 
C)  equal to 1. 
D)  less than 1. 
E)  of infinity.

Question 9

Assume that the price elasticity of demand equals .2 (ed = .2). Given a 10 percent increase in price, there will be a

Accepted Answer

A)  20 percent increase in the quantity demanded. 
B)  2 percent decrease in the quantity demanded. 
C)  20 percent decrease in the quantity demanded. 
D)  2 percent increase in the quantity demanded. 
E)  .2 percent decrease in the quantity demanded. 
A)  20 percent increase in the quantity demanded. 
B)  2 percent decrease in the quantity demanded. 
C)  20 percent decrease in the quantity demanded. 
D)  2 percent increase in the quantity demanded. 
E)  .2 percent decrease in the quantity demanded.

Question 10

A unit elastic supply curve is vertical.

Accepted Answer

A) True 
 B)False

Question 11

Calculate the cross-price elasticity for the following goods. Are they substitutes or complements?
(A)The price of airline tickets goes up by 20 percent, causing the quantity demanded for gasoline to go up by 5 percent.
(B)The price of pancake flour goes up by 10 percent, causing the quantity demanded for pancake syrup to drop by 20 percent.
(C)The price of coffee goes up by 5 percent, causing the quantity demanded for tea to go up by 5 percent.
(D)The price of computers goes up by 5 percent, causing the quantity demanded for computer disks to drop by 2 percent.

Accepted Answer

(A)Substitutes
(B)Co

Question 12

If demand is elastic, the price elasticity of demand is between 0 and 1.

Accepted Answer

A) True 
 B)False

Question 13

Define, in words, income elasticity of demand and tell why we care if it is positive or negative.

Accepted Answer

Income elasticity is the perce

Question 14

Suppose that, as the price of wheat falls from $10 to $8, the quantity demanded of wheat increases from 100 bushels to 150 bushels. Using the midpoint formula, the price elasticity of demand for wheat is 1.8.

Accepted Answer

A) True 
 B)False

Question 15

If there are very few substitutes for a product, then an increase in its price causes

Accepted Answer

A)  a relatively large increase in quantity demanded. 
B)  a relatively large decrease in quantity demanded. 
C)  no change in quantity demanded. 
D)  a relatively small increase in quantity demanded. 
E)  a relatively small decrease in quantity demanded. 
A)  a relatively large increase in quantity demanded. 
B)  a relatively large decrease in quantity demanded. 
C)  no change in quantity demanded. 
D)  a relatively small increase in quantity demanded. 
E)  a relatively small decrease in quantity demanded.

Question 16

Suppose one market demand (D1) has a price elasticity of .65 and a second market demand (D2) has a price elasticity of .89. In comparing price elasticities of demand, it is proper to say that

Accepted Answer

A)  D2 is elastic compared to D1. 
B)  D2 is inelastic compared to D1. 
C)  D2 is more inelastic than D1. 
D)  D2 is more elastic than D1. 
E)  the elasticity of D1 and D2 is the same. 
A)  D2 is elastic compared to D1. 
B)  D2 is inelastic compared to D1. 
C)  D2 is more inelastic than D1. 
D)  D2 is more elastic than D1. 
E)  the elasticity of D1 and D2 is the same.

Question 17

If a firm lowers the price of a product when demand is elastic, then the firm should expect total revenue to

Accepted Answer

A)  fall. 
B)  rise. 
C)  remain the same. 
D)  become zero. 
E)  rise and then fall. 
A)  fall. 
B)  rise. 
C)  remain the same. 
D)  become zero. 
E)  rise and then fall.

Question 18

A price ceiling is

Accepted Answer

A)  a minimum price set by government. It causes a surplus if effective. 
B)  a maximum price set by government. It causes a shortage if effective. 
C)  the equilibrium price. 
D)  a maximum price set by government. It causes a surplus if effective. 
E)  a minimum price set by government. It causes a shortage if effective. 
A)  a minimum price set by government. It causes a surplus if effective. 
B)  a maximum price set by government. It causes a shortage if effective. 
C)  the equilibrium price. 
D)  a maximum price set by government. It causes a surplus if effective. 
E)  a minimum price set by government. It causes a shortage if effective.

Question 19

The demand for gasoline should be

Accepted Answer

A)  less elastic in the long run than in the short run. 
B)  more elastic in the long run than in the short run. 
C)  equally elastic in the long run as in the short run. 
D)  perfectly inelastic in the long run and perfectly elastic in the short run. 
E)  unit elastic in both the long run and the short run. 
A)  less elastic in the long run than in the short run. 
B)  more elastic in the long run than in the short run. 
C)  equally elastic in the long run as in the short run. 
D)  perfectly inelastic in the long run and perfectly elastic in the short run. 
E)  unit elastic in both the long run and the short run.

Question 20

Suppose that, as the price of product H falls from $5 to $4, the quantity of H demanded increases from 2,000 to 6,000 units. In this case, what is the elasticity of demand, using the midpoint formula?

Accepted Answer

A)  .9 
B)  .4 
C)  4.5 
D)  1.6 
E)  3.0 
A)  .9 
B)  .4 
C)  4.5 
D)  1.6 
E)  3.0

Exam 4: Subtleties of the Supply and Demand Model: Price Floors, Price Ceilings, and Elasticity

A product has elastic demand if, when price rises, total revenue falls.

Suppose that the price of product G increases from $10 to $20 and, in response, quantity demanded declines from 100 to 80. Using the midpoint formula, what is the elasticity of demand?

If price falls by 10 percent, total revenue

Why isn't the slope of a demand curve used to measure the sensitivity of demand to a price change?

In the case of a price floor, price is not allowed to increase above a certain level.

A product with an inelastic demand means that

If a household's demand for bread decreases as its income increases, then its income elasticity of demand for bread is

A perfectly elastic demand curve has a price elasticity

Assume that the price elasticity of demand equals .2 (ed = .2). Given a 10 percent increase in price, there will be a

A unit elastic supply curve is vertical.

If demand is elastic, the price elasticity of demand is between 0 and 1.

Define, in words, income elasticity of demand and tell why we care if it is positive or negative.

Suppose that, as the price of wheat falls from $10 to $8, the quantity demanded of wheat increases from 100 bushels to 150 bushels. Using the midpoint formula, the price elasticity of demand for wheat is 1.8.

If there are very few substitutes for a product, then an increase in its price causes

Suppose one market demand (D1) has a price elasticity of .65 and a second market demand (D2) has a price elasticity of .89. In comparing price elasticities of demand, it is proper to say that

If a firm lowers the price of a product when demand is elastic, then the firm should expect total revenue to

A price ceiling is

The demand for gasoline should be

Suppose that, as the price of product H falls from $5 to $4, the quantity of H demanded increases from 2,000 to 6,000 units. In this case, what is the elasticity of demand, using the midpoint formula?

The Central Idea

Observing and Explaining the Economy

The Supply and Demand Model

Macroeconomics: the Big Picture

Measuring the Production, Income, and Spending of Nations

The Spending Allocation Model

Unemployment and Employment

Productivity and Economic Growth

Money and Inflation

The Nature and Causes of Economic Fluctuations

Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model

The Economic Fluctuations Model

Using the Economic Fluctuations Model

Fiscal Policy

Monetary Policy

Capital and Financial Markets

Economic Growth and Globalization

International Trade

International Finance

Reading, Understanding, and Creating Graphs

the Miracle of Compound Growth

Present Discounted Value

Deriving the Growth Accounting Formula

Filters

Assume that the price elasticity of demand equals .2 (e_d = .2). Given a 10 percent increase in price, there will be a

Suppose one market demand (D₁) has a price elasticity of .65 and a second market demand (D₂) has a price elasticity of .89. In comparing price elasticities of demand, it is proper to say that