Question 1

The price elasticity of demand measures the change in quantity demanded given a dollar change in price.

Accepted Answer

A) True 
 B)False

Question 2

Supply is elastic if the quantity supplied responds substantially to a change in price, and supply is inelastic if the quantity supplied responds only slightly to a change in price.

Accepted Answer

A) True 
 B)False

Question 3

Compare a market where supply and demand are both very elastic to one where supply and demand are both very inelastic. Suppose the current equilibrium price and quantity are the same in both markets. Suppose further that the government imposes a price ceiling $.50 below the equilibrium price. Prepare a diagram comparing the shortages that result. Explain the difference in these two cases.

Accepted Answer

In the two diagrams below, the equilibri

Question 4

If the price elasticity of demand is equal to 4, a 1 percent increase in the price will cause quantity demanded to increase from 100 to 104 units.

Accepted Answer

A) True 
 B)False

Question 5

The price elasticity of demand measures

Accepted Answer

A) a buyer's responsiveness to a change in income. 
B) a buyer's responsiveness to a change in price. 
C) a seller's responsiveness to a change in demand. 
D) how much price increases for a change in demand. 
E) how much demand changes for a change in supply. 
A) a buyer's responsiveness to a change in income. 
B) a buyer's responsiveness to a change in price. 
C) a seller's responsiveness to a change in demand. 
D) how much price increases for a change in demand. 
E) how much demand changes for a change in supply.

Question 6

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 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 vertical demand curve is perfectly elastic.

Accepted Answer

A) True 
 B)False

Question 9

Exhibit 4-1  
-Refer to Exhibit 4-1. The price elasticity of demand is most likely to be inelastic

Accepted Answer

A) at point A. 
B) at point B. 
C) at point C. 
D) anywhere along the demand curve. 
E) nowhere along the demand curve. 
A) at point A. 
B) at point B. 
C) at point C. 
D) anywhere along the demand curve. 
E) nowhere along the demand curve.

Question 10

Normal goods have positive income elasticities of demand, and inferior goods have negative income elasticities of demand.

Accepted Answer

A) True 
 B)False

Question 11

Good X has a high price elasticity of demand; it is most likely that

Accepted Answer

A) consumers have high incomes. 
B) good X has a lot of substitutes. 
C) good X has a lot of complements. 
D) good X is in short supply. 
E) good X is not related to any other goods. 
A) consumers have high incomes. 
B) good X has a lot of substitutes. 
C) good X has a lot of complements. 
D) good X is in short supply. 
E) good X is not related to any other goods.

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

If the consumption of alcoholic beverages is higher for lower-income people than for higher-income people, then the income elasticity of demand for alcoholic beverages is positive.

Accepted Answer

A) True 
 B)False

Question 14

A price elasticity of supply of 1.5 implies that

Accepted Answer

A) a 20 percent increase in the quantity supplied increases the price by 30 percent. 
B) total revenue is 1.5 times total cost. 
C) a 20 percent increase in the price increases the quantity supplied by 30 percent. 
D) a 20-unit increase in supply reduces the price by $30. 
E) a $20 increase in the price increases the quantity supplied by 30 units. 
A) a 20 percent increase in the quantity supplied increases the price by 30 percent. 
B) total revenue is 1.5 times total cost. 
C) a 20 percent increase in the price increases the quantity supplied by 30 percent. 
D) a 20-unit increase in supply reduces the price by $30. 
E) a $20 increase in the price increases the quantity supplied by 30 units.

Question 15

If a 1 percent change in price results in a 4 percent change in quantity demanded, then

Accepted Answer

A) the price elasticity of demand is 4. 
B) the slope of the demand curve is 1/4. 
C) the slope of the demand curve is 4. 
D) the price elasticity of demand is 1/4. 
E) there is not enough information to calculate slope or elasticity. 
A) the price elasticity of demand is 4. 
B) the slope of the demand curve is 1/4. 
C) the slope of the demand curve is 4. 
D) the price elasticity of demand is 1/4. 
E) there is not enough information to calculate slope or elasticity.

Question 16

Because tea and coffee are substitutes, their cross-price elasticity must be

Accepted Answer

A) less than 1. 
B) less than 0. 
C) equal to 0. 
D) positive. 
E) infinity. 
A) less than 1. 
B) less than 0. 
C) equal to 0. 
D) positive. 
E) infinity.

Question 17

When demand shifts, knowing supply elasticity can help us anticipate how big the changes in price and quantity might be.

Accepted Answer

A) True 
 B)False

Question 18

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 19

Total revenue will decrease if price

Accepted Answer

A) rises and demand is inelastic. 
B) falls and demand is unit elastic. 
C) rises and demand is unit elastic. 
D) rises and demand is elastic. 
E) falls and demand is elastic. 
A) rises and demand is inelastic. 
B) falls and demand is unit elastic. 
C) rises and demand is unit elastic. 
D) rises and demand is elastic. 
E) falls and demand is elastic.

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 4: Subtleties of the Supply and Demand Model

The price elasticity of demand measures the change in quantity demanded given a dollar change in price.

Supply is elastic if the quantity supplied responds substantially to a change in price, and supply is inelastic if the quantity supplied responds only slightly to a change in price.

If the price elasticity of demand is equal to 4, a 1 percent increase in the price will cause quantity demanded to increase from 100 to 104 units.

The price elasticity of demand measures

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

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

A vertical demand curve is perfectly elastic.

Exhibit 4-1 -Refer to Exhibit 4-1. The price elasticity of demand is most likely to be inelastic

Normal goods have positive income elasticities of demand, and inferior goods have negative income elasticities of demand.

Good X has a high price elasticity of demand; it is most likely that

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

If the consumption of alcoholic beverages is higher for lower-income people than for higher-income people, then the income elasticity of demand for alcoholic beverages is positive.

A price elasticity of supply of 1.5 implies that

If a 1 percent change in price results in a 4 percent change in quantity demanded, then

Because tea and coffee are substitutes, their cross-price elasticity must be

When demand shifts, knowing supply elasticity can help us anticipate how big the changes in price and quantity might be.

A product with an inelastic demand means that

Total revenue will decrease if price

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

The Central Idea

Observing and Explaining the Economy

The Supply and Demand Model

The Demand Curve and the Behavior of Consumers

The Supply Curve and the Behavior of Firms

The Efficiency of Markets

Costs and the Changes at Firms Over Time

The Rise and Fall of Industries

Monopoly

Product Differentiation, Monopolistic Competition, and Oligopoly

Antitrust Policy and Regulation

Labor Markets

Taxes, Transfers, and Income Distribution

Public Goods, Externalities, and Government Behavior

Capital and Financial Markets

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

The Economic Fluctuations Model

Using the Economic Fluctuations Model

Fiscal Policy

Monetary Policy

Economic Growth Around the World

International Trade

International Finance

Filters