Question 1

When the demand curve is inelastic, total revenues go down in proportion to a price increase.

Accepted Answer

A) True 
 B)False

Question 2

The manager of a company notices that the company's total revenue would increase if the manager raises the price of the company's product. Accordingly, the manager can assert that the demand for the company's product is:

Accepted Answer

A)  elastic. 
B)  inelastic. 
C)  unit elastic. 
D)  zero elastic. 
A)  elastic. 
B)  inelastic. 
C)  unit elastic. 
D)  zero elastic.

Question 3

The price of wheat increases, but few people cut back on their consumption of bread because:

Accepted Answer

A)  the price of bread is a small portion of the budget, and thus the demand for bread is inelastic. 
B)  the price of bread is a large portion of the budget, and thus the demand for bread is elastic. 
C)  change in the price of wheat does not affect the price of bread. 
D)  None of the answers is correct. 
A)  the price of bread is a small portion of the budget, and thus the demand for bread is inelastic. 
B)  the price of bread is a large portion of the budget, and thus the demand for bread is elastic. 
C)  change in the price of wheat does not affect the price of bread. 
D)  None of the answers is correct.

Question 4

A cross-price elasticity value that is negative will always indicate goods that are substitutes.

Accepted Answer

A) True 
 B)False

Question 5

For each of the following goods would you expect the supply to be elastic or inelastic? Provide explanation for each of your rationales. a. oil b. toothpicks c. Picasso paintings.

Accepted Answer

a. The supply curve for oil is quite ine

Question 6

When a good has fewer substitutes in consumption, is a small part of the consumer's budget, and a long time passes, demand for such a good is inelastic.

Accepted Answer

A) True 
 B)False

Question 7

Gary Becker suggested:

Accepted Answer

A)  raising the capital gains tax to help provide more government resources for the War on Drugs. 
B)  that the government should make drugs legal and then place a tax on drugs to control their usage. 
C)  subsidizing the consumption of illegal drugs in an effort to avoid deadweight losses. 
D)  All of the answers are correct. 
A)  raising the capital gains tax to help provide more government resources for the War on Drugs. 
B)  that the government should make drugs legal and then place a tax on drugs to control their usage. 
C)  subsidizing the consumption of illegal drugs in an effort to avoid deadweight losses. 
D)  All of the answers are correct.

Question 8

If the demand for a good is elastic, then firms producing the good should ________ price in order to increase revenue.

Accepted Answer

A)  increase 
B)  decrease 
C)  hold constant 
D)  either increase or decrease 
A)  increase 
B)  decrease 
C)  hold constant 
D)  either increase or decrease

Question 9

Consider a market that is described by the equations Qd = 10 - 0.5P, and Qs = -2 + 1.5P. What is the equilibrium price? What is the equilibrium quantity? If the demand curve shifts and the new demand equation is 8 - 0.5P, what are the new equilibrium price and the new equilibrium quantity? Calculate the price elasticity of supply. Is the supply curve rather inelastic or rather elastic?

Accepted Answer

The answer of Consider a market that is described by...

Question 10

The quantity demanded for cosmetic surgery increased by 12 percent following a period of strong economic growth that raised consumer income by 4 percent. What type of good is cosmetic surgery?

Accepted Answer

A)  It is a luxury good since the income elasticity of demand exceeds 1. 
B)  It is a normal good since the income elasticity is less than 1. 
C)  It is a necessity since the income elasticity of demand is equal to 1. 
D)  It is a super normal good since the income elasticity is greater than 2. 
A)  It is a luxury good since the income elasticity of demand exceeds 1. 
B)  It is a normal good since the income elasticity is less than 1. 
C)  It is a necessity since the income elasticity of demand is equal to 1. 
D)  It is a super normal good since the income elasticity is greater than 2.

Question 11

When the demand curve for a good is unit elastic, raising the price of the good by 25 percent will raise the revenue of the firm by:

Accepted Answer

A)  125 percent. 
B)  100 percent. 
C)  25 percent. 
D)  There is not enough information to answer the question. 
A)  125 percent. 
B)  100 percent. 
C)  25 percent. 
D)  There is not enough information to answer the question.

Question 12

Why is the war on drugs hard to win?

Accepted Answer

A)  It is not a conventional war. 
B)  The government has not used adequate resources in the war. 
C)  Drug dealers get stronger following successful government prohibition efforts. 
D)  The demand for illegal drugs is too elastic. 
A)  It is not a conventional war. 
B)  The government has not used adequate resources in the war. 
C)  Drug dealers get stronger following successful government prohibition efforts. 
D)  The demand for illegal drugs is too elastic.

Question 13

Evidence from the Sudan indicates that the supply of slaves is likely:

Accepted Answer

A)  perfectly elastic. 
B)  perfectly inelastic. 
C)  more elastic than inelastic. 
D)  more inelastic than elastic. 
A)  perfectly elastic. 
B)  perfectly inelastic. 
C)  more elastic than inelastic. 
D)  more inelastic than elastic.

Question 14

If the income elasticity of demand of a good is positive, we can conclude that the good is:

Accepted Answer

A)  a normal good. 
B)  an inferior good. 
C)  a substitute. 
D)  a complement. 
A)  a normal good. 
B)  an inferior good. 
C)  a substitute. 
D)  a complement.

Question 15

Consider a market that is described by the equations Qd = 10 - 0.5P, and Qs = -2 + 1.5P. What is the equilibrium price? What is the equilibrium quantity? If the supply curve shifts and the new supply equation is -4 + 1.5P, what are the new equilibrium price and the new equilibrium quantity? Calculate the price elasticity of demand. Is the demand curve rather inelastic or rather elastic?

Accepted Answer

10 - 0.5P = -2 + 1.5P 12 = 2P P = $6 and

Question 16

If Major League Baseball ticket prices rise by 15 percent, the number of tickets sold falls by 5 percent. The elasticity of demand is:

Accepted Answer

A)  -3. 
B)  -1/3. 
C)  -7.5. 
D)  -0.75. 
A)  -3. 
B)  -1/3. 
C)  -7.5. 
D)  -0.75.

Question 17

The elasticity of demand for a good is -0.75. A 4 percent increase in price will cause a:

Accepted Answer

A)  3 percent decrease in quantity demanded. 
B)  5.33 percent increase in quantity demanded. 
C)  5.33 percent decrease in quantity demanded. 
D)  0.19 percent decrease in quantity demanded. 
A)  3 percent decrease in quantity demanded. 
B)  5.33 percent increase in quantity demanded. 
C)  5.33 percent decrease in quantity demanded. 
D)  0.19 percent decrease in quantity demanded.

Question 18

Compared to the 1980s, the price of computer chips is much lower today but revenues from computer chips are ________ because demand is elastic.

Accepted Answer

A)  higher 
B)  lower 
C)  approximately unchanged 
D)  about $14 trillion higher 
A)  higher 
B)  lower 
C)  approximately unchanged 
D)  about $14 trillion higher

Question 19

Explain the change in tactics Gary Becker suggests concerning the method of fighting the war on drugs. What is so attractive about this alternative?

Accepted Answer

Becker suggests that a tax could be set

Question 20

Summarize the factors that cause goods to have a more inelastic supply.

Accepted Answer

[Note: Students will likely gi

Exam 5: Elasticity and Its Applications

When the demand curve is inelastic, total revenues go down in proportion to a price increase.

The manager of a company notices that the company's total revenue would increase if the manager raises the price of the company's product. Accordingly, the manager can assert that the demand for the company's product is:

The price of wheat increases, but few people cut back on their consumption of bread because:

A cross-price elasticity value that is negative will always indicate goods that are substitutes.

For each of the following goods would you expect the supply to be elastic or inelastic? Provide explanation for each of your rationales. a. oil b. toothpicks c. Picasso paintings.

When a good has fewer substitutes in consumption, is a small part of the consumer's budget, and a long time passes, demand for such a good is inelastic.

Gary Becker suggested:

If the demand for a good is elastic, then firms producing the good should ________ price in order to increase revenue.

The quantity demanded for cosmetic surgery increased by 12 percent following a period of strong economic growth that raised consumer income by 4 percent. What type of good is cosmetic surgery?

When the demand curve for a good is unit elastic, raising the price of the good by 25 percent will raise the revenue of the firm by:

Why is the war on drugs hard to win?

Evidence from the Sudan indicates that the supply of slaves is likely:

If the income elasticity of demand of a good is positive, we can conclude that the good is:

If Major League Baseball ticket prices rise by 15 percent, the number of tickets sold falls by 5 percent. The elasticity of demand is:

The elasticity of demand for a good is -0.75. A 4 percent increase in price will cause a:

Compared to the 1980s, the price of computer chips is much lower today but revenues from computer chips are ________ because demand is elastic.

Explain the change in tactics Gary Becker suggests concerning the method of fighting the war on drugs. What is so attractive about this alternative?

Summarize the factors that cause goods to have a more inelastic supply.

The Big Ideas in Economics

The Power of Trade and Comparative Advantage

Business Fluctuations: Aggregate Demand and Supply

Equilibrium: How Supply and Demand Determine Prices

Taxes and Subsidies

The Price System: Signals, Speculation, and Prediction

Price Ceilings and Floors

International Trade

Externalities: When the Price Is Not Right

Costs and Profit Maximization Under Competition

Competition and the Invisible Hand

Monopoly

Price Discrimination and Pricing Strategy

Oligopoly and Game Theory

Competing for Monopoly: the Economics of Network Goods

Monopolistic Competition and Advertising

Labor Markets

Public Goods and the Tragedy of the Commons

Political Economy and Public Choice

Economics, Ethics, and Public Policy

Managing Incentives

Stock Markets and Personal Finance

Asymmetric Information: Moral Hazard and Adverse Selection

Consumer Choice

Gdp and the Measurement of Progress

The Wealth of Nations and Economic Growth

Growth, Capital Accumulation, and the Economics of Ideas: Catching up Vs the Cutting Edge

Saving, Investment, and the Financial System

Supply and Demand

Unemployment and Labor Force Participation

Inflation and the Quantity Theory of Money

Transmission and Amplification Mechanisms

The Federal Reserve System and Open Market Operations

Monetary Policy

The Federal Budget: Taxes and Spending

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