Question 1

Price elasticity of demand measures

Accepted Answer

A)  how responsive suppliers are to price changes. 
B)  how responsive sales are to changes in the price of a related good. 
C)  how responsive quantity demanded is to a change in price. 
D)  how responsive sales are to a change in buyers' incomes. 
A)  how responsive suppliers are to price changes. 
B)  how responsive sales are to changes in the price of a related good. 
C)  how responsive quantity demanded is to a change in price. 
D)  how responsive sales are to a change in buyers' incomes.

Question 2

The price elasticity of supply is calculated as the change in supply divided by the change in price.

Accepted Answer

A) True 
 B)False

Question 3

Suppose the governor of California has proposed increasing toll rates on California's toll roads, and has presented two possible scenarios to implement these increases. Following are projected data for the two scenarios for the California toll roads:
Scenario 1: Toll rate in 2012: $10.00. Toll rate in 2016: $22.50
For every 100 cars using the toll roads in 2012, only 81.6 cars will use the toll roads in 2016.
Scenario 2: Toll rate in 2012: $10.00. Toll rate in 2016: $17.50
For every 100 cars using the toll roads in 2012, only 96.2 cars will use the toll roads in 2016.
a. Using the midpoint formula, calculate the price elasticity of demand for Scenario 1 and Scenario 2.
b. Assume 10,000 cars use California toll roads every day in 2012. What would be the daily total revenue received for each scenario in 2012 and in 2016?
c. Is demand under Scenario 1 and under Scenario 2 price elastic, inelastic, or unit elastic. Briefly explain.
(For above questions, assume that nothing other than the toll change occurs during the time frame listed that would affect consumer demand.)

Accepted Answer

a.
For Scenario 1:
Percentage change in

Question 4

The demand for most farm products is relatively inelastic. A drought that reduces the supply of farm products will also cause farm revenues to fall.

Accepted Answer

A) True 
 B)False

Question 5

When demand is elastic, a fall in price causes total revenue to rise because

Accepted Answer

A)  when price falls, quantity sold increases so total revenue automatically rises. 
B)  the increase in quantity sold is large enough to offset the lower price. 
C)  the percentage increase in quantity demanded is less than the percentage fall in price. 
D)  the demand curve shifts. 
A)  when price falls, quantity sold increases so total revenue automatically rises. 
B)  the increase in quantity sold is large enough to offset the lower price. 
C)  the percentage increase in quantity demanded is less than the percentage fall in price. 
D)  the demand curve shifts.

Question 6

If a firm's goal is to maximize revenue, it will price its product to correspond to the unit-elastic segment of its demand curve.

Accepted Answer

A) True 
 B)False

Question 7

To calculate the price elasticity of demand we divide

Accepted Answer

A)  the percentage change in quantity demanded by the percentage change in price. 
B)  the percentage change in price by the percentage change in quantity demanded. 
C)  rise by the run. 
D)  the average price by the average quantity demanded. 
A)  the percentage change in quantity demanded by the percentage change in price. 
B)  the percentage change in price by the percentage change in quantity demanded. 
C)  rise by the run. 
D)  the average price by the average quantity demanded.

Question 8

Demand for staples such as dairy products and bread is likely to be both income and price inelastic.

Accepted Answer

A) True 
 B)False

Question 9

A perfectly elastic demand curve is

Accepted Answer

A)  vertical. 
B)  horizontal. 
C)  curvilinear. 
D)  upward sloping. 
A)  vertical. 
B)  horizontal. 
C)  curvilinear. 
D)  upward sloping.

Question 10

Explain the concepts of cross-price elasticity of demand and income elasticity of demand. What do positive and negative values indicate for each of these demand elasticities?

Accepted Answer

Cross-price elasticity of demand measure

Question 11

The income elasticity of demand measures

Accepted Answer

A)  the responsiveness of quantity demanded to changes in income. 
B)  how a consumer's purchasing power is affected by a change in the price of a product. 
C)  the percentage change in the price of a product divided by the percentage change in consumer income. 
D)  the income effect of a change in price. 
A)  the responsiveness of quantity demanded to changes in income. 
B)  how a consumer's purchasing power is affected by a change in the price of a product. 
C)  the percentage change in the price of a product divided by the percentage change in consumer income. 
D)  the income effect of a change in price.

Question 12

Suppose a frost destroys the tomato crop in California but farmers see an increase in their revenues. Which of the following best explains this?

Accepted Answer

A)  The decrease in supply led to huge price increases. 
B)  Tomatoes are necessities. 
C)  The demand for tomatoes is price inelastic. 
D)  The cross-price elasticity between tomatoes and most other substitute vegetables is very low. 
A)  The decrease in supply led to huge price increases. 
B)  Tomatoes are necessities. 
C)  The demand for tomatoes is price inelastic. 
D)  The cross-price elasticity between tomatoes and most other substitute vegetables is very low.

Question 13

Consider the following pairs of items: a. shampoo and conditioner
B. iPhones and earbuds
C. a laptop computer and a desktop computer
D. beef and pork
E. air-travel and weed killer
Which of the pairs listed will have cross-price elasticity of zero?

Accepted Answer

A)  a and b only 
B)  c only since most people cannot do without computers 
C)  e only 
D)  none of the pairs listed 
A)  a and b only 
B)  c only since most people cannot do without computers 
C)  e only 
D)  none of the pairs listed

Question 14

When the price of tortilla chips rose by 10 percent, the quantity of tortilla chips sold fell 4 percent, and the sale of dips (like salsa and bean dip) fell 8 percent. This set of facts indicates that

Accepted Answer

A)  the cross-price elasticity between tortilla chips and dips is 0.8, so the two are substitutes. 
B)  the cross-price elasticity between tortilla chips and dips is -0.4, so the two are complements. 
C)  the cross-price elasticity between tortilla chips and dips is -0.8, so the two are complements. 
D)  the cross-price elasticity between tortilla chips and dips is 0.4, so the two are substitutes. 
A)  the cross-price elasticity between tortilla chips and dips is 0.8, so the two are substitutes. 
B)  the cross-price elasticity between tortilla chips and dips is -0.4, so the two are complements. 
C)  the cross-price elasticity between tortilla chips and dips is -0.8, so the two are complements. 
D)  the cross-price elasticity between tortilla chips and dips is 0.4, so the two are substitutes.

Question 15

Jonah lives in a small town where there is only one Mexican restaurant. Which of the following is likely to be true about the price elasticity of demand for meals at the Mexican restaurant?

Accepted Answer

A)  Demand is likely to be perfectly inelastic. 
B)  Demand is likely to be perfectly elastic. 
C)  Demand is likely to be relatively elastic. 
D)  Demand is likely to be relatively inelastic. 
A)  Demand is likely to be perfectly inelastic. 
B)  Demand is likely to be perfectly elastic. 
C)  Demand is likely to be relatively elastic. 
D)  Demand is likely to be relatively inelastic.

Question 16

Along a downward-sloping linear demand curve, total revenue is the greatest

Accepted Answer

A)  where demand is normal. 
B)  where demand is the most inelastic. 
C)  where demand is the most elastic. 
D)  where demand is unit-elastic. 
A)  where demand is normal. 
B)  where demand is the most inelastic. 
C)  where demand is the most elastic. 
D)  where demand is unit-elastic.

Question 17

Using cross-sectional data from the two Housing Assistance Supply Experiment (HASE) sites-Brown County, Wisconsin, and St. Joseph County, Indiana, John Mulford of Rand Research estimates that the long-run "permanent" income elasticity of housing expenditures to be 0.45 for owners. Using this information, what is likely to happen to housing expenditures if the government increases income transfers to recipients in HASE sites?

Accepted Answer

A)  Housing expenditures will increase significantly. 
B)  Housing expenditures in HASE sites significantly will fall as recipients moved out of these areas to higher-income areas. 
C)  Housing expenditures will increase, but not significantly. 
D)  Housing expenditures will decrease by a small amount. 
A)  Housing expenditures will increase significantly. 
B)  Housing expenditures in HASE sites significantly will fall as recipients moved out of these areas to higher-income areas. 
C)  Housing expenditures will increase, but not significantly. 
D)  Housing expenditures will decrease by a small amount.

Question 18

Suppose a decrease in the supply of wheat results in an increase in revenue. This indicates that

Accepted Answer

A)  the decrease in quantity sold is proportionately larger than the resulting change in price. 
B)  the resulting increase in price is proportionately greater than decrease in quantity sold. 
C)  the demand curve for wheat must be vertical. 
D)  the supply curve for wheat must be vertical. 
A)  the decrease in quantity sold is proportionately larger than the resulting change in price. 
B)  the resulting increase in price is proportionately greater than decrease in quantity sold. 
C)  the demand curve for wheat must be vertical. 
D)  the supply curve for wheat must be vertical.

Question 19

The paradox of American farming is

Accepted Answer

A)  the demand for imported luxury food products has risen as the demand for domestic food products has fallen. 
B)  the demand for food has risen as the number of people who pursue farming as a career has fallen. 
C)  food has become cheaper and more abundant as the number of farms has decreased. 
D)  the amount of food produced has increased as the average farm size has fallen. 
A)  the demand for imported luxury food products has risen as the demand for domestic food products has fallen. 
B)  the demand for food has risen as the number of people who pursue farming as a career has fallen. 
C)  food has become cheaper and more abundant as the number of farms has decreased. 
D)  the amount of food produced has increased as the average farm size has fallen.

Question 20

Of the following, which is the best example of a good with a perfectly inelastic demand?

Accepted Answer

A)  the demand for tickets in New York City when the Mets or Yankees are in the World Series 
B)  the demand for gasoline 
C)  a diabetic's demand for insulin 
D)  the demand for a college education by a student who has a full scholarship to an Ivy League school 
A)  the demand for tickets in New York City when the Mets or Yankees are in the World Series 
B)  the demand for gasoline 
C)  a diabetic's demand for insulin 
D)  the demand for a college education by a student who has a full scholarship to an Ivy League school

Exam 6: Elasticity: the Responsiveness of Demand and Supply

Price elasticity of demand measures

The price elasticity of supply is calculated as the change in supply divided by the change in price.

The demand for most farm products is relatively inelastic. A drought that reduces the supply of farm products will also cause farm revenues to fall.

When demand is elastic, a fall in price causes total revenue to rise because

If a firm's goal is to maximize revenue, it will price its product to correspond to the unit-elastic segment of its demand curve.

To calculate the price elasticity of demand we divide

Demand for staples such as dairy products and bread is likely to be both income and price inelastic.

A perfectly elastic demand curve is

Explain the concepts of cross-price elasticity of demand and income elasticity of demand. What do positive and negative values indicate for each of these demand elasticities?

The income elasticity of demand measures

Suppose a frost destroys the tomato crop in California but farmers see an increase in their revenues. Which of the following best explains this?

Consider the following pairs of items: a. shampoo and conditioner B. iPhones and earbuds C. a laptop computer and a desktop computer D. beef and pork E. air-travel and weed killer Which of the pairs listed will have cross-price elasticity of zero?

When the price of tortilla chips rose by 10 percent, the quantity of tortilla chips sold fell 4 percent, and the sale of dips (like salsa and bean dip) fell 8 percent. This set of facts indicates that

Jonah lives in a small town where there is only one Mexican restaurant. Which of the following is likely to be true about the price elasticity of demand for meals at the Mexican restaurant?

Along a downward-sloping linear demand curve, total revenue is the greatest

Suppose a decrease in the supply of wheat results in an increase in revenue. This indicates that

The paradox of American farming is

Of the following, which is the best example of a good with a perfectly inelastic demand?

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, Government Price Setting, and Taxes

Externalities, Environmental Policy, and Public Goods

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Comparative Advantage and the Gains From International Trade

Consumer Choice and Behavioral Economics

Technology, Production, and Costs

Firms in Perfectly Competitive Markets

Monopolistic Competition: the Competitive Model in a More Realistic Setting

Oligopoly: Firms in Less Competitive Markets

Monopoly and Antitrust Policy

Pricing Strategy

The Markets for Labor and Other Factors of Production

Public Choice, Taxes, and the Distribution of Income

GDP: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Federal Reserve System

Monetary Policy

Fiscal Policy

Inflation, Unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

The International Financial System

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