Deck 5: Elasticity and Its Applications

Question 1

Which good below might be expected to have the most inelastic demand curve?

A) salt
B) women's blouses from Walmart
C) potato chips
D) Tylenol

Answer 1

A

Question 2

(Figure: Price Elasticity of Demand) Refer to the figure. Which of the four demand curves has the greatest responsiveness to price changes? Figure: Price Elasticity of Demand

A) A
B) B
C) C
D) D

Answer 2

A

Question 3

Which of the following is a reason why the demand curve for an item would be more elastic?

A) The item is a necessity.
B) People's incomes are very high relative to the cost of the item.
C) The item has many very good substitutes.
D) The cost of the item forms a very small part of the consumer's budgets.

Answer 3

C

Question 4

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

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 5

Why is the demand curve for oil rather inelastic?

A) There are few widely available good substitutes for oil.
B) To increase the production of oil requires a significant outlay of exploration and drilling costs.
C) The world supply of oil is low relative to demand.
D) The demand curve for oil is always perfectly inelastic.

Question 6

A) greater than the change in quantity demanded for D2 so D1 is more elastic than D2.
B) greater than the change in quantity demanded for D2 so D2 is more elastic than D1.
C) less than the change in quantity demanded for D2 so D1 is more inelastic than D2.
D) less than the change in quantity demanded for D2 so D2 is more inelastic than D1.

Question 7

The demand for oil is inelastic because there are:

A) many complements for oil in its major use.
B) few complements for oil in its major use.
C) many substitutes for oil in its major use.
D) few substitutes for oil in its major use.

Question 8

The elasticity of demand:

A) equals the inverse of price to quantity demanded.
B) measures how far the demand curve shifts from a change in price.
C) tells us how responsive consumer purchases are to price changes.
D) estimates the relationship between quantity demand and production costs.

Question 9

The price elasticity of demand is:

A) the responsiveness of price to changes in the quantity demanded of the product.
B) the responsiveness of quantity demanded to changes in the price of the product.
C) the change in the firm's total revenue when prices change.
D) exactly the same as the slope of the demand curve.

Question 10

A) X; Y
B) Z; Y
C) X; Z
D) Y; X

Question 11

The demand curve for oil is inelastic, meaning that the quantity of oil demanded:

A) rises by a lot even when the price of oil increases by only a little.
B) rises by only a little even when the price of oil increases by a lot.
C) falls by a lot even when the price of oil increases by only a little.
D) falls by only a little even when the price of oil increases by a lot.

Question 12

The elasticity of demand measures how sensitive the:

A) price is to a change in quantity demanded.
B) quantity demanded is to a change in price.
C) price is to a change in the quantity supplied.
D) demand is to a change in the number of suppliers.

Question 13

If the price of gasoline in this country were expected to rise due to a permanent increase in the tax on gasoline, which of the following would you expect to happen?

A) The demand for gasoline would become more elastic.
B) The demand for gasoline would decrease as a result of the higher price.
C) Producers will have less of an incentive to supply gasoline as a result of the higher taxes.
D) The elasticity of demand will not change since gasoline is a necessity good.

Question 14

Which one of the following products would tend to have inelastic demand?

A) luxury sedans
B) candy
C) crude oil
D) Black Angus T-bone steak

Question 15

The demand curve for Froot Loops breakfast cereal is very elastic because:

A) most breakfast cereals are considered a luxury good.
B) there are many good substitutes for Froot Loops.
C) the demand curve is negatively sloped.
D) it is one of the most advertised cereals in the world.

Question 16

Which of the following would NOT make elasticity of demand for a good more elastic?

A) more substitutes
B) luxuries
C) large part of budget
D) less time

Question 17

Which of the following factors causes a demand curve to become more elastic over time?

A) New substitutes for the product are discovered.
B) New and important uses for the product are discovered.
C) More producers begin to produce the product.
D) More consumers acquire a desire for the product.

Question 18

The demand curve for physician office visits is quite inelastic; therefore, a:

A) large increase in price causes quantity demanded to decrease by very little.
B) large decrease in price causes quantity demanded to decrease by a lot.
C) small increase in price causes quantity demanded to decrease by a lot.
D) small decrease in price causes quantity demanded to decrease by very little.

Question 19

All of the following conditions would cause the demand curve for a good to be more elastic EXCEPT:

A) a longer time horizon.
B) the good is considered a luxury good.
C) the price of the good falls.
D) the good has many substitutes.

Question 20

The elasticity of demand measures:

A) the height of the demand curve.
B) how sensitive the quantity demanded is to a change in price.
C) how sensitive the price is to a change in demand.
D) the extent to which demand shifts in response to supply changes.

Question 21

If the price of Good X rises from $4 to $5, and the quantity demanded of Good X falls from 200 units to 180 units, the price elasticity of demand is:

A) 2.1.
B) 0.47.
C) 1.4.
D) 0.4.

Question 22

If the price elasticity of demand is 0.5, then when the price of Good X rises by 20 percent:

A) the quantity demanded of Good X rises by 40 percent.
B) the quantity demanded of Good X rises by 10 percent.
C) the quantity demanded of Good X falls by 10 percent.
D) the quantity demanded of Good X falls by 40 percent.

Question 23

If the price of ice cream changes by 30 percent and the quantity demanded changes by 75 percent, what is the absolute value of demand elasticity?

A) 2.5, so demand is inelastic
B) 0.4, so demand is inelastic
C) 0.4, so demand is elastic
D) 2.5, so demand is elastic

Question 24

Assume that the supply curve for a good is constantly fixed at 100 units. Now suppose that the demand curve for the good increases such that the equilibrium price rises from $20 to $30. How does total revenue for the sale of this product change?

A) Total revenue rises by $1,000.
B) Total revenue does not change.
C) Total revenue rises by $3,000.
D) Total revenue rises by $10.

Question 25

If the demand curve is elastic a price ________ causes a(n) ________ in revenues.

A) decrease; decrease
B) increase; increase
C) decrease; increase
D) There is not enough information to answer.

Question 26

(Figure: Elasticity and Total Revenue) Refer to the figure. If price falls from $60 to $40, total revenue changes by ________, so demand is ________.

A) $120; inelastic
B) $480; elastic
C) $360; inelastic
D) $120; elastic

Question 27

If the price elasticity of demand for Good X is 1 in absolute value, which of the following is TRUE? I. When the price of the good changes, the total revenue for the product does not change. II. A percentage drop in price will lead to an equal percentage increase in quantity demanded. III. When the price of the product rises, total revenue also increases.

A) I only
B) I and II only
C) II and III only
D) II only

Question 28

Marge tutors English students-if she raises rates, her revenues increase. Brad tutors biology students-if he lowers rates, his revenues increase. Which of the following is TRUE?

A) Marge's demand is elastic, and Brad's demand is inelastic.
B) Marge's demand is inelastic, and Brad's demand is elastic.
C) Marge's demand is elastic, and Brad's demand is elastic.
D) Marge's demand is inelastic, and Brad's demand is inelastic.

Question 29

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

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

Question 30

Total revenue is:

A) price X quantity.
B) quantity/price.
C) the elasticity of demand X price.
D) price + quantity.

Question 31

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

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 32

If the demand curve is inelastic a price ________ causes a(n) ________ in revenues.

A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) There is not enough information to answer.

Question 33

If an increase in the price of oil by 10 percent would cause the quantity demanded for oil to fall by 5 percent, the elasticity of demand for oil in absolute terms is:

A) 10.
B) 5.
C) 2.
D) 0.5.

Question 34

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:

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

Question 35

A 4 percent increase in the price of beer will cause a 1 percent decline in the quantity of beer demanded. The demand for beer is:

A) elastic.
B) unitary elastic.
C) inelastic.
D) elastic at 4 (in absolute value).

Question 36

The demand curve is inelastic if the absolute value of the elasticity is:

A) greater than 1.
B) greater than 0.
C) less than 1.
D) equal to 1.

Question 37

If the price of Good Y falls from $10 to $8, and the quantity demand of Good Y rises from 1,000 units to 1,200 units, the price elasticity of demand is:

A) 1.00.
B) 0.20.
C) 0.81.
D) 1.22.

Question 38

At a price $4 for Good X, a firm is willing to supply 1,400 units of X. For a price of $5 for Good X, the firm is willing to supply 1,500 units X. The change in revenue for the firm when the price of the good rises from $4 to $5 is a:

A) $100 increase in total revenue.
B) $1,500 increase in total revenue.
C) $7,500 increase in total revenue.
D) There is not enough information to answer the question.

Question 39

If the price elasticity of demand is 2 in absolute value, then when the price of Good X rises by 25 percent:

A) the quantity demanded of Good X rises by 50 percent.
B) the quantity demanded of Good X falls by 50 percent.
C) the quantity demanded of Good X rises by 12.5 percent.
D) the quantity demanded of Good X falls by 12.5 percent.

Question 40

The price of cigars is $10, with a quantity demanded of 1,000 per day. If the price increases to $12, the quantity demanded declines to 800 per day. What is the absolute value of elasticity of demand?

A) 1.00
B) 0.82
C) 1.22
D) 12.2

Question 41

Nobel prize-winning economist Gary Becker suggests that a tax could be set so that it raised drug seller costs without prohibition, and in turn would:

A) increase seller revenues.
B) decrease seller revenues.
C) increase government revenues.
D) decrease government revenues.

Question 42

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

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

Question 43

(Figure: Price Decrease and Elasticity) Refer to the figure. If price decreases from $20 to $10, total revenue will: Figure: Price Decrease and Elasticity

A) decrease by $1,500, so the demand curve is inelastic.
B) decrease by $2,500, so the demand curve is inelastic.
C) increase by $1,500, so the demand curve is elastic.
D) increase by $2,500, so the demand curve is elastic.

Question 44

Since roughly 1950 total revenues in the farming sector have ________, and since 1980 total revenues in computer chips have ________.

A) increased; decreased
B) decreased; decreased
C) increased; increased
D) decreased; increased

Question 45

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

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

Question 46

What happens to revenues when the demand curve is unit elastic and the price changes?

A) Revenues increase when the price increases.
B) Revenues remain unchanged.
C) Revenues decrease when the price increases.
D) The change in revenues cannot be estimated.

Question 47

Since the demand for illegal drugs is quite inelastic, an increase in the price of illegal drugs:

A) increases seller revenues.
B) decreases seller revenues.
C) does not affect seller revenues.
D) The change in revenue depends on supply elasticity.

Question 48

(Figure: Price Increase and Elasticity) Refer to the figure. If price increases from $10 to $20, total revenue will:

A) increase by $800 so the demand curve must be inelastic.
B) increase by $100 so the demand curve must be inelastic.
C) decrease by $800 so the demand curve must be elastic.
D) decrease by $100 so the demand curve must be elastic.

Question 49

If the supply of a product is inelastic, a large price increase will:

A) not have an effect on the quantity supplied.
B) only bring about a small increase in quantity supplied.
C) cause the supply curve to increase by a nontrivial amount.
D) cause a modest decrease in supply.

Question 50

Which of the following statements is FALSE?

A) A perfectly inelastic supply curve is vertical.
B) The supply curve is more elastic in the long run than in the short run.
C) Products that take a long time to produce, such as decades- aged Scotch whiskey, have supply curves that are less responsive to price changes.
D) The supply curve of oil is more inelastic in Texas than it is globally.

Question 51

Farmers can produce more milk at lower cost, but Americans want to drink only so much milk. This suggests that the demand curve for milk is:

A) elastic.
B) inelastic.
C) unit elastic.
D) unaffected by elasticity.

Question 52

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:

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

Question 53

Which of the following statements is TRUE? I. The War on Drugs has increased revenues in the illegal drug industry. II. The War Drugs has increased the costs of selling drugs, causing a decrease in the supply of drugs. III. The War on Drugs has caused the price of drugs to increase. IV. The quantity demanded of illicit drugs is elastic.

A) II, III and IV only
B) II only
C) I, II, and III only
D) I, II, III, and IV

Question 54

In general, the flatter the demand curve the:

A) less the demand elasticity.
B) greater the demand elasticity.
C) greater the change in price needed to induce a change in quantity demanded.
D) less the change in total revenue given a price change.

Question 55

Since the demand curve for computer chips is elastic, a decrease in the price of computer chips caused by an increase in productivity will:

A) increase revenue for the computer chip industry and make computers a larger share of the American economy.
B) increase revenue for the computer chip industry and make computers a smaller share of the American economy.
C) decrease revenue for the computer chip industry and make computers a larger share of the American economy.
D) decrease revenue for the computer chip industry and make computers a smaller share of the American economy.

Question 56

Increases in farm productivity have lowered the prices of many agricultural products. Farm revenues decreased, which implies the:

A) demand for many agricultural products is inelastic.
B) costs of production increased.
C) demand for many agricultural products is elastic.
D) costs of production stayed the same.

Question 57

Gary Becker suggested:

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 58

The per-unit cost of producing Tic Tac candy does not change with increases in production, which means the:

A) demand for Tic Tac candy is elastic.
B) demand for Tic Tac candy is inelastic.
C) supply of Tic Tac candy is elastic.
D) supply of Tic Tac candy is inelastic.

Question 59

If the demand curve is inelastic then an increase in price would cause:

A) an increase in total revenue.
B) a decrease in total revenue.
C) an increase or decrease in total revenue.
D) no change in total revenue.

Question 60

Why is the war on drugs hard to win?

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 61

Reference: Ref 5-1 (Figure: Elasticity of Supply) Refer to the figure. Which supply curve is the most elastic?

A) S1
B) S2
C) S3
D) S4

Question 62

Which factor would tend NOT to increase elasticity of supply?

A) the long run
B) global supply
C) constant production costs
D) local supply

Question 63

If the price of cocoa rises by 20 percent, the quantity supplied of cocoa rises by 4 percent. What is the elasticity of supply?

A) 5
B) 2
C) 0.2
D) 0.008

Question 64

The supply curve for manufactured goods is usually more elastic because production can often be:

A) increased at higher cost per unit by building more factories.
B) increased at lower cost per unit by building more factories.
C) decreased at the same cost per unit by building more factories.
D) increased at the same cost per unit by building more factories.

Question 65

Because producing more oil requires a significant increase in exploration and drilling costs, the supply curve for oil is:

A) relatively elastic.
B) relatively inelastic.
C) either elastic or inelastic.
D) unit elastic.

Question 66

The supply curve for oil is ________ because ________.

A) elastic; per unit costs do not increase when the quantity supplied increases
B) elastic; oil exploration and drilling is not expensive relative to revenues earned
C) inelastic; per-unit costs rise quickly when the quantity supplied increases
D) inelastic; oil exploration and drilling is not expensive relative to revenues earned

Question 67

A) elastic since quantity supplied increases more with an increase in price.
B) elastic since quantity supplied increases less with an increase in price.
C) inelastic since quantity supplied increases more with an increase in price.
D) inelastic since quantity supplied increases less with an increase in price.

Question 68

If the elasticity of supply is 2.0, what happens to quantity supplied following a 7 percent increase in price? Quantity supplied increases:

A) 3.5 percent.
B) 2.9 percent.
C) 14 percent.
D) 9 percent.

Question 69

Why do supply curves tend to be more elastic over time?

A) Sellers have time to adjust and increase production.
B) Consumers have time to look for substitutes for the good.
C) Consumers have time to reduce their consumption of the good.
D) All of the answers are correct.

Question 70

A perfectly inelastic supply curve is a:

A) vertical line indicating that a very large increase in price will increase the quantity supplied.
B) vertical line indicating that even a very large increase in price won't increase the quantity supplieB.
C) horizontal line indicating that a very small increase in price will increase the quantity supplieC.
D) horizontal line indicating that even a very small increase in price won't increase the quantity supplied.

Question 71

If the price of Good Y falls from $10 to $8, and the quantity supplied of Good Y falls from 1,000 units to 600 units, the price elasticity of supply is:

A) 2.67.
B) -2.67.
C) 2.25.
D) -2.25.

Question 72

All of the following would cause the supply curve to be more elastic EXCEPT:

A) production of the good requires only a small share of the market for inputs.
B) the good is primarily for local supply.
C) the good is a manufactured good.
D) there is potential difficulty to increasing the production of the good at constant unit cost.

Question 73

If the supply of raw materials is ________, increasing their production leads to ________ per-unit costs.

A) inelastic; higher
B) perfectly elastic; higher
C) perfectly elastic; lower
D) inelastic; lower

Question 74

(Figure: Supply Elasticity) Refer to the figure. Which one of the four supply curves has the greatest responsiveness to price changes?

A) Supply Curve A
B) Supply Curve B
C) Supply Curve C
D) Supply Curve D

Question 75

Why is the supply curve for oil rather inelastic?

A) There are not many widely available good substitutes for oil.
B) To increase the production of oil would require a very significant outlay in terms of costs of exploration and drilling.
C) The world supply of oil is decreasing.
D) The supply curve for oil is always perfectly inelastic.

Question 76

Supply tends to be ________ in local markets, and ________ in global markets.

A) elastic; inelastic
B) inelastic; elastic
C) unit elastic; perfectly inelastic
D) perfectly inelastic; unit elastic

Question 77

Which of the following explains why local supply tends to be more elastic than global supply?

A) As price increases in a certain locale, it is often costly to transport more goods to that particular area, and hence supply is more elastic.
B) Local suppliers are small in relation to the global market.
C) The statement is false, local supply tends to be less elastic than global supply.
D) As price increases in a certain locale, goods can be brought in from other areas, which is not possible on a global scale.

Question 78

When production of a good can be expanded without significantly increasing the overall demand for its inputs:

A) supply for this good will tend to be more inelastic.
B) supply for this good will tend to be more elastic.
C) price for the good will be constant.
D) the elasticity of supply of the product will equal the elasticity of supply of the inputs.

Question 79

A perfectly elastic supply curve is:

A) never feasible in reality.
B) vertical.
C) upward sloped.
D) horizontal.

Question 80

Reference: Ref 5-1 (Figure: Elasticity of Supply) Refer to the figure. Which supply curve is the most inelastic?

A) S1
B) S2
C) S3
D) S4