Deck 5: Elasticity and Its Application

Question 1

The demand for a good is said to be elastic if a small price decrease leads to a substantial increase in the quantity demanded.

Answer 1

True

Question 2

If the price elasticity of demand is elastic, reduced demand for a good will create a greater fall in revenue than the increase in revenue created by the increase in price.

Answer 2

True

Question 3

If the measured elasticity is less than one it means that the demand for this good is inelastic.

Answer 3

True

Question 4

Major Australian supermarket chains have been fighting to sell milk at the lowest price. The fact that they place such importance on the price must mean that they consider demand for milk to be somewhat price inelastic.

Question 5

If the price elasticity of demand is 1.5, a price decrease will cause total revenue to increase.

Question 6

The income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in income.

Question 7

Over three years the elasticity of demand for oil heaters will be greater than over ten years.

Question 8

The concept of the slope is the best way to measure the responsiveness of demand to changes in its determinants.

Question 9

The demand for apples is generally more elastic than the demand for Australian apples.

Question 10

A demand curve that is horizontal is perfectly inelastic. This means the elasticity is equal to one.

Question 11

The price of a hamburger increases by 25 per cent and the quantity of hamburgers demanded per week falls by 50 per cent. The price elasticity of demand is two.

Question 12

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

Question 13

As price elasticity of demand increases, the demand curve gets steeper and steeper.

Question 14

Necessities tend to have price inelastic demands, whereas luxuries have price elastic demands.

Question 15

If you enjoy buying luxury goods more than buying groceries, your income elasticity of demand for luxury goods will be less elastic than for groceries.

Question 16

A good experiences a shift of the demand curve so that it is now flatter than before. Suppose that the market price and quantity demanded does not change. This means that the good has now become inelastic.

Question 17

The demand curve for a market may be different depending on how widely the market is defined.

Question 18

Goods with close substitutes tend to have more elastic demands than do goods without close substitutes.

Question 19

A linear demand curve always has the same elasticity over its entire length.

Question 20

The price elasticity of demand for a product will tend to be higher if fewer good substitutes for it are available.

Question 21

Suppose a coffee plantation in Colombia increases the quantity of coffee beans it supplies by 5% when it learns that the price of a coffee at cafes in Melbourne has risen by 25%. The Colombian producer's price elasticity of supply of coffee beans is 0.2.

Question 22

In general, elasticity is:

A) the friction that develops between buyer and seller in a market
B) a measure of how much government intervention is prevalent in a market
C) a measure of how much buyers and sellers respond to changes in markets
D) a measure of the competitive nature of a market

Question 23

Price elasticity of supply measures how much the quantity supplied responds to changes in demand.

Question 24

While an increase in total agricultural production may benefit farmers as a group, it will not benefit an individual farmer to increase his production.

Question 25

The cross-price elasticity of demand will be positive for complement goods and negative for substitute goods.

Question 26

Price elasticity of supply is defined as the percentage change in quantity supplied divided by the percentage change in price.

Question 27

Economists use the concept of price elasticity of demand to measure how much:

A) sellers respond to changes in the price of the good
B) worse off consumers are when the price of the good rises
C) demand responds to changes in buyers' incomes
D) buyers respond to changes in the price of the good

Question 28

In the 1970s OPEC generated high prices for oil but could not sustain this in the mid-80s and 90s. The reason was that both the supply and demand elasticity for oil is less elastic in the short run than in the long run.

Question 29

Cross-price elasticity of demand measures how the quantity demanded of one good changes as the price of another good changes.

Question 30

Slope is the ratio of the changes in two variables, while elasticity is the ratio of the percentage changes in two variables.

Question 31

The demand for basic foodstuffs such as rice or flour is usually elastic.

Question 32

Demand is said to be inelastic if:

A) the price of the good responds only slightly to changes in demand
B) demand shifts only slightly when the price of the good changes
C) buyers respond substantially to changes in the price of the good
D) the quantity demanded changes only slightly when the price of the good changes

Question 33

If a supply curve is horizontal, it is said to be perfectly elastic, and the price elasticity of supply approaches infinity.

Question 34

Demand is said to be elastic if:

A) the price of the good responds substantially to changes in demand
B) the supply of the good responds weakly to changes in demand
C) the quantity demanded responds substantially to changes in the quantity supplied of the good
D) the quantity demanded responds substantially to changes in the price of the good

Question 35

If the price of forest-products rises, the price elasticity of supply will be more responsive in the long run than in the short run.

Question 36

Supply is said to be inelastic if the quantity supplied responds substantially to changes in the price and elastic if the quantity supplied responds only slightly to price.

Question 37

If price changes and total revenue changes in the opposite direction, we can conclude that demand is relatively elastic.

Question 38

If the price of one good goes up, and this causes the quantity demanded of another good to go down, the cross-price elasticity of demand will be negative.

Question 39

The price elasticity of demand measures how responsive:

A) buyers are to a change in price
B) buyers are to a change in advertising by sellers
C) sellers are to a change in price
D) buyers are to a change in their tastes

Question 40

A government program that reduces land under cultivation hurts farmers but helps consumers.

Question 41

Graph 5-1

In Graph 5-1, the section of the demand curve labelled C represents the:

A) elastic section of the demand curve
B) unit elastic section of the demand curve
C) perfectly elastic section of the demand curve
D) inelastic section of the demand curve

Question 42

The price elasticity of demand for toasted muesli would increase if:

A) there was an increase in complements for toasted muesli
B) the definition of the toasted muesli market was made very broad
C) toasted muesli was considered a luxury product
D) the effect of a price rise was measured over a long period of time

Question 43

Graph 5-2

Refer to Graph 5-2. If there is a four per cent decrease in the price of a good and this leads to a 12 per cent increase in the quantity demanded then the price elasticity is:

A) 3 and elastic
B) 3 and inelastic
C) 0.3 and elastic
D) 0.3 and inelastic

Question 44

The demand for a good tends to be more elastic:

A) the longer the period of time
B) the greater the availability of close substitutes
C) the narrower the definition of the market
D) all of the above are correct

Question 45

Suppose there is a 10 per cent increase in the price of fish and a resulting five per cent decrease in the quantity of fish demanded. The price elasticity of demand for fish is:

A) 10
B) 5.0
C) 2.0
D) 0.5

Question 46

Graph 5-3

In Graph 5-3, as price falls from P_A to P_B, which demand curve is most elastic?

A) D₁
B) D₂
C) D₃
D) all of the above are equally elastic

Question 47

Suppose the price of product X is reduced from $16.00 to $12.00 and, as a result, the quantity of X demanded increases from 300 to 450. Using the midpoint method, the price elasticity of demand for X in the given price range is:

A) 1.40
B) 1.00
C) 0.40
D) 0.29

Question 48

Economists compute the price elasticity of demand as the:

A) percentage change in the price divided by the percentage change in quantity demanded
B) percentage change in the quantity demanded divided by the percentage change in price
C) change in quantity demanded divided by the change in the price
D) percentage change in the quantity demanded divided by the percentage change in income

Question 49

Graph 5-1

In Graph 5-1, the point on the demand curve labelled B represents the:

A) inelastic section of the demand curve
B) unit elastic section of the demand curve
C) elastic section of the demand curve
D) perfectly elastic section of the demand curve

Question 50

Demand is classed as price inelastic if the elasticity coefficient is:

A) less than one
B) equal to one
C) greater than one
D) equal to zero

Question 51

The elasticity of demand for a good tends to increase if:

A) there is an increase in the availability of complements
B) there is an increase in the availability of substitutes
C) the market is considered over a longer period of time
D) the definition of the market is broadened

Question 52

Graph 5-1

In Graph 5-1, the section of the demand curve labelled A represents the:

A) inelastic section of the demand curve
B) unit elastic section of the demand curve
C) elastic section of the demand curve
D) perfectly elastic section of the demand curve

Question 53

Suppose the price of product X is increased from $8.00 to $10.00 and as a result, the quantity of X demanded decreases from 1500 to 1000. Using the midpoint method, the price elasticity of demand for X in the given price range is:

A) 2.00
B) 1.80
C) 1.00
D) 0.40

Question 54

Graph 5-2

In Graph 5-2, the elasticity of demand from point A to point B, using the midpoint method, would be:

A) 1
B) 1.5
C) 2
D) 2.5

Question 55

Suppose that there are many substitutes for crocodile-leather handbags. This would mean that the:

A) demand for crocodile-leather handbags would tend to be income inelastic
B) demand for crocodile-leather handbags would tend to be price elastic
C) demand for crocodile-leather handbags would tend to be price inelastic
D) demand for crocodile-leather handbags would tend to be income elastic

Question 56

If a good is a necessity, demand for the good would tend to be:

A) elastic
B) unit elastic
C) inelastic
D) horizontal

Question 57

A perfectly inelastic demand implies that buyers:

A) enjoy paying more for the good
B) increase their quantity demanded of the good when the price rises
C) will continue to buy the good no matter how big the change in price
D) purchase none of the good when the price rises

Question 58

A perfectly inelastic demand implies that:

A) buyers will not respond to any change in price
B) any rise in price above that represented by the demand curve will result in no output demanded
C) price and quantity demanded respond proportionally
D) price will rise by an infinite amount when there is a change in quantity demanded

Question 59

Alice says that she likes banana splits, but if the price changed, she would not buy them anymore. If this is the case:

A) Alice's demand for banana splits is perfectly inelastic
B) Alice's price elasticity of demand for banana splits is one
C) Alice's income elasticity of demand for banana splits is negative
D) Alice's demand for banana splits is perfectly elastic

Question 60

Graph 5-2

In Graph 5-2, the elasticity of demand from point B to point C, using the midpoint method, would be:

A) 0.5
B) 0.75
C) 1.0
D) 1.3

Question 61

Oliver makes guitars. There are four other guitar shops that also make good guitars on the same street. If Oliver wishes to increase his total revenue, he should:

A) decrease the price of the guitars
B) increase the price of the guitars
C) not change the price of the guitars
D) manufacture pianos instead

Question 62

Last year, Joan bought 50 kg of hamburger mince when the household income was $40 000. This year, the household income was only $30 000 and Joan bought 60 kg of hamburger mince. All else being constant, Joan's income elasticity of demand for hamburger mince is:

A) positive, so Joan considers hamburger to be an inferior good
B) positive, so Joan considers hamburger to be a normal good and a necessity
C) negative, so Joan considers hamburger mince to be an inferior good
D) negative, so Joan considers hamburger mince to be a normal good

Question 63

Table 5-1
Suppose a coffee shop faces the following demand schedule for coffee.

Referring to Table 5-1, if the shop increases the price from $3.00 to $4.00, the price elasticity of demand will (according to the mid-point method) be:

A) 0.29 and inelastic
B) 0.29 and elastic
C) 3.5 and inelastic
D) 3.5 and elastic

Question 64

If an increase in income results in a decrease in the quantity demanded of a good, then the good is:

A) a normal good
B) a necessity
C) an inferior good
D) a luxury

Question 65

Graph 5-4

Refer to Graph 5-4. The total revenue at P₁ is represented by area(s):

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

Question 66

Table 5-1
Suppose a coffee shop faces the following demand schedule for coffee.

Referring to Table 5-1, comparing the sales at $1.00 and $3.00, which of the statements below is true?

A) the price elasticity of demand is higher at $3.00 than $1.00
B) the price elasticity of demand is lower at $3.00 than at $1.00
C) the price elasticity of demand is the same at both prices
D) the price elasticity of demand at $3.00 is zero

Question 67

In any market, total revenue is the price:

A) divided by the price elasticity of demand
B) multiplied by the quantity
C) plus the quantity
D) divided by the quantity

Question 68

In the case of a downward linear demand curve, total revenue is always maximised at:

A) the upper end of the demand curve
B) the lower end of the demand curve
C) the midpoint of the demand curve
D) it depends on the cost curve

Question 69

Graph 5-3

In Graph 5-3, as price falls from P_A to P_B, which demand curve is least elastic?

A) D₁
B) D₂
C) D₃
D) all of the above are equally elastic

Question 70

If the demand curve is linear and downward-sloping, which of the following would NOT be correct?

A) the upper part of the demand curve is more elastic than the lower part
B) elasticity will change with a movement down the curve
C) the lower part of the demand curve will be less elastic than the upper part
D) elasticity and slope will both remain constant along the curve

Question 71

Table 5-2
Quantities purchased

Refer to Table 5-2. Using the midpoint method, what is the income elasticity of good Y?

A) -0.75
B) 0.75
C) -1.33
D) 0

Question 72

Income elasticity of demand measures how:

A) the quantity demanded changes as consumer income changes
B) consumer purchasing power is affected by a change in the price of a good
C) the price of a good is affected when there is a change in consumer income
D) many units of a good a consumer can buy given a certain income level

Question 73

When demand is elastic in the current price range:

A) an increase in price will increase total revenue because the decrease in quantity demanded is less than the increase in price
B) an increase in price will decrease total revenue because the decrease in quantity demanded is greater than the increase in price
C) a decrease in price will decrease total revenue because the increase in quantity demanded is smaller than the decrease in price
D) a decrease in price will not affect the total revenue

Question 74

If a change in the price of a good results in no change in total revenue:

A) the demand for the good must be elastic
B) the demand for the good must be inelastic
C) the demand for the good must be unit elastic
D) buyers must not respond very much to a change in price

Question 75

Assume that a four per cent decrease in income results in a two per cent increase in the quantity demanded of a good. The income elasticity of demand for the good is:

A) negative and therefore the good is an inferior good
B) negative and therefore the good is a normal good
C) positive and therefore the good is an inferior good
D) positive and therefore the good is a normal good

Question 76

How does total revenue change as one moves down a linear demand curve?

A) it increases
B) it decreases
C) it first increases, then decreases
D) it is unaffected by a movement along the demand curve

Question 77

Table 5-1
Suppose a coffee shop faces the following demand schedule for coffee.

Refer to Table 5-1. Notice that if the price is lowered from $2.00 to $1.50, total revenue falls from $2000 to $1800. This means that over this price range, the demand for coffee must be:

A) price elastic
B) price inelastic
C) price unit elastic
D) income elastic

Question 78

Graph 5-4

Refer to Graph 5-4. Total revenue at P₂ would be represented by area(s):

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

Question 79

Suppose the price elasticity of demand for wine is 1.60. A 12 per cent decrease in price will result in:

A) a 19.2 per cent increase in the quantity of wine demanded
B) a 19.2 per cent decrease in the quantity of wine demanded
C) a 7.5 per cent increase in the quantity of wine demanded
D) a 7.5 per cent decrease in the quantity of wine demanded

Question 80

The local pizza restaurant makes such great bread sticks that consumers do not respond much to a change in the price. If the owner is only interested in increasing revenue, he should:

A) lower the price of the bread sticks
B) raise the price of the bread sticks
C) leave the price of the bread sticks alone
D) reduce costs