Deck 4: Elasticity and Its Applications

Question 1

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

Answer 1

True

Question 2

If the cross-price elasticity of demand for two goods is negative, then the two goods are complements.

Answer 2

True

Question 3

The demand for Rice Krispies is less elastic than the demand for cereal in general.

Answer 3

False

Question 4

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

Question 5

If a small percentage increase in the price of a good greatly reduces the quantity demanded for that good, the demand for that good is

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

Question 6

An advance in technology that shifts the market supply curve to the right always increases total revenue received by producers.

Question 7

If price elasticity of demand for a good is 2.0, this implies that consumers would

A) buy twice as much of the good if price falls by 10 per cent.
B) require a 2 per cent cut in price to raise quantity demanded of the good by 1 per cent.
C) buy 2 per cent more of the good in response to a 1 per cent cut in price.
D) require at least a R2 increase in price before showing any response to the price increase.

Question 8

In general, a flatter demand curve is more likely to be

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

Question 9

If a demand curve is linear, the price elasticity of demand is constant along it.

Question 10

The price elasticity of demand measures the

A) magnitude of the response in quantity demanded to a change in price.
B) direction of the shift in the demand curve in response to a market event.
C) size of the shortage created by the increase in demand.
D) responsiveness of quantity demanded to a change in income.

Question 11

Suppose that when the price rises by 10% for a particular good, the quantity demanded of that good falls by 20%. The price elasticity of demand for this good is equal to 2.0.

Question 12

The price elasticity of supply tends to be more inelastic as the firm's production facility reaches maximum capacity.

Question 13

The price elasticity of demand is defined as

A) the percentage change in the quantity demanded divided by the percentage change in income.
B) the percentage change in income divided by the percentage change in the quantity demanded.
C) the percentage change in the quantity demanded of a good divided by the percentage change in the price of that good.
D) the percentage change in the price of a good multiplied by the inverse of the percentage change in demand
E) the percentage change in price of a good divided by the percentage change in the quantity demanded of that good.

Question 14

The income elasticity of demand for luxury items, such as diamonds, tends to be large (greater than 1).

Question 15

In general, demand curves for luxuries tend to be price elastic.

Question 16

Which of the following statements about the price elasticity of demand is correct?

A) The price elasticity of demand for a good measures the willingness of buyers of the good to buy less of the good as its price increases.
B) Price elasticity of demand reflects the many economic, psychological, and social forces that shape consumer tastes.
C) Other things equal, if good x has close substitutes and good y does not have close substitutes, then the demand for good x will be more elastic than the demand for good y.
D) All of the above are correct.

Question 17

If the price elasticity of demand within the price range from R10 to R12.50 per kilogram for carrots is 0.79 and for radishes is 1.6, then within that price range

A) demand for carrots is more price elastic than that for radishes.
B) demand for radishes is more price elastic than that for carrots.
C) carrots and radishes must be substitute goods.
D) carrots and radishes must be complementary goods.

Question 18

In general, a steeper supply curve is more likely to be

A) price elastic.
B) perfectly inelastic.
C) unit price elastic.
D) price inelastic.

Question 19

If SA T-Shirt Co. lowers its price from R60 to R50 and finds that students increase their quantity demanded from 400 to 600 T-shirts per month, then the demand for SA T-shirts within this price range is

A) price inelastic.
B) price elastic.
C) unit elastic.
D) cross elastic.

Question 20

The price elasticity of demand for a good measures the willingness of

A) consumers to buy less of the good as price rises.
B) consumers to avoid monopolistic markets in favour of competitive markets.
C) firms to produce more of a good as price rises.
D) firms to respond to the tastes of consumers.

Question 21

The cross-price elasticity of demand for substitute goods must be

A) greater than one.
B) less than one.
C) zero.
D) greater than zero.

Question 22

If an increase in income results in a decrease in the quantity demanded of a good, then for that good, the

A) cross-price elasticity of demand is negative.
B) price elasticity of demand is elastic.
C) income elasticity of demand is negative.
D) income elasticity of demand is positive.

Question 23

Technological improvements in agriculture that shift the supply of agricultural commodities to the right tend to

A) increase total revenue to farmers as a whole because the demand for food is elastic.
B) increase total revenue to farmers as a whole because the demand for food is inelastic.
C) reduce total revenue to farmers as a whole because the demand for food is elastic.
D) reduce total revenue to farmers as a whole because the demand for food is inelastic.

Question 24

Suppose that the price elasticity of supply of lawn mowers is 1.5. If the price of lawn mowers rises 5 per cent, the quantity supplied of lawn mowers would

A) decline 7.5 per cent.
B) rise 7.5 per cent.
C) rise 1.5 per cent.
D) rise 0.3 per cent.

Question 25

If an increase in the price of a good has no impact on the total revenue in that market, demand must be

A) perfectly elastic
B) price inelastic.
C) unit price elastic.
D) price elastic.

Question 26

Total revenue

A) always increases as price increases.
B) increases as price increases, as long as demand is elastic.
C) decreases as price increases, as long as demand is inelastic.
D) remains unchanged as price increases when demand is unit elastic.

Question 27

If supply is price inelastic, the value of the price elasticity of supply must be

A) infinite.
B) zero.
C) less than 1.
D) unity.
E) greater than 1.

Question 28

In the market for oil in the short run, demand

A) and supply are both elastic.
B) and supply are both inelastic.
C) is elastic and supply is inelastic.
D) is inelastic and supply is elastic.

Question 29

If a supply curve for a good is price elastic, then

A) the quantity supplied is sensitive to changes in the price of that good.
B) the quantity demanded is insensitive to changes in the price of that good.
C) the quantity demanded is sensitive to changes in the price of that good.
D) the quantity supplied is insensitive to changes in the price of that good.

Question 30

The midpoint method is used to compute elasticity because it

A) automatically computes a positive number instead of a negative number.
B) results in an elasticity that is the same as the slope of the demand curve.
C) gives the same answer regardless of the direction of change.
D) automatically rounds quantities to the nearest whole unit.

Question 31

A perfectly inelastic supply curve represents a

A) product supply that is extremely responsive to a price change.
B) product with a constant price, regardless of the quantity offered for sale.
C) product in abundant supply.
D) fixed supply of a good.

Question 32

If the income elasticity of demand for a good is negative, it must be

A) an elastic good.
B) an inferior good.
C) a normal good.
D) a luxury good.

Question 33

If the price elasticity of supply equals zero, this implies that

A) suppliers can easily change quantity supplied when price changes.
B) the supply curve is vertical.
C) the percentage change in price of the good supplied is zero.
D) the percentage change in quantity supplied equals the percentage change in price.

Question 34

The demand for which of the following is likely to be the most price inelastic?

A) Transportation
B) Uber rides
C) Bus tickets
D) Airline tickets

Question 35

Which of the following would cause a demand curve for a good to be price inelastic?

A) The good is a luxury.
B) There are a great number of substitutes for the good.
C) The good is a necessity.
D) The good is an inferior good.

Question 36

If there is excess capacity in a production facility, it is likely that the firm's supply curve is

A) price inelastic.
B) perfectly inelastic.
C) unit price elastic.
D) price elastic.

Question 37

If the cross-price elasticity between two goods is negative, the two goods are likely to be

A) substitutes.
B) complements.
C) necessities.
D) luxuries.

Question 38

Suppose that quantity demand falls by 30% as a result of a 5% increase in price. The price elasticity of demand for this good is

A) inelastic and equal to 6.
B) elastic and equal to 6.
C) inelastic and equal to 0.17.
D) elastic and equal to 0.17.

Question 39

For which of the following goods is the income elasticity of demand likely lowest?

A) Water.
B) Diamond necklaces.
C) Fillet steaks.
D) Fresh fruit.

Question 40

Price elasticity of supply for the long run is

A) always greater than the long-run price elasticity of demand.
B) always zero.
C) perfectly inelastic.
D) always greater than the short-run price elasticity of supply.

Question 41

Suppose that at a price of R300 per month, there are 300 000 subscribers to a television service in Small Town. If Small Town Television raises its price to R400 per month, the number of subscribers will fall to 200 000. At which of the following prices does Small Town Television earn the greatest total revenue?

A) R0 per month
B) R300 per month
C) R400 per month
D) Either R300 or R400 per month because the price elasticity of demand is 1.0.

Question 42

Use the graph shown to answer the following questions. Put the correct letter(s) in the blank.
a. The elastic section of the graph is represented by section from _______.
b. The inelastic section of the graph is represented by section from _______.
c. The unit elastic section of the graph is represented by section _______.
d. The portion of the graph in which a decrease in price would cause total revenue to fall would be from _________.
e. The portion of the graph in which a decrease in price would cause total revenue to rise would be from _________.
f. The portion of the graph in which a decrease in price would not cause a change in total revenue would be _________.
g. The section of the graph in which total revenue would be at a maximum would be _______.
h. The section of the graph in which elasticity is greater than 1 is _______.
i. The section of the graph in which elasticity is equal to 1 is ______.
j. The section of the graph in which elasticity is less than 1 is _______.

Question 43

If demand is linear (a straight line), then price elasticity of demand is

A) elastic in the upper portion and inelastic in the lower portion.
B) inelastic in the upper portion and elastic in the lower portion.
C) inelastic throughout.
D) constant along the demand curve.
E) elastic throughout.

Question 44

Suppose a producer is able to separate customers into two groups, one having an inelastic demand and the other having an elastic demand. If the producer's objective is to increase total revenue, she should

A) increase the price charged to customers with the elastic demand and decrease the price charged to customers with the inelastic demand.
B) decrease the price charged to customers with the elastic demand and increase the price charged to customers with the inelastic demand.
C) decrease the price to both groups of customers.
D) increase the price for both groups of customers.

Question 45

When studying how some event or policy affects a market, elasticity provides information on the

A) government expenditures associated with the policy.
B) costs and benefits of the effect.
C) allocative efficiency of the effect.
D) direction and magnitude of the effect.

Question 46

Pharmaceutical drugs have an inelastic demand, and computers have an elastic demand. Assume technological advances lead to the doubling of supply of both products.
a. What happens to the equilibrium price and quantity in each market?
b. Which product experiences a larger change in price?
c. Which product experiences a larger change in quantity?
d. What happens to total consumer spending on each product?

Question 47

Economists have observed that spending on restaurant meals declines more during economic downturns than does spending on food to be eaten at home. How might the concept of elasticities help explain this.

Question 48

A decrease in supply will cause the largest increase in price when

A) both supply and demand are inelastic.
B) both supply and demand are elastic.
C) demand is elastic and supply is inelastic.
D) demand is inelastic and supply is elastic.

Question 49

If demand is elastic, how will an increase in price change total revenue?

Question 50

Using the midpoint method, compute the elasticity of demand between points A and B. Is demand along this portion of the curve elastic or inelastic? Interpret your answer with regard to price and quantity demanded. Now compute the elasticity of demand between points B and C. Is demand along this portion of the curve elastic or inelastic?

Question 51

Why is supply more likely to be inelastic in the short run especially during strong periods of economic growth?

Question 52

Consider the following pairs of goods. For which of the two goods would you expect the demand to be more price elastic? Why?
a. Water or diamonds.
b. Insulin or nasal decongestant spray.
c. Food in general or breakfast cereal.
d. Petrol over the course of a week or petrol over the course of a year.

Question 53

A government seeking to raise revenue would be most likely to tax a good with a

A) high income elasticity of demand.
B) low cross-price demand elasticity.
C) high price elasticity of demand.
D) low price elasticity of demand.

Question 54

You own a small performance theatre. You currently charge R5 per ticket for everyone who comes. Your friend, who took an economics course at University, tells you that there may be a way to increase your total revenue. Given the demand curves shown, answer the following questions.
a. What is your current total revenue for both children and adults?
b. The elasticity of demand is more elastic in which market?
c. Which market has the more inelastic demand?
d. What is the elasticity of demand between the prices of R5 and R2 in the adult market? Is this elastic or inelastic?
e. What is the elasticity of demand between R5 and R2 in the children's market? Is this elastic or inelastic?
f. Given the graphs and what your friend knows about economics, he recommends you increase the price of adult tickets to R8 each and lower the price of a child's ticket to R3. How much could you increase total revenue if you take his advice?

Question 55

If consumers think that there are very few substitutes for a good, then

A) supply would tend to be price elastic.
B) none of these answers are correct.
C) demand would tend to be price inelastic.
D) demand would tend to be price elastic.
E) supply would tend to be price inelastic.

Question 56

A decrease in supply will cause the smallest increase in price when

A) both supply and demand are inelastic.
B) demand is elastic and supply is inelastic.
C) both supply and demand are elastic.
D) demand is inelastic and supply is elastic.