Deck 5: Business in a Market Environment

Question 1

A downward- sloping straight- line demand curve will

A) be elastic over its whole length.
B) have unit elasticity over its whole length.
C) be inelastic over its whole length.
D) become less elastic as price rises.
E) become more elastic as price rises.

Answer 1

be inelastic over its whole length.

Question 2

The price elasticity of demand for bottled water in Yorkshire is - 0.2, while the price elasticity of demand for bottled water in London is - 1.2. In other words, demand in Yorkshire is __________ and demand in Lonon is ___________ .

A) elastic; unitarily elastic
B) inelastic; unitarily inelastic
C) inelastic; elastic
D) elastic; inelastic

Answer 2

inelastic; elastic

Question 3

If the charge for a phone call were higher between 8am and 6pm than between 6pm and 8am, this could be explained by the fact that the demand for phone calls is __________ between 8am and 6pm and the demand for phone calls is __________ between 6pm and 8am.

A) zero; one
B) less elastic; more elastic
C) perfectly elastic; perfectly inelastic
D) more elastic; less elastic

Answer 3

less elastic; more elastic

Question 4

The government wants to reduce the consumption of electricity by 5%. The price elasticity of demand for electricity is - 0.4. The government should

A) raise the price of electricity by 12.5%.
B) raise the price of electricity by 2%.
C) raise the price of electricity by 0.08%.
D) lower the price of electricity by 0.4%.

Question 5

When priced at £5.00, the same amount of money was spent on DVDs as when the price was £6.00. Therefore, demand for DVDs is

A) unitarily elastic.
B) inelastic.
C) elastic.
D) perfectly elastic.
E) perfectly inelastic.

Question 6

The owner of a local hotdog stand has estimated that, if he lowers the price of hotdogs from £1.50 to£1.00, he will increase sales from 400 to 500 hotdogs per day. The demand for hotdogs is

A) unitarily elastic.
B) elastic.
C) perfectly inelastic.
D) inelastic.
E) perfectly elastic.

Question 7

If a family spends a large part of its total budget on food, then its demand for food tends to be

A)inelastic
B) elastic.
C) cannot tell from the information given
D) perfectly elastic.
E) unitarily elastic.

Question 8

The price elasticity of demand for holidays in Greece is likely to be high because

A) holidays at home provide no real alternative.
B) people need a holiday if they are to cope with the year ahead.
C) people tend to book up a long time in advance.
D) foreign holidays are becoming much cheaper.
E) there are plenty of different foreign holidays to choose from.

Question 9

Total revenue will increase if

A) price falls and demand is inelastic.
B) price rises and demand is unitarily elastic.
C) price rises and demand is elastic.
D) price falls and demand is elastic.

Question 10

A supermarket decides to reduce the price of its own brand of baked beans as a special offer for one week only. During this week it discovers that its total revenue on these baked beans increases. This indicates that

A) its own brand of baked beans is inelastic with respect to price.
B) the demand for its own brand of baked beans is inelastic with respect to income.
C) the demand for its own brand of baked beans is elastic with respect to income.
D) the demand for its own brand of baked beans is elastic with respect to price.
E) its own brand of baked beans is an inferior good.

Question 11

If the owner of an ice- cream van charges £1 for an ice- cream cone, his total revenue is £400 a day. If he lowers the price to 75p, his total revenue is £350 a day. The demand for ice- cream is

A) inelastic.
B) elastic.
C) unitarily elastic.
D) neither elastic nor inelastic because this situation violates the law of demand.

Question 12

A cinema decides to increase the price of its seats and, as a result, finds that its revenue increases. This means that

A) the demand for seats is inelastic with respect to price.
B) the demand for seats is elastic with respect to income.
C) the income elasticity of demand for seats is negative.
D) the demand for seats is inelastic with respect to income.
E) the demand for seats is elastic with respect to price.

Question 13

If the income elasticity of demand for a good is positive and less than one, the good must be

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

Question 14

The income elasticity of demand for good X is - 3. Other things being equal, which of the following is true?

A) In order to predict the effect of an increase in consumers' income on either the quantity of good X demanded and supplied or the total revenue of the suppliers of good X, we must first know the price elasticity of demand for good X.
B) An increase in consumers' income will increase the total expenditure on the product by consumers.
C) An increase in consumers' income will decrease the total revenue of suppliers of good X.
D) A 3% increase in consumers' income will lead to a 1% decrease in the quantity of good X demanded and supplied.
E) A 1% increase in consumers' income will lead to a 3% increase in the quantity of good X demanded and supplied.

Question 15

If the income elasticity of demand for a good is positive and less than one, the good must be

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

Question 16

If the income elasticity of a demand for a good is negative, then the good is

A) an inferior good.
B) a luxury good.
C) an income- neutral good.
D) a normal good.

Question 17

If the cross- price elasticity between X and Y is negative, then

A) X and Y are substitutes.
B) consumer income has increased.
C) X and Y are unrelated.
D) X and Y are complements.

Question 18

Which of the following defines the price elasticity of supply?

A) The responsiveness of quantity demanded to a change in supply
B) The responsiveness of supply to a change in demand
C) The responsiveness of quantity supplied to a change in income
D) The responsiveness of quantity supplied to a change in price

Question 19

Price elasticity of supply will be greater when

A) firms hold large stocks.
B) there is a minimum wage.
C) firms have spare capacity.
D) some time has passed.
E) A, C and D

Question 20

What will be the price elasticity of supply for a vertical supply curve?

A) Unitary
B) Zero
C) One
D) None of the above

Question 21

There are two goods X and Y. In which of the following cases will good X have the most price- elastic supply?

A) If it is less costly to shift from producing X to another product than it is to shift from Y to another product.
B) A higher proportion of national income is spent on X than on Y.
C) The cost of producing extra units increases more rapidly in the case of X than in the case of Y.
D) Consumers find it easier to find alternatives for X than for Y.

Question 22

The price elasticity of supply of butter is 0.2. The guaranteed price is originally set at £20 and the quantity produced is 1,000 tons. Which of the following quantities will represent the planned level of production for butter if the guaranteed price is reduced by 10%?

A) 2 tons
B) 980 tons
C) 200 tons
D) 800 tons
E) 20 tons

Question 23

Which of the following is a determinant of the price elasticity of supply?

A) The proportion of income spent on the good
B) How profitable it is
C) The closeness of substitutes
D) The amount that costs rise as output rises

Question 24

A supply curve has a price elasticity that is constant along it, if and only if

A) it is a straight- line supply curve through the origin.
B) it is a horizontal supply curve.
C) it is a vertical supply curve.
D) it is a downward- sloping supply curve.

Question 25

Which one of the following is true of the long run?

A) Demand and supply are less elastic with respect to price than in the short run.
B) Demand is more elastic and supply is less elastic with respect to price than in the short run.
C) Demand is less elastic and supply is more elastic with respect to price than in the short run.
D) Demand and supply are more elastic with respect to price than in the short run.

Question 26

If speculation is stablising, a change in price resulting from a rise in demand will result in

A) a further rise in demand and a rise in supply.
B) a further rise in demand and a fall in supply.
C) a fall in demand and a fall in supply.
D) a fall in demand and a rise in supply.

Question 27

Stabilising speculation can be defined as

A) a situation where the actions of speculators tend to cause the very effect that they had anticipated.
B) a situation where the actions of speculators tend to make price movements larger.
C) a situation where the actions of speculators tend to reduce price fluctuations.
D) none of the above

Question 28

Buyers and sellers are likely to anticipate what will happen to prices before they buy or sell. If people believe that prices are likely to rise, current supply will shift to the ______ and current demand will shift to th ________.

A) left; left
B) left; right
C) right; right
D) right; left

Question 29

If speculation is destablising, a change in price resulting from a rise in demand will result in

A) a further rise in demand and a rise in supply.
B) a fall in demand and a fall in supply.
C) a further rise in demand and a fall in supply.
D) a fall in demand and a rise in supply.

Question 30

To an economist risk is defined as

A) when an outcome may or may not occur and its probability of occurring is unknown.
B) when an outcome may or may not occur, but its probability of occurring is known.
C) a situation where more than one possible choice could be made.
D) a situation when an insurance company has worse information than the person taking out the insurance and thus they face an uncertain outcome.

Question 31

To an economist uncertainty is defined as

A) a situation when an insurance company has worse information than the person taking out the insurance and so faces a higher risk.
B) when an outcome may or may not occur and its probability of occurring is unknown.
C) when an outcome may or may not occur, but its probability of occurring is known.
D) a situation where more than one possible choice could be made.

Question 32

You bet £20 on the roll of a dice. If the dice lands with a 6 facing upwards, you win £100. If any other number lands face up you lose your £20. To an economist you would be operating under

A) a black market.
B) risky conditions.
C) uncertain conditions.
D) It is not possible to say from the information provided.

Question 33

When the probability of an outcome is unknown, we refer to it as

A) moral hazard.
B) certain gamble.
C) risk.
D) adversity.
E) uncertainty.

Question 34

Uncertainly can be reduced by

A) using futures.
B) using forwards.
C) holding stocks.
D) all of the above

Question 35

A forward market allows traders to

A) make a contract to buy or sell at a future date at a price agreed today.
B) make a contract to buy or sell today at a price to be agreed in the future.
C) reduce uncertainty.
D) A and C

Question 36

The responsiveness of quantity demand to a change in price is called 'price elasticity of demand'.

Question 37

If a demand drops to zero at the slightest increase in price, demand is perfectly elastic.

Question 38

Price elasticity of demand is the ratio of the change in demand to the change in price.

Question 39

If price elasticity of demand is inelastic then, ignoring the sign, it will have a value <1.

Question 40

If price elasticity of demand is elastic then, ignoring the sign, it will have a value >1.

Question 41

If the price elasticity of demand for apples is - 1, then a change in price will cause no change in the amount spent on apples.

Question 42

If goods have few close substitutes they will tend to have low price elasticities of demand.

Question 43

After a price increase, the demand for items like natural gas and home heating fuel is likely to become less elastic 'as time goes by'.

Question 44

Price and total revenue are inversely related (i.e. when price rises revenue falls) when demand is inelastic.

Question 45

If a firm knows that demand is inelastic, it should cut its price to increase revenue.

Question 46

Luxury goods have an income elasticity that is positive and greater than one. However, if the income elasticity of a demand for a good is negative, then the good is an inferior good.

Question 47

A good whose demand falls as income increases is a normal good.

Question 48

Most basic foodstuffs have an income elasticity of demand which is low or negative.

Question 49

Cross- price elasticity of demand for complements is positive.

Question 50

The cross- price elasticity between X and Y is positive. An increase in the price of X will cause the demand for Y to decrease.

Question 51

In the long run, price elasticity of supply tends to be more inelastic.

Question 52

The elasticity of both supply and demand for a good will reduce over time.

Question 53

Speculation is always stabilising.

Question 54

Following a rise in demand, prices first rise and then fall back towards the equilibrium. This suggests that speculation was destabilising.

Question 55

Short- selling is unlikely to cause any damage to the stock market.

Question 56

It is not possible to reduce uncertainty with 'forwards' and 'futures' due to the possibility of speculation.

Question 57

The price of a newspaper increases by 10% and quantity demanded of that newspaper falls by 10%. Calculate the price elasticity of demand for newspapers and comment on how revenue will be influenced by a change in price.

Question 58

Explain the three main determinants of a good's price elasticity of demand.

Question 59

Why do products with close substitutes have relatively price- elastic demands?

Question 60

How will a knowledge of the price elasticity of demand for its products benefit a firm?

Question 61

The university you attend needs to increase total revenue. The vice chancellor suggests that raising tuition fees by 5% will increase total revenue. However, after the tuition fee increase, total revenue actually fell. What can you infer about the price elasticity of demand for an education at your university? Why is this likely to be true? What did your university vice chancellor assume to be true about the price elasticity of demand for an education at your university?

Question 62

What happens to income elasticity of demand for normal, inferior and luxury goods?

Question 63

The cross- price elasticity between X and Y is positive. What will happen if the supply of X decreases? Illustrate this on two graphs, one for good X and one for good Y.

Question 64

Comment briefly on the price and income elasticity of demand for agricultural products in advanced industrial countries such as the UK.

Question 65

What is speculation, and is it useful to society?

Question 66

Under what circumstances is speculation likely to be (a) stabilising and (b) destabilising?

Question 67

Distinguish between the different types of speculation?

Question 68

Distinguish between risk and uncertainty.

Question 69

Why may a farmer wish to enter the forward or futures market?