Deck 3: Empirical Methods for Demand Analysis

Question 1

If the demand curve for slices of pizza is given as Q = 300 - 16p, then the point elasticity of demand when price is $1.50 is

A)-24.
B)-16.
C)-0.0054.
D)-0.087.

Answer 1

-0.087.

Question 2

If the demand curve for comic books is expressed as Q = 10,000 * p-1, then demand has a unitary elasticity

A)only when p = 10,000.
B)only when p = 100.
C)always.
D)never.

Answer 2

always.

Question 3

The market demand for wheat is Q = 100 - 2p + 1pb, where pb is the price of barley. If the price of wheat is $2, the price elasticity of demand

A)equals (-4/46).
B)equals (-46).
C)equals (-1).
D)cannot be calculated without more information.

Answer 3

cannot be calculated without more information.

Question 4

The percentage change in the quantity demanded in response to a percentage change in the price is known as the

A)slope of the demand curve.
B)excess demand.
C)price elasticity of demand.
D)All of the above.

Question 5

The above figure shows the demand curve for crude oil. If the market price is $10 a barrel, what is the price elasticity of demand?

A)-.02
B)-1
C)-10
D)-500

Question 6

If the price of a slice of pizza rises from $2.50 to $3, and quantity demanded falls from 10,000 slices to 7,400 slices, using the formula for arc price elasticity what is the percentage change in price?

A)18.18%
B)29.89%
C)20%
D)16.67%

Question 7

The above figure shows the demand curve for crude oil. The demand curve has unitary price elasticity when price equals

A)$0.
B)$1.
C)$10.
D)$20.

Question 8

If the elasticity of demand is -2.3 when calculated using the point elasticity method and -3.4 using the arc elasticity method, then

A)you should use the point elasticity.
B)it is OK to use either one.
C)there must be a mistake in the calculations.
D)you should use the arc elasticity.

Question 9

Elasticity along a downward sloping linear demand curve

A)is constant and equal to the slope of the curve.
B)is constant and equal to the slope times the ratio of price to quantity.
C)changes along the curve.
D)does not vary with price unless the good is expensive.

Question 10

If the demand for orange juice is expressed as Q = 2000 - 500p, where Q is measured in gallons and p is measured in dollars, then at the price of $3, the demand curve

A)is elastic.
B)has a unitary elasticity.
C)is inelastic.
D)is perfectly inelastic.

Question 11

If the price of a slice of pizza rises from $2.50 to $3, and quantity demanded falls from 10,000 slices to 7,400 slices, calculate the arc price elasticity.

A)-1.92
B)-1.64
C)-4
D)-2

Question 12

If the demand curve is given by Q = a + bp, then b is

A)positive.
B)the quantity demanded when price is zero.
C)the change in quantity demanded if price changes by 1.
D)different at different points on the demand curve.

Question 13

The elasticity of demand is

A)measured in money (e.g., dollars).
B)measured in units of the good (e.g., slices of pizza).
C)unitless.
D)measured in money/unit (e.g., 1.50 $/slice of pizza).

Question 14

If the price of a slice of pizza rises from $2.50 to $3, and quantity demanded falls from 10,000 slices to 7,400 slices, using the formula for arc price elasticity what is the percentage change in quantity?

A)-18.18%
B)-29.89%
C)-26%
D)-35.14%

Question 15

To calculate the point elasticity of demand, a manager must know

A)where the supply curve intersects the demand curve.
B)two points on the demand curve.
C)information about the entire demand curve.
D)whether or not the demand curve is linear.

Question 16

Suppose the demand function for a good is expressed as Q = 100 - 4p. If the good currently sells for $10, then the point price elasticity of demand equals

A)-1.5.
B)-0.67.
C)-4.
D)-2.5.

Question 17

Horizontal and vertical demand curves

A)have constant elasticities.
B)are not possible in the real world.
C)have elasticities that change with price.
D)cannot have their elasticities computed using the point method.

Question 18

If the demand curve is given by Q = a + bp, then a is

A)negative.
B)the quantity demanded when price is zero.
C)the slope of the demand curve.
D)measured in money.

Question 19

If the price of orange juice rises 10%, and as a result the quantity demanded falls by 8%, the price elasticity of demand for orange juice is

A)-1.25.
B)-80.0.
C)-0.80.
D)-10.0.

Question 20

If the demand function for orange juice is expressed as Q = 2000 - 500p, where Q is quantity in gallons and p is price per gallon measured in dollars, then the demand for orange juice has a unitary elasticity when price equals

A)$0.
B)$1.
C)$2.
D)$4.

Question 21

A horizontal demand curve for a good could arise because consumers

A)are irrational.
B)are not sensitive to price changes.
C)view this good as identical to another good.
D)have no equivalent substitutes for this good.

Question 22

If demand is elastic

A)then a 1% decrease in price leads to a rise in quantity of greater than 1%.
B)then a 1% decrease in price leads to a rise in quantity of less than 1%.
C)then a 1% decrease in prices leads to a rise in quantity of 1%.
D)then a 1% decrease in price leads to a fall in quantity greater than 1%.

Question 23

If demand is elastic

A)then it changes very little in response to a price change.
B)then it changes significantly in response to a price change.
C)then demand is zero.
D)then demand is infinite.

Question 24

If the price elasticity of demand for a good is less than one in absolute value, economists would characterize consumers of this good

A)as not very sensitive to price.
B)as not very sensitive to the quantity they demand.
C)as very sensitive to price.
D)as elastic.

Question 25

If a consumer increases her quantity of ice cream consumed by 100% when her income rises by 25%, then her income elasticity of demand for ice cream is

A)8.0.
B)4.0.
C).25.
D).08.

Question 26

If the price of orange juice rises 10%, and as a result the quantity demanded falls by 8%, the price elasticity of demand for orange juice is

A)-1.25.
B)inelastic.
C)Both A and B above.
D)Neither A nor B above.

Question 27

If demand is perfectly inelastic

A)then a 1% increase in price leads to a fall in quantity of greater than 1%.
B)then a 1% increase in price leads to a fall in quantity of less than 1%.
C)then a 1% increase in prices then quantity demanded falls to zero.
D)then a 1% increase in price has no effect on quantity demanded.

Question 28

Ramen noodles are likely considered

A)a normal good.
B)an inferior good.
C)to have inelastic demand.
D)to have perfectly elastic demand.

Question 29

On a linear demand curve, the lower the price

A)the less elastic is demand.
B)the more elastic is demand.
C)the elasticity equals -1.
D)the elasticity equals zero.

Question 30

Premium beer is likely considered

A)a normal good.
B)an inferior good.
C)to have inelastic demand.
D)to have perfectly elastic demand.

Question 31

A normal good has a ________ income elasticity of demand and quantity demanded ________ as income rises.

A)negative; increases
B)negative; decreases
C)positive; increases
D)positive; decreases

Question 32

If demand is inelastic

A)then it changes very little in response to a price change.
B)then it changes significantly in response to a price change.
C)then demand is zero.
D)then demand is infinite.

Question 33

An inferior good has a ________ income elasticity of demand and quantity demanded ________ as income rises.

A)negative; increases
B)negative; decreases
C)positive; increases
D)positive; decreases

Question 34

If the demand curve for a good always has unitary price elasticity, what does this imply about consumer behavior?

A)Consumers do not react to a price change.
B)Consumers will spend a constant total amount on the good.
C)Consumers are irrational.
D)Consumers do not obey the Law of Demand.

Question 35

If the price of orange juice rises 10%, and as a result the quantity demanded falls by 8%, the price elasticity of demand for orange juice is

A)-1.25.
B)elastic.
C)Both A and B above.
D)Neither A nor B above.

Question 36

Which of the following is most likely to be TRUE?

A)Income elasticity of demand for fur coats exceeds that of oatmeal.
B)Income elasticity of demand for oatmeal exceeds that of fur coats.
C)Income elasticity of demand for fur coats equals that of oatmeal.
D)It is not possible to make any prediction about relative income elasticities.

Question 37

If demand is perfectly elastic

A)then a 1% increase in price leads to a fall in quantity of greater than 1%.
B)then a 1% increase in price leads to a fall in quantity of less than 1%.
C)then a 1% increase in price causes quantity demanded to fall to zero.
D)then a 1% increase in price has no effect on quantity demanded.

Question 38

If the price elasticity of demand for a good is greater than one in absolute value, economists characterize that demand is

A)elastic.
B)inelastic.
C)perfect.
D)vertical.

Question 39

A vertical demand curve

A)is impossible.
B)reasonably represents demand for essential goods.
C)has a price elasticity of negative infinity since people will pay an infinite amount for the good.
D)represents a normal good.

Question 40

If demand is inelastic

A)then a 1% increase in price leads to a fall in quantity of greater than 1%.
B)then a 1% increase in price leads to a fall in quantity of less than 1%.
C)then a 1% increase in price leads to a fall in quantity of 1%.
D)then a 1% increase in price leads to a rise in quantity of less than 1%.

Question 41

If it is difficult to substitute for a good in the short run, but easy in the long run, then

A)the elasticity of demand is more elastic in the short run.
B)the elasticity of demand is more elastic in the long run.
C)the good is an inferior good.
D)elasticity changes along the demand curve.

Question 42

If the cross price elasticity of two goods is -3.5, then

A)these two products are relatively elastic substitutes.
B)these two products are relatively inelastic substitutes.
C)these two products are relatively elastic complements.
D)these two products are relatively inelastic complements.

Question 43

The percentage change in the quantity supplied in response to a percentage change in the price is known as the

A)slope of the supply curve.
B)excess supply.
C)price elasticity of supply.
D)All of the above.

Question 44

In Ordinary Least Squares Regression, the gap between the value of the dependent variable and the predicted value is called

A)the error term.
B)the minimizing coefficient.
C)the residual.
D)the explanatory variable.

Question 45

As prices change, the elasticity of supply describes the movement

A)of a shift in the supply curve.
B)of the equilibrium price.
C)along the supply curve.
D)from a necessity to a luxury good.

Question 46

When a variable is determined by a factor outside of the function or model being evaluated, it is said to be

A)endogenous.
B)exogenous.
C)unexplained.
D)statistically insignificant.

Question 47

An estimated demand curve does NOT necessarily match actual data perfectly because

A)it is not possible to accurately calculate the coefficients of the curve.
B)some factors that are not measured or observed may affect the curve.
C)the random error term has too large of a range.
D)demand is unpredictable.

Question 48

In regression analysis, the explanatory variables

A)are always price and income.
B)are the variables whose variations are to be explained.
C)are the factors that are thought to affect the dependent variable.
D)are used to explain the random error term.

Question 49

Ordinary Least Squares Regression analysis attempts to

A)maximize the distance of each point from a regression line.
B)select a line that fits the data well.
C)maximize the residual.
D)change a multivariate problem into a single dimension.

Question 50

A regression analysis with ________ explanatory variables is called a ________.

A)two or less; limited regression
B)exactly two; binomial least squares regression
C)one; dependent regression
D)two or more; multivariate regression

Question 51

The market demand for wheat is Q = 100 - 2p + 1pb, where pb is the price of barley. The cross price elasticity of demand for wheat with respect to barley

A)cannot be calculated from just the information provided.
B)is negative.
C)suggests that wheat and barley are complements.
D)equals 1.

Question 52

The cross price elasticity of demand between two goods will be positive if

A)the two goods are complements.
B)the two goods are substitutes.
C)the two goods are luxuries.
D)one of the goods is a luxury and the other is a necessity.

Question 53

The market demand for wheat is Q = 100 - 2p + 1pb + 2Y. If the price of wheat, p, is $2, and the price of barley, pb, is $3, and income, Y, is $1000, the income elasticity of wheat is

A)2 ∗ (1000/2099).
B)2.
C)1/2 ∗ (1000/2099).
D)Cannot be calculated from the information provided.

Question 54

The goodness of the fit of a line is measured by the

A)R2 statistic.
B)t-statistic.
C)unbiased coefficient.
D)standard error.

Question 55

The gap between the actual and predicted values of a dependent variable is called

A)the error term.
B)an exogenous factor.
C)the residual.
D)an endogenous factor.

Question 56

The random error term ________ the effects of ________ influences on the dependent variable that are not included as explanatory variables.

A)captures; observed
B)ignores; unobserved
C)ignores; observed
D)captures; unobserved

Question 57

In regression analysis, the dependent variable

A)is always quantity demanded.
B)is the variable whose variation is to be explained.
C)is one of the factors that explains what is happening with demand.
D)is represented by the inverse demand function.

Question 58

When a variable is determined by a factor inside of the function or model being evaluated, it is said to be

A)endogenous.
B)exogenous.
C)unexplained.
D)statistically insignificant.

Question 59

An R2 close to 1

A)does not happen with real data.
B)indicates that almost all of the variation in the dependent variable is explained by the regression.
C)does not explain variation as well as an R2 that is above 2.
D)means that the regression line does not fit the data very well.

Question 60

The cross price elasticity of demand for a good is the percentage change in the quantity demanded in response to a given percentage change in

A)income.
B)the price of that good.
C)the price of another good.
D)the quantity demanded of another good.

Question 61

If two variables B and V are positively correlated, B ________ when V ________.

A)goes up; goes down
B)goes up; goes up
C)goes down; goes up
D)remains unchanged; goes up

Question 62

Forecasts are

A)generally incorrect.
B)predictions about the future.
C)explanations of past occurrences.
D)limited to short time periods.

Question 63

The t-statistic measures

A)the efficiency of the t-test relative to the standard z-test.
B)the probability that the estimated coefficient is within the range of the standard error.
C)whether the estimated coefficient is independent of the standard error.
D)whether the estimated coefficient is large relative to the standard error.

Question 64

When selecting explanatory variables to include in a regression

A)you should pick all observable variables available.
B)you should pick all observable variables that are likely to have a meaningful impact on the dependent variable.
C)ignore all variables that have t-statistics less than the critical value.
D)ignore variables that have an R2 less than 1.

Question 65

Which of the following statements is TRUE?

A)If two variables X and Y are correlated, then X causes changes in Y.
B)If two variables X and Y are correlated, then Y causes changes in X.
C)If X causes changes in Y, then X and Y are correlated.
D)None of the above.

Question 66

What is the meaning of the statement "correlation does not mean causation"?

Question 67

If there is a causal relationship between two variables X and Y

A)both should be used as explanatory variables.
B)then the causal variable should be used as the explanatory variable.
C)then they must be positively correlated.
D)one of them can be omitted from the analysis.

Question 68

If R2 is less than 1

A)the regression analysis is incorrect.
B)the observation data is suspect.
C)some observations do not lie on the regression line.
D)the probability of having the correct fit is very low.

Question 69

Two variables are said to be ________ if they move together.

A)procyclical
B)spurious
C)correlated
D)co-dependent

Question 70

If two variables B and V are negatively correlated, B ________ when V ________.

A)goes up; goes down
B)goes up; goes up
C)goes down; goes down
D)remains unchanged; goes down

Question 71

A 95% confidence interval

A)indicates that there is 95% confidence that the value of the estimated coefficient is correct.
B)indicates that there is 95% confidence that the degrees of freedom explain the data correctly.
C)is a range of of values that gives a 95% probability that the true value of the coefficient is within the specified interval.
D)is the probability that we have obtained the true value of the coefficient with 95% accuracy.

Question 72

A regression specification must include

A)the choice of the dependent variable.
B)the explanatory variable(s).
C)the functional relationship.
D)All of the above.

Question 73

Demand curves and other economic relationships

A)are always linear.
B)produce linear regression equations.
C)can take many different functional forms.
D)are dependent upon the type of advertising done.

Question 74

If we have a small standard error, then

A)the estimated coefficient is small.
B)the true demand function has imprecise coefficients.
C)the expected variation of the estimated coefficient is small.
D)the estimated coefficients are imprecise indicators of the true values.

Question 75

An estimation method is unbiased if it produces a(n)________ that equals the ________ on average.

A)R2; t-statistic
B)estimated coefficient; true coefficient
C)error term; standard error
D)estimated coefficient; residual

Question 76

Omitted variables

A)can cause hypothesis tests to be unreliable.
B)require multiple regression analyses to find.
C)are usually those with t-statistics less than the critical value.
D)are usually outside the confidence interval.

Question 77

If you are testing the null hypothesis, you are testing

A)the hypothesis that the coefficient for an explanatory variable is zero and therefore has no impact on your results.
B)whether or not price should be set to 0.
C)the relationship between the t-statistic and the standard error.
D)the hypothesis that setting a given price will yield no increase in profits.

Question 78

If an estimated regression explains none of the variation, R2 will be

A)0.
B)between 0 and 1.
C)1.
D)unable to determine with the information given.

Question 79

A regression specification must include

A)the functional relationship between dependent and explanatory variables.
B)the estimated coefficients.
C)the estimated t-statistic.
D)All of the above.

Question 80

If you are using a 95% confidence interval and the absolute value of the t-statistic is larger than the critical value, then

A)we accept the null hypothesis at a 95% confidence level.
B)we reject the null hypothesis at a 95% confidence level.
C)we will be wrong less than 5% of the time if we accept the null hypothesis.
D)we will be wrong 95% of the time if we reject the null hypothesis.