Question 1

If the income elasticity of demand of a good is negative, we can conclude that the good is:

Accepted Answer

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

Question 2

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

Accepted Answer

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 3

Why is the demand curve for oil rather inelastic?

Accepted Answer

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 4

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

Accepted Answer

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 5

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?

Accepted Answer

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 6

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

Accepted Answer

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 7

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:

Accepted Answer

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

Question 8

The price of Good B increases by 4 percent, causing the quantity demanded of Good A to decrease by 6 percent. The cross-price elasticity of demand is ________, and the goods are ________.

Accepted Answer

A)  1.5; substitutes 
B)  -1.5; complements 
C)  0.67; complements 
D)  -0.67; substitutes

Question 9

When a shift in demand or supply occurs, economists can make a quick prediction of the change in price. The denominator of the simple price-change formula is the:

Accepted Answer

A)  multiple of the elasticities of supply and demand. 
B)  sum of the elasticities of supply and demand. 
C)  difference between the elasticities of supply and demand. 
D)  percent change in either demand or supply.

Question 10

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

Accepted Answer

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 11

Which of the following statements is FALSE?

Accepted Answer

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 12

If the price elasticity of demand for a product is 1 in absolute value, and the price elasticity of supply of the same product is 1, what is the predicted percent change in price from a 1 percent increase in demand?

Accepted Answer

A)  a rise in price of 0.5 percent 
B)  a rise in price of 2 percent 
C)  a fall in price of 0.5 percent 
D)  a fall in price of 2 percent

Question 13

A cross-price elasticity value that is positive will always indicate goods that are substitutes.

Accepted Answer

A) True 
 B)False

Question 14

If the elasticity of demand for oil is 0.5 and the elasticity of supply for oil is 0.3, then a 1 percent increase in the supply of oil would cause the price of oil to:

Accepted Answer

A)  increase by 1.25 percent. 
B)  increase by 2.50 percent. 
C)  decrease by 1.25 percent. 
D)  decrease by 2.50 percent.

Question 15

Assume a product has an inelastic demand curve. If the producer of the good raises the price of the product, that producer's total revenue will decrease.

Accepted Answer

A) True 
 B)False

Question 16

Good X and Good Y are related goods. When the price of good X rises by 20 percent, the quantity demanded for good Y falls by 40 percent. What is the cross-price elasticity?

Accepted Answer

A)  2 
B)  4 
C)  -0.5 
D)  -2

Question 17

Which factor would tend NOT to increase elasticity of supply?

Accepted Answer

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

Question 18

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

Accepted Answer

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 19

If the price of cocoa rises by 10 percent and the elasticity of supply is 0.5, then the quantity supplied:

Accepted Answer

A)  increases by 5 percent. 
B)  increases by 20 percent. 
C)  decreases by 5 percent. 
D)  decreases by 20 percent.

Question 20

For each of the following goods would you expect the demand to be elastic or inelastic? Provide explanation for each of your rationales. a. oil b. Coca-Cola c. bread
B. a. The demand for oil is inelastic, at least in the short run, because there are few substitutes for oil in its major use, transportation. However if the price of oil increases by a significant amount for a long period of time then the demand for oil will become more elastic as substitutes are developed. b. Some people have an elastic demand for Coca-Cola because for them Pepsi or other soft drinks can be good substitutes for Coca- Cola, whereas other people may have a more inelastic demand for Coca-Cola if they will keep buying Coca-Cola when the price of Coca-Cola increases. c. The price of bread is too small a portion of the budgets to worry very much about its price so the consumption of bread is inelastic.

Accepted Answer

The answer of For each of the following goods would...

Exam 5: Elasticity and Its Applications