Question 1

A straight-line downward-sloping demand curve has a price elasticity of demand that:

Accepted Answer

A)   decreases as price decreases.
B)   increases as price decreases.
C)   is zero at all prices.
D)   is unitary at all prices. A

Question 2

The main reason for the high price of antiques is that:

Accepted Answer

A)   supply is relatively elastic and demand increases over time.
B)   supply is relatively inelastic and demand increases over time.
C)   demand is relatively elastic and supply increases over time.
D)   demand is relatively inelastic and supply increases over time. B

Question 3

Indy has a price elasticity of demand for beer of 1.00.Suppose the price of each beer is increased by 10 percent.What will happen to the total amount Indy spends on beer?

Accepted Answer

A)   It will not change.
B)   It will decrease 10 percent.
C)   It will increase 10 percent.
D)   It is impossible to tell. A

Question 4

Refer to the table above.Which product is a normal good but least responsive to a change in income?

Accepted Answer

A)   Product W
B)   Product X
C)   Product Y
D)   Product Z

Question 5

Which would be the best item to use for an analogy to describe elastic demand?

Accepted Answer

A)   A roller coaster
B)   An Ace bandage for a knee injury
C)   Rubber tie-downs to hold items in the back of a truck
D)   The production of aluminum in an aluminum plant

Question 6

The price elasticity of demand increases with the length of the period to which the demand curve pertains because:

Accepted Answer

A)   consumers' incomes will increase.
B)   the demand curve will shift outward.
C)   all prices will increase over time.
D)   consumers will be better able to find substitutes.

Question 7

If a product has a short-run elasticity of supply equal to zero,then an increase in the demand for the product will:

Accepted Answer

A)   have no effect on price or quantity sold.
B)   increase price and leave quantity sold unchanged.
C)   increase price and reduce the quantity sold to zero.
D)   leave the price unchanged and reduce the quantity sold.

Question 8

If the cross-price-elasticity of goods X and Y is negative,then the sales of X move:

Accepted Answer

A)   in the same direction as the price of Y,and X and Y are complementary goods.
B)   in the opposite direction as the price of Y,and X and Y are complementary goods.
C)   in the opposite direction as the price of Y,and X and Y are substitute goods.
D)   in the same direction as the price of Y,and X and Y are substitute goods.

Question 9

Refer to the figure above.What is the price elasticity of supply between points A and B above?

Accepted Answer

A)   -1
B)   1/3
C)   1
D)   2The change in quantity is (12 - 6) /(12 + 6) = 0.33 and the change in price is (4 - 2) /(4 + 2) = 0.33.Thus,the elasticity is 0.33/0.33 = 1.0.

Question 10

Consider the above parallel demand curves.Which curve is relatively more elastic at P1?

Accepted Answer

A)   AA.
B)   BB.
C)   Cannot be determined.
D)   Both have the same slope;therefore,both have the same elasticity.

Question 11

Consider the demand curve above.If area 0ABC is smaller than area 0DEF,we may conclude that demand in this range is:

Accepted Answer

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

Question 12

Movie theaters charge lower prices to see a movie in the afternoon than in the evening because there is an:

Accepted Answer

A)   inelastic supply of movies in the evening.
B)   elastic demand to see movies in the evening.
C)   elastic demand to see movies in the afternoon.
D)   inelastic demand to see movies in the afternoon.

Question 13

Refer to the figure above.Over the $5-$6 range,the elasticity of demand using the midpoint formula is:

Accepted Answer

A)   0.22.
B)   0.88.
C)   1.00.
D)   1.16.The change in quantity is (60 - 50) /(60 + 50) = 0.091 and the change in price is (5 - 6) /(5 + 6) = 0.091.Thus,elasticity is 0.091/0.091 = 1.0.

Question 14

Refer to the graph above.Over the $5-$6 range,the elasticity of supply using the midpoints formula is:

Accepted Answer

A)   0.22.
B)   0.88.
C)   1.00.
D)   1.22.The change in quantity is (50 - 40) /(50 + 40) = 0.111 and the change in price is (6 - 5) /(6 + 5) = 0.091.Thus elasticity is 0.111/0.091 = 1.22.

Question 15

Refer to the graph above.If the price increases from P1 to P2,then the gain in total revenue is areas:

Accepted Answer

A)   B + E and the loss in total revenue is areas H + I + J.
B)   C + F + H and the loss in total revenue is area J.
C)   E + F + G and the loss in total revenue is area J.
D)   A + B + C and the loss in total revenue is areas G + I + J.

Question 16

Estimates of the income elasticity of demand for health care indicate that it is about 1.These estimates suggest that spending on health care will probably:

Accepted Answer

A)   increase proportionately with income.
B)   increase faster than income.
C)   increase less than income.
D)   not increase or decrease.

Question 17

Elastic demand displays considerable:

Accepted Answer

A)   price stretch.
B)   income stretch.
C)   quantity stretch.
D)   cross-price stretch.

Question 18

In some markets consumers may buy many different brands of a product.Which of the statements below best represents a situation where demand for a particular brand would be very elastic?

Accepted Answer

A)   "The different brands are almost identical so I always buy the cheapest."
B)   "I use so little of that product that when I do buy it,I don't pay much attention to the price."
C)   "The brand I buy is so superior to other available brands that I hardly consider the others."
D)   "I pinch pennies in buying other products,but like most people I feel I owe it to myself to get the best brand of this product."

Question 19

You are the sales manager for a software company and have been informed that the price elasticity of demand for your most popular software is less than 1.To increase total revenues,you should:

Accepted Answer

A)   increase the price of the software.
B)   decrease the price of the software.
C)   hold the price of the software constant.
D)   increase the supply of the software.

Question 20

The price elasticity of demand is a measure of the:

Accepted Answer

A)   steepness or slope of a demand curve.
B)   absolute changes in quantity demanded and price.
C)   responsiveness of quantity demanded to a change in price.
D)   sensitivity of the quantity demanded for one good to a change in the price of another good.

Exam 4: Elasticity of Demand and Supply