Question 1

Suppose that studies show that the income elasticity of demand for cigarettes is approximately five. What does this mean?

Accepted Answer

A)  A five percent increase in income leads to a one percent increase in cigarette consumption. 
B)  A one percent increase in income leads to a five percent increase in cigarette consumption. 
C)  Cigarettes are a relatively elastic product. 
D)  A one percent decrease in the price of cigarettes leads to a five percent increase in cigarette consumption.

Question 2

-Refer to Figure 5 -5. The data in the diagram indicates that DVDs

Accepted Answer

A)  are necessities. 
B)  are luxury goods. 
C)  are both luxury goods and price inelastic goods. 
D)  are both necessities and price inelastic goods. 
E)  are price inelastic goods.

Question 3

Hala, an expert in making desserts, made the following statement: "A cup of tea with mint is often the perfect end to a meal, sipped with a piece of my delicious chocolate cake." Evidently, Hala views

Accepted Answer

A)  tea with mint and chocolate cake as necessities. 
B)  tea with mint and chocolate cake as substitutes to other desserts. 
C)  tea with mint and chocolate cake as complementary goods. 
D)  tea with mint and chocolate cake as luxury items.

Question 4

According to an article in the Wall Street Journal, unlike airlines, even elite hotels don't have sophisticated systems that can react quickly to changes in demand. Even if they could, many hoteliers say people don't respond that much to lower rates. "We've tested this, cutting our rates by US$50 [per night], and we didn't see an appreciable response in occupancy," says Jim Schultenover, a vice president for Ritz-Carlton. Based on the information above, the demand for hotel rooms

Accepted Answer

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

Question 5

The internet has made it easy for consumers to buy books online. As a result, many traditional booksellers like Barnes & Noble and Borders (starting in 2008) along with Amazon sell books on their websites. What effect will the internet have on the demand curve that any bookstore faces?

Accepted Answer

A)  The price elasticity of demand will remain unchanged; only the cross -price elasticity will change. 
B)  The demand facing a bookstore will become more inelastic. 
C)  The demand facing a bookstore will become horizontal. 
D)  The demand facing a bookstore will become more elastic.

Question 6

Last year, Housam purchased 60 kilos of potatoes to feed his family of five when his household income was US$30,000. This year, his household income fell to US$20,000 and Housam purchased 80 kilos of potatoes. With all else constant, Housam's income elasticity of demand for potatoes is

Accepted Answer

A)  positive, so Housam considers potatoes to be a normal good and a necessity. 
B)  negative, so Housam considers potatoes to be an inferior good. 
C)  positive, so Housam considers potatoes to be an inferior good. 
D)  negative, so Housam considers potatoes to be a normal good.

Question 7

The elasticity coefficient is constant along a vertical demand curve.

Accepted Answer

A) True 
 B)False

Question 8

Using cross -sectional data from the two Housing Assistance Supply Experiment (HASE) sites in the U.S., John Mulford of Rand Research, estimates that the long -run "permanent" income elasticity of housing expenditures is 0.45 for owners. Using this information, what is likely to happen to housing expenditures if the government increases income transfers to recipients in HASE sites?

Accepted Answer

A)  Housing expenditures in HASE sites will fall significantly as recipients move out of these areas to higher -income areas. 
B)  Housing expenditures will increase significantly. 
C)  Housing expenditures will increase, but not significantly. 
D)  Housing expenditures will decrease by a small amount.

Question 9

In September 2006, the Food and Drug Administration recommended that Americans avoid eating bagged raw spinach in the wake of an outbreak of E. coli bacteria. Following this recommendation, the food industry looked at alternatives and many turned to arugula. One Chicago distributor claims, "The sale of the stuff has gone through the roof." Based on this information,

Accepted Answer

A)  the cross price elasticity between arugula and spinach is negative. 
B)  arugula is a normal food item while raw spinach is an inferior food item. 
C)  the cross price elasticity between arugula and spinach is positive. 
D)  the price elasticity of arugula is positive while the price elasticity of spinach falls to zero.

Question 10

Suppose that the price of a money clip increases from US$0.75 to US$0.90 and quantity supplied rises from 8,000 units to 10,000 units. Use the midpoint formula to calculate the price elasticity of supply.

Accepted Answer

A)  0.07 
B)  1.22 
C)  1 
D)  0.82

Question 11

Which of the following does not affect the price elasticity of demand for a product?

Accepted Answer

A)  how long buyers have to respond to any price change 
B)  the number of close substitutes available for the product 
C)  how much demand shifts when buyers' incomes change 
D)  expenditures on the product relative to buyers' incomes

Exam 5: Elasticity: The Responsiveness of Demand and Supply