Question 1

Assume that the price elasticity of demand for petrol is -0.06. If the government tax causes the price of petrol to increase by 50 per cent, what will be the decrease in the quantity of petrol demanded?

Accepted Answer

A)  0.5 per cent 
B)  3.0 per cent 
C)  8.33 per cent 
D)  50 per cent

Question 2

If you expect the economy is going to boom and average income in the economy will rise in the foreseeable future, the type of firm that would be able to increase its sales if your expectations are met is

Accepted Answer

A)  one that sells an inferior good. 
B)  one that sells a necessity good. 
C)  one that sells a luxury good. 
D)  one that sells a price inelastic good.

Question 3

Supply is elastic whenever the elasticity value for supply is positive and greater than 1.

Accepted Answer

A) True 
 B)False

Question 4

The price elasticity of demand for Stork ice cream is -4. Suppose you're told that following a price increase, quantity demanded fell by 10 per cent. What was the percentage change in price that brought about this change in quantity demanded?

Accepted Answer

A)  40 per cent 
B)  25 per cent 
C)  2.5 per cent 
D)  0.4 per cent

Question 5

Which of the following items is likely to have the highest income elasticity of demand?

Accepted Answer

A)  a luxury cruise to several European countries 
B)  water 
C)  breakfast cereal 
D)  a hamburger

Question 6

What does price elasticity of demand measure? When is demand elastic? Inelastic? Unit elastic?

Accepted Answer

The answer of What does price elasticity of demand measure?...

Question 7

Assume that a 50 per cent petrol tax led to a large increase in its price and only a small decrease in the quantity of petrol demanded. Economic analysis would lead one to conclude that

Accepted Answer

A)  petrol should be taxed because the benefits of the tax would exceed the costs. 
B)  petrol should not be taxed because the benefits are uncertain. 
C)  petrol should not be taxed on ethical grounds since ethical benefits and costs can't be measured. 
D)  the benefits of taxing petrol is a normative issue. Economic analysis can be used to contribute to discussion of this issue but cannot decide it.

Question 8

If the cross-price elasticity of demand for goods A and B is zero, this means the two goods are unrelated.

Accepted Answer

A) True 
 B)False

Question 9

Bringing oil to the market is a relatively long and costly process. The whole process from exploration to pumping significant amounts of oil can take years. What does this indicate about the price elasticity of supply for oil?

Accepted Answer

A)  The elasticity coefficient is likely to be very high, and supply is inelastic. 
B)  The elasticity coefficient is likely to be close to zero, and supply is perfectly elastic. 
C)  The elasticity coefficient is likely to be low, and supply is highly inelastic. 
D)  The elasticity coefficient is likely to be low, and supply is highly elastic.

Question 10

-Refer to Figure 4-8. What is the value of the price elasticity of supply between g and h?

Accepted Answer

A)  20 
B)  0.5 
C)  2 
D)  0.02

Question 11

When the price of tortilla chips rose by 10 per cent, the quantity of tortilla chips sold fell 4 per cent. This indicates that the demand for tortilla chips is

Accepted Answer

A)  inelastic. 
B)  elastic. 
C)  unit-elastic. 
D)  perfectly inelastic.

Question 12

If the cross-price elasticity of demand between beer and wine is 0.31, then beer and wine are

Accepted Answer

A)  complements. 
B)  price inelastic goods. 
C)  substitutes. 
D)  necessities.

Question 13

When demand is unit-elastic, a change in price causes total revenue to stay the same because

Accepted Answer

A)  the percentage change in quantity demanded exactly offsets the percentage change in price. 
B)  buyers are buying the same quantity. 
C)  total revenue never changes with price changes. 
D)  the change in profit is offset by the change in production cost.

Question 14

Studies show that the income elasticity of demand for wine is approximately five. What does this mean?

Accepted Answer

A)  A 1 per cent decrease in the price of wine leads to a 5 per cent increase in wine consumption. 
B)  A 1 per cent increase in income leads to a 5 per cent increase in wine consumption. 
C)  A 5 per cent increase in income leads to a 1 per cent increase in wine consumption. 
D)  Wine is a relatively elastic good.

Question 15

Economists use the concept of ________ to measure how one economic variable, such as quantity, responds to a change in another economic variable, such as price.

Accepted Answer

A)  slope 
B)  efficiency 
C)  relativity 
D)  elasticity

Question 16

A private school is considering increasing its tuition to raise revenue. If the school believes that raising tuition will increase revenue,

Accepted Answer

A)  it is assuming that the demand for attending the school is inelastic. 
B)  it is assuming that the demand for attending the school is elastic. 
C)  it is assuming that the demand for attending the school is unit-elastic. 
D)  it is assuming that the demand for attending the school is perfectly elastic.

Question 17

If a firm wanted to know whether the demand for its product was elastic, unit-elastic, or inelastic, then the firm could

Accepted Answer

A)  survey competitors and ask them what they think demand elasticity is for the product. 
B)  talk to its customers. 
C)  change price a little bit and observe what happens to total revenue. 
D)  not do anything as there is no way to find an elasticity value.

Question 18

Which of the following statements is true about the price elasticity of demand along a downward-sloping linear demand curve?

Accepted Answer

A)  It is inelastic at high prices and elastic at low prices. 
B)  It is unit-elastic throughout the demand curve. 
C)  It is elastic at high prices and inelastic at low prices. 
D)  It is perfectly elastic at very high prices and perfectly inelastic at very low prices.

Question 19

The price elasticity of demand for beef is estimated to be 0.60 (in absolute value). This means that a 20 per cent increase in the price of beef, holding every thing else constant, will cause the quantity of beef demanded to

Accepted Answer

A)  decrease by 12 per cent. 
B)  decrease by 26 per cent. 
C)  decrease by 32 per cent. 
D)  decrease by 60 per cent.

Question 20

Total revenue equals

Accepted Answer

A)  price per unit times quantity sold. 
B)  price per unit times quantity supplied. 
C)  price per unit times change in quantity sold. 
D)  change in price per unit times quantity sold.

Exam 4: Elasticity: The Responsiveness of Demand and Supply