Deck 2: Demand Theory

Question 1

A manufacturer of infant clothes has found that the demand for its product is given by Q = 100P ^{± 1.25}A^0.5,where P is price and A is advertising expenditures.The price elasticity of demand for these infant clothes is:

A) -0.8.
B) -1.25.
C) -1.0.
D) -2.5.
E) -0.5.

Answer 1

B

Question 2

A firm's demand curve is usually:

A) to the right of the market demand curve.
B) more inelastic than the market demand curve.
C) the same as the market demand curve.
D) drawn holding supply constant.
E) more elastic than the market demand curve.

Answer 2

E

Question 3

If the elasticity of per capita demand with respect to population is zero,then a 10% increase in the population will cause the quantity demanded to:

A) increase by 25%.
B) decrease by 10%.
C) remain constant.
D) increase by 10%.
E) decrease by 25%.

Answer 3

C

Question 4

The demand curve's usual slope implies that consumers:

A) buy more as the price of a good is increased.
B) buy more as a good is advertised more.
C) buy more at higher average incomes.
D) buy less as the price of a good is increased.
E) have tastes that sometimes change.

Question 5

The market demand schedule shows the quantities that would be purchased,holding all other factors constant,from a group of firms during a given time period:

A) at varying prices.
B) at varying advertising levels.
C) at varying competitors' prices and advertising levels.
D) at varying prices and advertising levels.
E) over different time intervals.

Question 6

As we move down a linear demand curve,demand becomes:

A) more elastic.
B) less elastic at first and then more elastic.
C) steeper.
D) more elastic at first and then less elastic.
E) less elastic.

Question 7

Information on the quantities that would be purchased at different prices,holding all other factors constant,in a given time period from a group of firms is shown in a:

A) firm demand curve.
B) market demand curve.
C) firm demand schedule.
D) market supply schedule.
E) firm supply curve.

Question 8

The demand for textbooks is Q = 200 - P + 25U - 50P_beer.Assume that the unemployment rate U is 8 and the price of beer P_beer is $2.When the average price of a textbook is P = $100,the price elasticity of demand is:

A) -1.0.
B) -2.0.
C) -0.5.
D) -50.
E) -5.0.

Question 9

A market demand curve is likely to shift to the right when:

A) average income falls.
B) prices fall.
C) prices rise.
D) population increases.
E) new firms enter the market.

Question 10

The formula for the point price elasticity can be written as:

A) $\eta$ = ( $\Delta$ Q / $\Delta$ P)(P / Q).
B) $\eta$ = ( $\Delta$ P / $\Delta$ Q)(P / Q).
C) $\eta$ = ( $\Delta$ Q / $\Delta$ P)(Q / P).
D) $\eta$ = ( $\Delta$ P / $\Delta$ Q)(Q / P).
E) none of the above.

Question 11

The demand for office chairs in thousands is Q = 80 - P².At a price of $4,the price elasticity of demand is:

A) -0.5.
B) -8.0.
C) -2.0.
D) -4.0.
E) -0.25.

Question 12

Suppose that the demand curve for compact disks is given by P = 600 - Q and that the supply curve is given by P = 0.5Q,where Q is the quantity of compact disks and P is their price.What is the price elasticity of demand at the equilibrium price and quantity?

A) -0.05.
B) -0.02.
C) -0.20.
D) -0.50.
E) -2.00.

Question 13

The formula for the arc price elasticity can be written (where $\Delta$ Q denotes the change in Q)as:

A) $\eta$ = [ $\Delta$ Q /(Q₁ + Q₂)]/[ $\Delta$ P/(P₁ + P₂)].
B) $\eta$ = [ $\Delta$ Q /(Q₁ + Q₂)]/[ $\Delta$ P/(Q₁ + Q₂)].
C) $\eta$ = [ $\Delta$ Q /(P₁ + P₂)]/[ $\Delta$ P/(Q₁ + Q₂)].
D) $\eta$ = [ $\Delta$ P /(P₁ + P₂)]/[ $\Delta$ Q/(Q₁ + Q₂)].
E) none of the above.

Question 14

The price elasticity of demand can be interpreted as the:

A) percentage change in the quantity demanded divided by the percentage change in the good's price.
B) percentage change in the quantity demanded divided by the percentage change in a substitute good's price.
C) percentage change in the good's price divided by the percentage change in quantity demanded.
D) change in the quantity demanded of a good divided by the change in its price.
E) change in the quantity demanded of a good divided by the change in a related good's price.

Question 15

A graphical representation of the demand function is called a:

A) demand schedule.
B) demand curve.
C) demand function.
D) marginal revenue schedule.
E) marginal revenue curve.

Question 16

The formula for the arc elasticity of demand can be written as:

A) $\eta$ _XY = [ $\Delta$ Q_X /(Q¹_X + Q²_X)]/[ $\Delta$ _X/(P¹_X + P²_X)].
B) $\eta$ _XY = [ $\Delta$ Q_X /(Q¹_Y + Q²_Y)]/[ $\Delta$ _Y/(P¹_X + P²_X)].
C) $\eta$ _XY = [ $\Delta$ Q_X /(Q¹_X + Q²_X)]/[ $\Delta$ P_Y/(P¹_Y + P²_Y)].
D) $\eta$ _XY = [ $\Delta$ P_X /(P¹_X + P²_X)]/[ $\Delta$ Q_Y/(Q¹_Y + Q²_Y)].
E) none of the above.

Question 17

The demand for answering machines is Q = 1,000 - 150P + 25I.Assume that per capita disposable income I is $200.When the price of answering machines is P = $10,the price elasticity of demand is:

A) -3.0.
B) -3.33.
C) -1.33.
D) -0.33.
E) -1.0.

Question 18

The demand for personal computers has been estimated to be Q = 500,000 - 700P + 200I - 500S.Assume that per capita income I is $13,000 and the average price of software S is $400.When the price of personal computers is P = $3,000,the price elasticity of demand is:

A) -2.625.
B) -7.0.
C) -1.0.
D) -21.0.
E) -4.25.

Question 19

In the article "Colombia,Brazil Advance Proposal to Withhold 10 Percent of Export Output" (The Wall Street Journal,September 23,1991,p.B6),a Colombian delegate to the International Coffee Organization said that if all its members withheld 10% of export output,the international price would rise 20%.This statement implies that the price elasticity of demand for coffee is approximately:

A) -0.00.
B) -5.00.
C) -2.00.
D) -0.20.
E) -0.50.

Question 20

The demand for cough medicine is Q = 10 - 2P.At a price of $2.50,the price elasticity of demand is:

A) -2.0.
B) -1.0.
C) -2.5.
D) -0.4.
E) -1.5.

Question 21

The demand for space heaters is Q = 250 - P + 2COOL,where COOL is the absolute value of the difference between the average overnight low temperature and 40°F.Assume that the average overnight low is 0°F.When the price of space heaters is P = $30,the price elasticity of demand is:

A) -0.1.
B) -1.0.
C) -0.66.
D) -1.5.
E) -6.6.

Question 22

If price is $25 when the price elasticity of demand is -0.5,then marginal revenue must be:

A) $50.
B) -$25.
C) $12.50.
D) $37.50.
E) $25.

Question 23

Total revenue decreases as output increases whenever:

A) marginal revenue is less than average revenue.
B) marginal revenue is greater than average revenue.
C) average revenue is decreasing.
D) marginal revenue is negative.
E) average revenue is negative.

Question 24

The demand for space heaters is Q = 250 - P + 2COOL,where COOL is the absolute value of the difference between the average overnight low temperature and 40°F.Assume that the average overnight low this month is 40°F.When the price of space heaters is P = $50,the price elasticity of demand is:

A) -1.38.
B) -13.8.
C) -0.138.
D) -1.50.
E) -0.25.

Question 25

Marginal revenue can be defined as the:

A) percent increase in total revenue resulting from a 1% increase in output.
B) increase in total revenue resulting from a 1-unit increase in output.
C) total revenue divided by output.
D) average revenue multiplied by output.
E) average revenue multiplied by output divided by 4.

Question 26

Total revenue can be defined as:

A) average revenue multiplied by marginal revenue.
B) average revenue divided by marginal revenue.
C) average revenue multiplied by output.
D) average revenue divided by output.
E) marginal revenue divided by output.

Question 27

Marginal revenue can be defined in terms of price (P)and elasticity (ç)as:

A) MR = P( $\eta$ + 1/ $\eta$ ).
B) P = MR(1/ $\eta$ ).
C) MR = P $\eta$ .
D) MR = P(1 + 1/ $\eta$ ).
E) P = MR(1 - 1/ $\eta$ ).

Question 28

El Niño wind patterns affected the weather across the United States during the winter of 1997-1998.Suppose the demand for home heating oil in Connecticut is given by Q = 20 - 2P_hho + 0.5P_ng - TEMP,where Q is the quantity of home heating oil demanded,P_hho is the price of home heating oil per unit,P_ng is the price of natural gas per unit,and TEMP is the absolute difference between the average winter temperature over the past 10 years and the current average winter temperature.If the current price of home heating oil is $1.20,the current price of natural gas is $2.00,and the average winter temperature this year is 40 degrees compared to 28 degrees over the past 10 years,the price elasticity of demand for home heating oil is:

A) -0.09.
B) -0.36.
C) -1.2.
D) -2.
E) none of the above.

Question 29

The demand for a product is more elastic the:

A) more broadly the product is defined.
B) longer the time period covered.
C) higher the average income of consumers.
D) smaller the share of a consumer's income the item represents.
E) larger the number of firms in the market.

Question 30

El Niño wind patterns affected the weather across the United States during the winter of 1997-1998.Suppose the demand for home heating oil in Connecticut is given by Q = 20 - 2P_hho + 0.5P_ng - TEMP,where Q is the quantity of home heating oil demanded,P_hho is the price of home heating oil per unit,P_ng is the price of natural gas per unit,and TEMP is the absolute difference between the average winter temperature over the past 10 years and the current average winter temperature.If the current price of home heating oil is $1.20,the current price of natural gas is $2.00,and the average winter temperature this year is 40 degrees compared to 28 degrees over the past 10 years,the quantity of home heating oil demanded is:

A) 6.6 gallons.
B) 16.6 gallons.
C) 35.4 gallons.
D) 20 gallons.
E) none of the above.

Question 31

The demand for fax machines in thousands of units has been estimated to be Q = 1,000 - 1.5P + 5L,where P is the price of the machines and L is the average cost of a 10-minute midday call from Los Angeles to New York.At a fax machine price of $400 and a phone call cost of $10,the price elasticity of demand for fax machines is:

A) -4.0.
B) -2.50.
C) -0.61.
D) -0.25.
E) -1.33.

Question 32

The price elasticity of market demand primarily depends on the:

A) number of firms in an industry.
B) cost of producing an industry's output.
C) availability of substitutes.
D) substitutability of inputs in producing a product.
E) supply curves of inputs.

Question 33

The demand for a product is more inelastic:

A) the more narrowly defined the product.
B) the longer the time period covered.
C) the lower the average income of consumers.
D) the better the available substitutes.
E) the poorer the available substitutes.

Question 34

The demand for fashion watches is Q = 9 - 0.7P + 2I.Assume that per capita income I is $13.When the price of fashion watches is P = $30,the price elasticity of demand is:

A) -0.66.
B) -1.0.
C) -2.0.
D) -0.5.
E) -1.5.

Question 35

Total revenue is rising with increases in output whenever:

A) output increases.
B) marginal revenue is positive.
C) average revenue is positive.
D) demand is inelastic.
E) average revenue is negative.

Question 36

El Niño wind patterns affected the weather across the United States during the winter of 1997-1998.Suppose the demand for home heating oil in Connecticut is given by Q = 20 - 2P_hho + 0.5P_ng - TEMP,where Q is the quantity of home heating oil demanded,P_hho is the price of home heating oil per unit,P_ng is the price of natural gas per unit,and TEMP is the absolute difference between the average winter temperature over the past 10 years and the current average winter temperature.If the current price of home heating oil is $1.20,the current price of natural gas is $2.00,and the average winter temperature this year is 40 degrees compared to 28 degrees over the past 10 years,the TEMP variable tells us that:

A) each 1-degree increase in temperature over the normal average raises home heating oil sales by 1 unit.
B) each 1-degree increase in temperature over the normal average lowers home heating oil sales by 1 unit.
C) the average daily temperature has no impact on the sales of home heating oil.
D) the average daily temperature has an impact only on the sales of natural gas.
E) price elasticity of demand for home heating oil is 2.

Question 37

Along a demand curve with unitary elasticity everywhere,total revenue:

A) increases as output increases.
B) decreases as output increases.
C) remains constant as output increases.
D) increases and then decreases as output increases.
E) decreases and then increases as output increases.

Question 38

The demand for costume jewelry has been estimated to be Q = 100P ^-2E²,where E is the price of real gem jewelry.Costume jewelry and real gem jewelry are:

A) substitute goods.
B) complement goods.
C) inferior goods.
D) normal goods.
E) unrelated goods.

Question 39

If price is $12 when the price elasticity of demand is -1,then marginal revenue must be:

A) $24.
B) $18.
C) $12.
D) $6.
E) $0.

Question 40

El Niño wind patterns affected the weather across the United States during the winter of 1997-1998.Suppose the demand for home heating oil in Connecticut is given by Q = 20 - 2P_hho + 0.5P_ng - TEMP,where Q is the quantity of home heating oil demanded,P_hho is the price of home heating oil per unit,P_ng is the price of natural gas per unit,and TEMP is the absolute difference between the average winter temperature over the past 10 years and the current average winter temperature.If the current price of home heating oil is $1.20,the current price of natural gas is $2.00,and the average winter temperature this year is 40 degrees compared to 28 degrees over the past 10 years,if the sellers of home heating oil are profit maximizers,they should:

A) lower prices.
B) raise prices.
C) advertise more.
D) advertise less.
E) none of the above

Question 41

In 1965,as per capita income among a particular segment of the population fell from $10,200 to $9,800,everything else remaining constant,annual per capita consumption of beer fell from 55 to 45 gallons; this implied an income elasticity of demand for beer of:

A) 4.44.
B) 4.55.
C) 5.0.
D) 4.65.
E) 0.5.

Question 42

The cross-price elasticity of demand is defined as the:

A) percentage change in the quantity demanded of a good divided by the percentage change in the good's price.
B) percentage change in the quantity demanded of a good divided by the percentage change in a different good's price.
C) percentage change in a good's price divided by the percentage change in a different good's price.
D) change in the quantity demanded of a good divided by the change in its price.
E) change in the quantity demanded of a good divided by the change in income.

Question 43

The constant price elasticity of demand for cigarettes has been estimated to be -0.5.To reduce smoking by 50%,approximately how much tax needs to be added to a $1 pack?

A) $1.00
B) $2.00
C) $3.00
D) $0.50
E) $4.00

Question 44

Along a linear demand curve,total revenue is maximized:

A) where the slope of a line from the origin to the demand curve is equal to the elasticity.
B) where the elasticity is -1.
C) near the quantity axis intercept.
D) near the price axis intercept.
E) where the elasticity is 0.

Question 45

The formula for the income elasticity of demand can be written as:

A) $\eta$ _I = ( $\Delta$ Q / $\Delta$ I)(I / Q).
B) $\eta$ _I = ( $\Delta$ I / $\Delta$ Q)(I / Q).
C) $\eta$ _I = ( $\Delta$ Q / $\Delta$ I)(Q / I).
D) $\eta$ _I = ( $\Delta$ I / $\Delta$ Q)(Q / I).
E) none of the above.

Question 46

The formula for the cross-price elasticity of demand can be written as:

A) $\eta$ _XY = ( $\Delta$ Q_X / $\Delta$ P_Y)(P_Y / Q_X)
B) $\eta$ _XY = ( $\Delta$ P_Y / $\Delta$ Q_X)(P_Y / Q_X).
C) $\eta$ _XY = ( $\Delta$ P_Y / $\Delta$ Q_X)(P_Y / Q_X)
D) $\eta$ _XY = ( $\Delta$ P_Y / $\Delta$ Q_X)(Q_X / P_Y).
E) none of the above.

Question 47

The demand for fax machines has been estimated to be Q = 1,000 - P + 40L,where P is the price of the machines and L is the average cost of a 10-minute midday call from Los Angeles to New York.At a fax machine price of $400 and a phone call cost of $10,the cross-price elasticity of demand for fax machines with respect to the price of phone service is:

A) 0.4.
B) 2.5.
C) -0.25.
D) 4.0.
E) 4.25.

Question 48

In Russia,as per capita income rises from $1,980 to $2,020,everything else remaining constant,annual per capita consumption of vodka falls from 525 to 475 liters; this implies an income elasticity of demand for vodka of:

A) -0.50.
B) -5.0.
C) 2.0.
D) 5.0.
E) 0.50.

Question 49

The income elasticity of demand is defined as the:

A) percentage change in the quantity demanded divided by the percentage change in the price level.
B) change in the quantity demanded divided by the change in per capita income.
C) percentage change in income divided by the percentage change in the quantity demanded.
D) change in per capita income divided by the change in the quantity demanded.
E) percentage change in the quantity demanded divided by the percentage change in per capita income.

Question 50

The demand for answering machines is Q = 1,000 - 150P + 25I.Assume that per capita disposable income I is $200.When the price of answering machines is P = $10,the income elasticity of demand is:

A) 2.5.
B) 0.11.
C) 1.0.
D) 25.
E) 1.11.

Question 51

Makers of disposable diapers must advertise 5% more to offset completely the 2% decline in sales due to heightened environmental concern.The advertising elasticity of demand is:

A) 4.0.
B) 0.4.
C) 2.5.
D) 0.25.
E) 0.20.