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Chapter 5Elasticity

MULTIPLE CHOICE

1. What is the definition of price elasticity of demand?
a
.
the slope of the demand curve divided by the price
b
.
the slope of the demand curve
c
.
the percentage change in price divided by the percentage change in quantity
demanded
d
.
the percentage change in quantity demanded divided by the percentage
change in price


2. What does the price elasticity of demand measure?
a
.
the responsiveness of price to a change in quantity demanded
b
.
the responsiveness of quantity demanded to a change in price
c
.
the responsiveness of quantity demanded to a change in income
d
.
the responsiveness of quantity demanded to a change in quantity supplied


3. What term accurately describes demand when the quantity demanded is
very responsive to changes in price?
a
.
independent
b
.
elastic
c
.
unit elastic
d
.
inelastic

4. What term accurately describes demand when the quantity demanded is
NOT very responsive to changes in price?
a
.
unit elastic
b
.
inelastic
c
.
independent
d
.
elastic


5. Bailey's Barber Shop knows that a 5 percent increase in the price of their
haircuts results in a 15 percent decrease in the number of haircuts purchased. What
is the elasticity of demand facing Bailey's Barber Shop?
a
.
0.05
b
.
0.10
c
.
0.15
d
.
3.0


6. Iron Mikes steel mill finds that a 10 percent increase in its price leads to a
14 percent decrease in the quantity it is able to sell. What term accurately describes
the demand curve for the mills output?
a
.
inelastic
b
.
elastic
c
.
unit elastic
d
.
perfectly elastic


7. The Shoe Emporium reduces the price of its shoes by 50 percent and finds
that the quantity demanded for its shoes more than doubles. What term accurately
describes the demand for shoes from The Shoe Emporium?
a
.
inelastic
b unit elastic
.
c
.
unit inelastic
d
.
elastic



8. When the Blue Ocean Surfboard Company lowered the price of surfboards
by 20 percent, it sold 10 percent more surfboards. What is the price elasticity
coefficient for surfboards?
a
.
0.5
b
.
1
c
.
2
d
.
20

9. The nation's largest cable TV company tested the effect of a price reduction
for premium movie channels. It lowered prices from $12 to $9.95 and found that the
number of customers rose by almost 50 percent. What does this illustrate?
a
.
The supply curve for premium movie channels has shifted to the left.
b
.
The demand curve for the premium movie channels has shifted to the right.
c
.
The demand for premium movie channels is elastic in this price range.
d
.
The demand for premium movie channels is inelastic in this price range.


10. If the price elasticity of demand coefficient for gourmet coffee is estimated
to be 1.6, what would a 5 percent increase in price likely lead to?
a
.
an 8 percent increase in the quantity of gourmet coffee demanded
b
.
a 16 percent increase in the quantity of gourmet coffee demanded
c
.
a 16 percent decrease in the quantity of gourmet coffee demanded
d
.
an 8 percent decrease in the quantity of gourmet coffee demanded


11. If the price elasticity of demand coefficient for herbal tea is estimated to be
0.5, what would a 10 percent decrease in price likely lead to?
a
.
a 10 percent decrease in the quantity of herbal tea demanded
b
.
a 5 percent decrease in the quantity of herbal tea demanded
c
.
a 10 percent increase in the quantity of herbal tea demanded
d
.
a 5 percent increase in the quantity of herbal tea demanded

12. As you move down (southeast) along a demand curve, what happens to the
elasticity?
a
.
It becomes larger.
b
.
It stays constant at zero.
c
.
It stays constant at one.
d
.
It becomes smaller.


13. The nation's largest cable TV company tested the effect of a price reduction
for premium movie channels. It increased prices from $9.95 to $12 and found
virtually no change in the number of customers. What does this illustrate?
a
.
The demand curve for the premium movie channels has shifted to the right.
b
.
The demand for premium movie channels is very elastic in this price range.
c
.
The supply curve for premium movie channels has shifted to the left.
d
.
The demand for premium movie channels is very inelastic in this price range.


14. Which of the following statements best describes inelastic demand?
a
.
The demand curves appear to be fairly flat.
b
.
The percentage change in quantity demanded results from a price change
greater than the percentage change in price.
c
.
Price elasticity of demand is greater than one.
d
.
Consumers are not very responsive to changes in price.

15. If the demand curve for a life-saving medicine is perfectly inelastic, what
result will a reduction in supply have on the equilibrium price and equilibrium
quantity?
a
.
The price will rise and the quantity will rise.
b
.
The price will rise and the quantity will stay the same.
c
.
The price will stay the same and the quantity will fall.
d
.
The price will rise and the quantity will fall.

16. If the demand curve is perfectly elastic, what will an increase in supply
result in?
a
.
an increase in the price, but no change in the quantity exchanged
b
.
an increase in the quantity exchanged, but no change in the price
c
.
a decrease in the price, but no change in the quantity exchanged
d
.
an increase in both the price and the quantity exchanged


FIGURE 5-1


17. Refer to Figure 5-1. What graph best illustrates a perfectly inelastic demand
curve?
a
.
Graph A
b
.
Graph B
c
.
Graph C
d
.
Graph D


18. Refer to Figure 5-1. What graph best illustrates a relatively inelastic (but
NOT perfectly inelastic) demand curve?
a
.
Graph A
b
.
Graph B
c
.
Graph C
d
.
Graph D

19. If the demand curve for a product is vertical, then what is the elasticity of
demand?
a
.
equal to zero
b
.
equal to one
c
.
greater than one, but less than infinity
d
.
equal to infinity


20. If the demand curve for a product is horizontal, then what is the elasticity of
demand?
a
.
equal to zero
b
.
equal to one
c
.
greater than one, but less than infinity
d
.
equal to infinity

21. What term accurately describes demand when the quantity demanded
changes in the same proportion as the price?
a
.
inelastic
b
.
independent
c
.
elastic
d
.
unit elastic

22. Suppose that Lance purchases one pizza per month when the price is $19
and three pizzas per month when the price is $15. What is the price elasticity of
Lances demand curve?
a
.
0.235
b
.
2.00
c
.
4.25
d
.
6.33


23. Suppose that Joan plays golf five times per month when the price is $40 and
four times per month when the price is $50. What is the price elasticity of Joans
demand curve?
a
.
0.1
b
.
0.8
c
.
1.0
d
.
10.0


24. Suppose that Percy eats a 200-gram steak eight times per month when the
price is $10 and six times per month when the price is $12. What is the price
elasticity of Percys demand curve?
a
.
0.636
b
.
1.0
c
.
1.25
d
.
1.57

The following schedule represents a portion of Kate's demand for sandwiches.

TABLE 5-1

Price
Quantity Demanded
per Month
$6 3
$5 5
$4 8

25. Refer to Table 5-1. Along this portion of Kate's demand curve for sandwiches,
what is the price elasticity of demand?
a
.
equal to zero
b
.
less than one
c
.
equal to one
d
.
greater than one


The following schedule represents a portion of Tim's demand for video rentals each
month.

TABLE 5-2

Price
Quantity Demanded
per Month
$4 8
$3 9
$2 10

26. Refer to Table 5-2. Along this portion of Tim's demand curve for video
rentals, what is the price elasticity of demand?
a
.
equal to zero
b
.
less than one
c
.
equal to one
d
.
greater than one

27. If makers of snake anti-venom implement significant price increases, it is
unlikely to significantly affect the use of anti-venom for treating poisonous
snakebites. What term accurately describes the demand for anti-venom among
users?
a
.
unit elastic
b
.
unit inelastic
c
.
elastic
d
.
inelastic


28. Which of the following best describes the relationship between the elasticity
of demand and the availability of substitutes?
a
.
The elasticity of demand will remain constant as the availability of
substitutes decrease.
b
.
The elasticity of demand will increase as the availability of substitutes
decreases.
c
.
The elasticity of demand will decrease as the availability of substitutes
remains constant.
d
.
The elasticity of demand will increase as the availability of substitutes
increases.

29. Which of the following will have the most elastic demand?
a
.
pizza from a restaurant
b
.
Pizza Hut pizza
c
.
pizza from Pizza Hut on the corner of Main Street and 8th Avenue
d
.
pizza


30. Which of the following is likely to have the most inelastic demand?
a
.
insulin, for diabetics
b
.
pizza from a restaurant
c
.
a one-week vacation at Disney World
d
.
a new Land Rover

31. Which of the following statements best describes the demand for
toothpaste?
a
.
It will likely be income elastic and price elastic.
b
.
It will likely be income inelastic and price elastic.
c
.
It will likely be income inelastic and price inelastic.
d
.
It will likely be income elastic and price inelastic.


32. When is price elasticity of demand said to be greater?
a
.
when there are fewer available substitutes
b
.
the longer the period of time consumers have to adjust to price changes
c
.
the shorter the period of time consumers have to adjust to price changes
d
.
when the elasticity of supply is greater

33. The larger the proportion of income spent on a product, other things equal,
what is indicated?
a
.
The consumer's demand is more inelastic.
b
.
The consumer's demand curve is more vertical.
c
.
The consumer's demand is more elastic.
d
.
The consumer's demand is more unit elastic.


34. What tends to happen to the price elasticity of demand as the time period
considered grows longer?
a
.
It converges to zero.
b
.
It increases.
c
.
It remains constant.
d
.
It decreases.

35. A recent study at a liberal arts college concluded that demand elasticity is
0.91 for college courses. The administration is considering a tuition increase to help
balance the budget. What might an economist advise the school to do?
a
.
Leave tuition unchanged, as a change in tuition is unlikely to enhance the
school's budget by increasing revenue.
b
.
Decrease tuition because demand for courses is elastic.
c
.
Decrease tuition in order to increase revenue by boosting enrolment.
d
.
Increase tuition in order to increase revenue.

36. When will a price cut increase the total revenue a firm receives?
a
.
when demand for its product is inelastic
b
.
when demand for its product is unit inelastic
c
.
when demand for its product is unit elastic
d
.
when demand for its product is elastic


37. A jeweller cut prices in his store by 20 percent and the dollar value of his
sales fell by 20 percent. What is this indicative of?
a
.
inelastic demand
b
.
elastic demand
c
.
a vertical demand curve
d
.
a horizontal demand curve


38. When the local symphony recently raised its price for tickets to their
summer concerts in the park, the symphony's total revenue actually decreased.
What does this indicate about the elasticity of demand for symphony tickets?
a
.
It is elastic.
b
.
It is unit elastic.
c
.
It is unit inelastic.
d
.
It is inelastic.


39. When the price of ulcer medication increased by $20 per 100 tablets, a drug
company's revenue increased by $10 million. What must its elasticity of demand
coefficient (in absolute terms) be?
a
.
zero
b
.
less than one
c
.
greater than one
d
.
infinitely large


The elasticity in the vicinity of five different points along a demand curve varies as
follows:

TABLE 5-3

Point A B C D E
Elasticity 1.25 0.3 1.0 0.2 2.1


40. Refer to Table 5-3. At what points would a price increase be accompanied by
an increase in total revenue?
a
.
A, C, and E
b
.
A and E
c
.
B and D
d
.
A and D

The elasticity in the vicinity of five different points along a demand curve varies as
follows:

TABLE 5-4

Point A B C D E
Elasticity 1.25 0.3 1.0 0.2 2.1


41. Refer to Table 5-4. In the vicinity of what points would a price decrease be
accompanied by an increase in total revenue?
a
.
A and D
b
.
A and E
c
.
B, C, and D
d
.
B and D


FIGURE 5-2


42. Refer to Figure 5-2. Compared to Graph B, what type of demand curve does
Graph A represent?
a
.
a unit inelastic curve
b
.
a relatively elastic curve
c
.
a unit elastic curve
d
.
a relatively inelastic curve


43. Refer to Figure 5-2. Compared to Graph A, what type of demand curve does
Graph B represent?
a
.
a unit inelastic curve
b
.
a relatively elastic curve
c
.
a relatively inelastic curve
d
.
a unit elastic curve
44. Refer to Figure 5-2. With reference to Graph A, at a price of $10, what is total
revenue equal to?
a
.
$200
b
.
$400
c
.
$500
d
.
$1000


45. Refer to Figure 5-2. With reference to Graph A, at a price of $5, what is total
revenue equal to?
a
.
$200
b
.
$400
c
.
$500
d
.
$1000


46. Refer to Figure 5-2. With reference to Graph B, at a price of $5, what is total
revenue equal to?
a
.
$150
b
.
$200
c
.
$250
d
.
$300

47. Most passenger trains operate far below full capacity. Under what
circumstances would reducing travel fares be likely to increase total revenue?
a
.
if demand is unit inelastic
b
.
if demand is inelastic
c
.
if demand is unit elastic
d
.
if demand is elastic

48. The demand for a product is unit elastic. At a price of $20, 10 units of a
product are sold. If the price is increased to $40, what would one expect sales to
equal?
a
.
0 units
b
.
5 units
c
.
10 units
d
.
20 units


49. A "war on drugs" is waged and, as a result, a larger quantity of drugs flowing
into Canada is seized and more drug traffickers are arrested. If demand for drugs is
inelastic, what effect would one expect this to have on the total expenditure on
drugs?
a
.
It would be zero.
b
.
It would increase.
c
.
It would stay constant.
d
.
It would decrease.


50. A 25 percent decrease in the price of breakfast cereal leads to a 20 percent
increase in the quantity of cereal demanded. What will result?
a
.
Total revenue will decrease.
b Total revenue will increase.
.
c
.
The elasticity of demand will decrease.
d
.
The elasticity of demand will increase.


51. The price elasticity of demand for tickets to local hockey matches is
estimated to be equal to 0.89. What would an economist advise in order to boost
ticket revenues?
a
.
increasing the price of hockey match tickets, because demand is inelastic
b
.
decreasing the price of hockey match tickets, because demand is elastic
c
.
not changing the price of hockey match tickets, because demand is unit
elastic
d
.
increasing the price of hockey match tickets, because demand is elastic


52. A 10 percent decrease in the price of energy bars leads to a 20 percent
increase in the quantity of energy bars demanded. What can we conclude from this
information?
a
.
Demand is elastic and total revenue will increase.
b
.
Demand is inelastic and total revenue will increase.
c
.
Demand is inelastic and total revenue will decrease.
d
.
Demand is unit elastic and total revenue will remain constant.


FIGURE 5-3


53. Refer to Figure 5-3. Elasticity varies along a linear demand curve. What does
Graph A represent?
a
.
the section of the curve where, starting at P2, a decrease in price will lead to
an increase in total revenue
b
.
the section of the curve where Ed is < 1
c
.
the section of the curve where the percentage change in quantity is larger
than the percentage change in price
d
.
the section of the curve where the curve is elastic


54. Refer to Figure 5-3. Elasticity varies along a linear demand curve. What does
Graph B represent?
a
.
the section of the curve where the curve is inelastic
b
.
the section of the curve where Ed is < 1
c
.
the section of the curve where, starting at P1, an increase in price will lead to
an increase in total revenue
d
.
the section of the curve where the percentage change in quantity is larger
than the percentage change in price


55. Refer to Figure 5-3. How would price elasticity of demand along a linear
demand curve be described?
a
.
It is always equal to one.
b
.
It is constant.
c
.
It is more elastic to the northwest than to the southeast.
d
.
It is less elastic to the northwest than to the southeast.

56. If demand is unit elastic, what is the relationship between revenue and
prices?
a
.
Revenue falls as price rises.
b
.
Revenue rises as price falls.
c
.
Revenue and prices rise and fall together.
d
.
Revenue remains constant as price rises or falls.


57. A 10 percent increase in the price of soda leads to a 20 percent increase in
the quantity of iced tea demanded. What can we conclude from this information?
a
.
The elasticity of demand for iced tea is 2 and is elastic.
b
.
The cross-price elasticity of demand for iced tea is -2.
c
.
The cross-price elasticity of demand for soda is -0.5.
d The elasticity of demand for soda is 0.5 and is inelastic.
.

58. A 10 percent decrease in the price of potato chips leads to a 30 percent
increase in the quantity of soda demanded. What can we conclude from this
information?
a
.
The elasticity of demand for soda is 3.
b
.
The elasticity of demand for potato chips is 3.
c
.
The cross-price elasticity of demand for soda is -3.
d
.
The cross-price elasticity of demand for potato chips is -3.


59. If cola and iced tea are good substitutes for consumers, what can we
conclude about their elasticity from this information?
a
.
Their cross-price elasticities are greater than zero.
b
.
Their income elasticities are less than zero.
c
.
Their price elasticities of supply are less than one.
d
.
Their price elasticities of demand are less than one.



60. A news report stated that movie attendance was up in the first quarter of
2009 due to the recession. Which of the following might explain this?
a
.
Blockbuster reduced its prices for DVD rentals.
b
.
The cost of making movies increased.
c
.
The price of going to a movie increased.
d
.
Movies are inferior goods.


61. A 10 percent increase in income leads to a 15 percent decrease in the
quantity of macaroni and cheese demanded but no change in the price of macaroni
and cheese. What can we conclude from this information?
a
.
Macaroni is an inferior good and price elasticity of demand is less than one.
b Macaroni is a normal good and price elasticity of demand is greater than one.
.
c
.
Macaroni is an inferior good and price elasticity of supply is equal to zero.
d
.
Macaroni is an inferior good and price elasticity of supply is infinite.


62. How is the elasticity of supply defined?
a
.
the percentage change in quantity supplied divided by the percentage change
in price
b
.
the total change in quantity supplied divided by the percentage change in
price
c
.
the marginal change in quantity supplied divided by the percentage change
in price
d
.
the percentage change in quantity supplied divided by the marginal change
in price


63. The elasticity of supply coefficient for lobster is estimated to be equal to 0.6.
What would a 10 percent decrease in price lead to?
a
.
a 10 percent decrease in the quantity of lobsters supplied
b
.
a 6 percent increase in the quantity of lobsters supplied
c
.
a 6 percent decrease in the quantity of lobsters supplied
d
.
a 10 percent increase in the quantity of lobsters supplied


64. Ceteris paribus, if an 8 percent increase in price leads to a 6 percent increase
in the quantity supplied, how would supply be described?
a
.
The supply curve is perfectly vertical.
b
.
Supply is inelastic.
c
.
Supply is elastic.
d
.
Supply is unit elastic.



65. The price of peanut butter decreases. As a result, the price of jelly (a
complement to peanut butter) rises by 5 percent and the quantity of jelly sold rises
by 10 percent. What can we conclude from this information?
a
.
The cross-price elasticity between peanut butter and jelly equals 0.5.
b
.
The elasticity of demand equals 2.0.
c The elasticity of supply equals 2.0.
.
d
.
The cross-price elasticity between peanut butter and jelly equals 2.0.


66. What term accurately describes supply when the quantity supplied is very
responsive to changes in price?
a
.
elastic
b
.
independent
c
.
inelastic
d
.
unit elastic

67. If the measured elasticity of supply coefficient equals 0.6, then what term
accurately describes supply?
a
.
inelastic
b
.
perfectly elastic
c
.
unit elastic
d
.
elastic

68. If the measured elasticity of supply coefficient equals 1.3, then what term
accurately describes supply?
a
.
elastic
b
.
perfectly elastic
c
.
unit elastic
d
.
inelastic


69. If the supply curve for a product is vertical, then what is the elasticity of
supply?
a
.
equal to zero
b
.
equal to one
c
.
greater than one, but less than infinity
d
.
equal to infinity

70. If the supply curve for a product is horizontal, then what is the elasticity of
supply?
a
.
equal to zero
b
.
equal to one
c
.
greater than one, but less than infinity
d
.
equal to infinity


71. Ceteris paribus, if a 4 percent increase in price leads to a 6 percent increase
in the quantity supplied, then which of the following best describes the supply?
a
.
The supply is elastic.
b
.
The supply is unit elastic.
c
.
The supply curve is perfectly vertical.
d
.
The supply is inelastic.

72. If the supply curve is perfectly elastic, what effect will an increase in
demand have?
a
.
It will increase the quantity exchanged but result in no change in the price.
b
.
It will increase both the price and the quantity exchanged.
c
.
It will increase the price but result in no change in the quantity exchanged.
d
.
It will decrease the price but result in no change in the quantity exchanged.

73. If the supply curve for housing is perfectly inelastic, how will a reduction in
demand affect the equilibrium price and quantity?
a
.
The price will rise and the quantity will fall.
b
.
The price will fall and the quantity will fall.
c
.
The price will fall and the quantity will stay the same.
d
.
The price will rise and the quantity will stay the same.

74. If the supply curve for aspirin is perfectly elastic, what effect will a reduction
in demand have on the equilibrium price and equilibrium quantity?
a
.
The price will rise and the quantity will fall.
b
.
The price will rise and the quantity will stay the same.
c
.
The price will fall and the quantity will fall.
d
.
The price will stay the same and the quantity will fall.


75. What is the direction of a perfectly elastic supply curve?
a
.
horizontal
b
.
vertical
c
.
downward sloping to the left
d
.
upward sloping to the right


76. What is the direction of a perfectly inelastic supply curve?
a
.
vertical
b
.
upward sloping to the right
c
.
horizontal
d
.
downward sloping to the left

77. What tends to happen to the elasticity of supply as the time period
considered grows longer?
a
.
It remains constant.
b
.
It decreases.
c
.
It converges to zero.
d
.
It increases.

78. A tax is imposed on orange juice. Under what circumstances will consumers
bear the burden from this tax?
a
.
when the supply curve for orange juice is unit elastic
b
.
when the supply curve for orange juice is perfectly inelastic
c
.
when the demand for orange juice is perfectly inelastic
d
.
when the demand for orange juice is perfectly elastic


79. A tax is imposed on wine. Under what circumstances will sellers bear the
burden from this tax?
a
.
when the demand for wine is perfectly inelastic
b
.
when the demand for wine is perfectly elastic
c
.
when the supply curve for wine is unit elastic
d
.
when the supply curve for wine is perfectly elastic


80. A tax is imposed on orange juice. Under what circumstance will consumers
bear the full burden of this tax?
a
.
when the supply curve for orange juice is perfectly inelastic
b
.
when the price elasticity of demand for orange juice equals 1.4
c
.
when the demand for orange juice is perfectly elastic
d
.
when the demand for orange juice is unit elastic

81. The demand for gasoline is highly inelastic and the supply is highly elastic. If
a tax is imposed on gasoline, how will it be paid?
a
.
largely by the sellers of gasoline
b
.
solely by the sellers
c
.
equally by the sellers and buyers of gasoline
d largely by the buyers of gasoline
.


82. The government proposes a tax on flowers in order to boost its revenue.
Under what circumstances will consumers bear all of this tax?
a
.
when the demand for flowers is perfectly elastic
b
.
when the demand for flowers is perfectly inelastic
c
.
when the supply of flowers is unit elastic
d
.
when the supply of flowers is perfectly inelastic

83. In order to raise more tax revenue, what type of goods should the
government tax?
a
.
goods with unit elastic demand curves over goods with inelastic demand
curves
b
.
goods with inelastic demand curves over goods with elastic demand curves
c
.
goods with elastic demand curves over goods with inelastic demand curves
d
.
goods with elastic demand curves over goods with unit elastic demand
curves